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Most businesses will have drafted their standard terms and conditions at a point when costs, supply chains and trading conditions looked very different.
However, recent events in geopolitics, particularly the conflict in the Middle East, are driving up costs for many businesses.
If you haven’t reviewed your terms and conditions recently, then now may be the time to do so.
In an environment of sustained cost pressure, where business are facing wage inflation, higher employer National Insurance contributions, energy costs and supplier price rises, outdated terms can quietly become a source of real financial exposure.
The problem with static pricing
If your terms do not contain a clear mechanism allowing you to adjust your prices, the default position under English contract law is that you cannot vary the price unilaterally.
Once a price is agreed, you are bound by it unless both parties agree to a change or your contract expressly provides a mechanism for adjustment.
Businesses that have been absorbing rising input costs without a contractual right to pass them on are either quietly losing margin or renegotiating on a case-by-case basis – neither of which is sustainable as a long-term strategy.
The solution is a well-drafted price adjustment clause that is built into your standard terms from the outset.
What a good price adjustment clause looks like
There is no single template that works for every business, but an effective price adjustment clause will typically set out the circumstances in which prices can be adjusted.
For example, where your input costs increase beyond a set threshold, or annually in line with a recognised index such as CPI or RPI.
Specify the calculation mechanism clearly. Courts have found vaguely drafted price clauses to be unenforceable, so precision matters.
Require reasonable notice before any increase takes effect. In most cases, at least 30 days is advisable.
A clause should also address what happens if a customer does not accept the revised price, in particular, whether they have a right to terminate and on what terms.
In business-to-consumer contracts, there are additional considerations, such as The Consumer Rights Act 2015 requires, which requires that price variation terms are fair and transparent.
A clause that allows a business to increase prices without notice or for no specific reason is likely to be unenforceable and potentially exposes the business to regulatory scrutiny.
Therefore, customers should have a genuine right to exit if they do not accept a significant price change.
Other conditions for consideration
Price clauses are rarely the only issue that emerges during a review. Other areas that frequently need attention include and should be interrogated:
- Liability limitations – are your caps on liability still appropriate given the value of contracts you are now entering?
- Payment terms – do your terms reflect realistic credit periods, and do they include adequate provisions for late payment interest and recovery of debt collection costs?
- Intellectual property – if you produce bespoke work, do your terms make clear who owns the output?
- Dispute resolution – do your terms include a process for handling complaints and disputes before they escalate to litigation?
Terms and conditions that were fit for purpose five years ago may not reflect how your business now operates, what you now charge, or what protections you currently need.
A review is not a major undertaking for most businesses and the cost of doing it properly is modest compared to the exposure that outdated terms can create.
If you would like us to review your standard terms and conditions, or to draft a pricing adjustment mechanism tailored to your business, please get in touch and we will be happy to help.
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