So, in a world of high inflation, how can firms protect their position? Can printers increase prices – if so, how? Can contracts be unilaterally ended if they’re uneconomic? And will the courts intervene to cancel a loss-making deal?

Printweek spoke to a commercial lawyer and the BPIF for advice. The key message is that all is not lost and that there are practical steps that printers can take to protect themselves, particularly when negotiating new contracts.

Pete Maguire, partner and head of commercial at Wright Hassall

It’s about price

For Pete Maguire, the path to success involves having good contracts and so, understandably, when it comes to increasing prices – regardless of whether changes are made – his first piece of advice to ensure that there’s a price review clause in place.

He comments that such a clause “may link to a specific raw material and any increase in its price or be more general in scope”. But as to how it might work, it may, for example, specify that prices increase in line with the Retail Price Index; that prices increase by a specific percentage at certain points in time; or it may set out specific intervals at which a printer can ask to change prices. 

However, for the sake of commercial harmony, he advises that “any price review clause should give the customer the option to accept and that in the absence of acceptance, the contract will either automatically continue at the revised price or potentially terminate”. His point is that while price increases may be necessary, unilateral, and unexpected, increases can leave a nasty taste in the mouth. 

Of course, the nature of a printer’s work will determine which approach is the most suitable. Regardless though, Maguire says that new contracts should always have a price review inserted into a supply contract – even if it’s not used. And for existing contracts, he recommends checking to see whether any clause currently exists before thinking about attempting to renegotiate. 

It follows that he thinks that printers should avoid fixed price agreements to allow flexibility over changing circumstances. However, Maguire often sees customers hesitate to accept this because of price uncertainty. This said, he says that “inserting a procedure for determining the price should provide the customer with some comfort whilst protecting the supplier from a potentially unprofitable contract.” And where customers will only accept a fixed price, then the only option for the printer is, as Maguire says, “to try to factor in anticipated increases to the cost of raw materials so that it can continue to be profitable.” 

Duration is important

Allied to a price review clause is the need to consider the duration of the contract. No supply contact can operate forever. And so, Maguire highly recommends examining the length of any supply contract. Indeed, he says that “at the moment, [print] suppliers are likely to find it more beneficial to try and limit the length of a contract until the cost of raw materials stabilises; this will give them more flexibility to renegotiate terms on a more regular basis”. The flip side to this, is, however, that customers may see this as introducing volatility and that may drive them elsewhere for contract fulfilment. In other words, firms need to weigh up the risk of losing their existing customers in return for pricing flexibility to hedge against exposure to rising costs and potential loss of business.

An alternative for Maguire is to look at inserting a termination for convenience clause. In describing how this works, he says that “it effectively allows a reduced notice period to terminate an agreement to limit any hardship if the cost of raw materials becomes so high that the contract is no longer profitable”. He adds: “This clause should, if possible, be inserted into all new contracts and especially if the print supplier is unable to insert a favourable pricing review clause.” 

Again, whether a customer will accept such a provision is a matter for conjecture and negotiation and Maguire says that printers may find that a customer insists on a reciprocal clause.

More to consider

Other contractual elements that Maguire thinks firms should consider are the insertion of a change control procedure, a material adverse change clause, and a change in law clause. The first of these is a multi-step change control procedure that encapsulates a formal arrangement for requesting a variation to the contract, and any timescales for doing so. Maguire explains that the procedure can be tailored to include discussions relating to pricing and it could also include any issues relating to the supply and cost of such raw materials. He says that “it should also oblige both parties to act reasonably to negotiate such changes. It would require that neither party could unreasonably withhold or delay agreement to a proposed variation”.

Although this procedure does not guarantee any variation, Maguire feels that “it allows either side to understand why the other is requesting a variation to the contract and as such should encourage cooperation”.

Of the material adverse change clause, Maguire says that this allows either side of an agreement to renegotiate the contract if an unforeseen situation arises which causes a severe disparity between the parties on performance of the contract. Known as ‘material adverse change’, he says that “this may provide the supplier with an additional layer of protection against any additional, unforeseen increases to raw material prices.”

The last is a change in law clause which is particularly relevant in light of Brexit and the pandemic. With what has been presented by clients to Maguire, it’s his view that “suppliers should consider including a provision giving them an opportunity to increase prices – or at least be able to propose an increase – to accommodate changes in law, or new government procedures, etc”. Almost akin to an Act of God, he feels that no firm should be left without options that result from macro-level events.

But if the position between the sides is intractable, a firm may want to seek a termination of the contract. But this would be the nuclear option in Maguire’s view as “termination can be minefield depending on provisions such as timescales and methods for serving notice; both parties need to be wary of any move that might put them in breach”. Whatever they do, he emphasises that they should certainly try to avoid anything that might escalate into a dispute.

Own supply chains 

One last piece of advice from Maguire – that printers should think about their own supply chains and not just the contracts put in place with their customers. It’s a case of ‘poacher turned gamekeeper’ where a print supplier looks at their contracts through the eyes of a buyer and looks to negotiate strong purchase contracts with its own raw material suppliers. But this will not always yield results in which case Maguire says that “suppliers should explore if they can source from elsewhere if the cost implications are favourable assuming, of course, that quality remains unchanged”.

Nicola Langley, head of legal at the BPIF

Basic principles laid out

Nicola Langley knows that contract law may appear complicated, however she says that it is based on three very simple principles.

In summary, the law states that if a trader makes an agreement to supply certain goods or services for an agreed price, then they are obliged to provide those goods for the price agreed; that if a trader fails to perform their side of the agreement, then they are in breach of contract, and the other party can seek to recover any loss they suffer because of the breach; and if both sides of the deal are contracting as businesses, the law will not interfere to any great extent in the agreements – the law will not prevent either side from making a bad bargain.

Langley notes that the majority of print supplied in the UK is likely to be based on individual orders for jobs. Therefore, she thinks that “the contract for the supply of the work is going to use either the print company’s standard terms and conditions of sale or the customer’s standard terms and conditions of purchase”.

Always use terms and conditions

For her, using standard terms and conditions are “a useful way for printers to set out the terms on which they will agree to supply goods.” Further, she says that “this will include putting limits on the type of loss that they can be liable for in the event that the contract is breached, and also a cap on the amount that they can be liable for”.

It’s worth noting that typically, a liability clause would state that the printer is not liable for loss of profit, goodwill or other consequential losses, and any liability is capped at the price of the goods.

As a result, she says that “when negotiating the terms of the contract, and in particular when providing estimates for the work, it is important to recognise the point at which agreement is made”. By this she explains that a contract is formed when there has been an offer to sell (or buy), at a particular price, and that offer has been accepted. This means that “if you provide a quote and the quote is accepted, the contract has been formed”. This is why she says that “if your input costs are rising, or are unpredictable, it is sensible to factor this in to your negotiations, using estimates rather than quotes and providing your terms and conditions at the outset”.

The BPIF has model standard terms available to members which include a clause that allows the printer to adjust prices if input prices rise. It says that “estimates are based on the seller’s current costs of production and, unless otherwise agreed in writing, are subject to amendment to meet any rise or fall in such costs that have taken place by the time of delivery”.

Using this type of clause enables a printer to add any increase in production costs on to the bill. However, Langley warns that “careful communication will be needed with the customer in order to preserve good customer relations; my advice is to be open and honest with the customer at the negotiation stage and point out in advance that estimates are just that and that the final bill may need to be adjusted”.

Other options

Where a printer has entered into a long-term supply contract, or framework agreement, where they have agreed to supply goods to a customer for one, two or three years, but now find that rising input costs are eroding any profit margin, it may wish to find a way out of the contract. 

However, Langley would urge them to first “fully understand the terms of the deal that has been signed up to” before taking action. She adds: “Framework agreements can be long and full of legal technical language, I would get some help with this as some timely legal advice could save you time and money in the long term.”

Other options that Langley points out depend on the construction of the contract. She notes here that a printer may find that they can “terminate the contract early on notice to the customer”, or simply “refuse to accept future purchase orders under the terms of the agreement”. But some long-term supply contracts may contain a price escalation clause or other mechanism that will “enable prices to be adjusted during the term of the contract, typically after an ‘initial period’ has expired”.

When negotiating new long-term supply agreements, Langley strongly suggests including a price escalation clause, if not already in place, that sets out a mechanism to enable price increases during the term of the contract. She says that the clause should scope out any risks: “Price escalation clauses sometimes are limited to the cost of raw material increases, but I would advise including overheads, such as minimum wage increases and of course energy costs”.

Printers may be aware of force majeure and that it may excuse a supplier from having to complete a contract. However, she says “it is important to understand that there is no general principle of force majeure in English contract law and therefore each contract will depend entirely on the wording of the clause in the contract”.

In detailing how force majeure works, she says that it will “excuse a party from performing their obligations under the contract where circumstances beyond their control make performance physically impossible”. It will not apply where performance becomes unprofitable, or loss making.

Decisions to make

Ultimately, if a printer finds that they are locked into a contract which is now loss-making, Langley says that “they will have to assess the likely outcome of failing to supply and being in breach of contract”. She continues: “This means assessing what loss the customer will suffer as a result of the failure to supply and the amount of that loss that can be recovered from the printer under the liability clause in the contract.” Simple mathematics may well drive the decision.

If in any doubt about the effect of the liability clause, Langley says that there is no alternative but “to get some legal advice before you decide to stop supply to the customer”. The risk of ending up in court or in tarnishing a reputation become very real and very quickly too.

Summary

There’s no doubt that print is navigating a very difficult marketplace. Those that stay the course will have taken good advice and planned ahead. But those that find themselves in stormy seas may well be doing so after acting in haste only to repent at leisure.