One issue that currently concerns many companies active in international trade is the rising price of raw materials. I had already written an article here for the Chamber of Industry and Commerce last month, but I would like to shed some light on the topic here as well:
Still ongoing effects of the coronavirus pandemic, supply chain disruptions and international trade conflicts are currently testing international supply relationships. One of the consequences: Soaring prices for raw materials and intermediate products. Many companies are faced with the question of how they can continue to do business despite the high prices and, above all, in the face of a constant uncertainty.
Important to know: You can take precautions to absorb price risks with a well thought-out contract design. In practice, open price formulations as well as price adjustment and price adjustment clauses are used here. By the following, I want to provide you with important practice tips.
The crucial point is, first of all, a direct look at the existing contract. If the contracting parties have agreed on a fixed price or a fixed unit price for the delivery, then this is in general given priority first – also with regard to the general legal principle that the seller must bear the general price risk.
Nevertheless, special arrangements are possible: Suppliers can secure contractual freedom with so-called open formulations such as “subject to short-term price adjustments” or “offers subject to change based on weekly prices”. Dynamic adjustment to a weekly or monthly updated price list is also possible.
However, if one is in the situation of drafting a wording oneself, it should be clear and predictable. Otherwise, the user of the contractual wording runs the risk of it being considered “non-transparent” and could be ruled invalid by the courts.
Many suppliers also use price adjustment or price escalation clauses. In case law, these clauses are sometimes also referred to as price escalation clauses. These trigger an automatic percentage adjustment of the current delivery prices, often in connection with a specific price index. The increase/decrease can be designed as a direct price adjustment according to an index or in connection with a threshold value. A feasible formulation here would be: “If, after conclusion of the contract, the listed purchase prices increase or decrease by more than 20 percent at the time of settlement according to the price index listed below, the unit prices of the affected items shall be adjusted by this factor at the request of a contracting party.” It should be noted here, however, that there must be a clear basis for assessing the initial prices and that the clause must be clear and understandable.
Finally, so-called change order clauses are also conceivable. These allow the contracting parties to agree in advance on a specific procedure for any price adjustment. Specifically, a process is agreed upon here which provides for the necessity of a formal change request, an agreement procedure and/or the involvement of management bodies or an arbitration expert. Change order clauses are used, for example, if an installation service is agreed together with the supply contract, and in particular for complex and time-consuming processes such as the installation of a facility. From a legal point of view, change order clauses are largely unproblematic, as the contracting parties must first agree on the new price and there is no unilateral price adjustment.
If the specific contract does not provide for an explicit clause, depending on the legal system, an adjustment of the contract in the sense of a price adjustment is only possible to a very limited degree.
Under German law, for example, a statutory price adjustment is only possible if price changes are very serious and unforeseeable – in fact, under German law, the principle applies that changes in economic conditions may only have an impact on existing contracts to a fairly limited extent. In practice, there must be an enormous price increase and a sudden event as a compelling cause. A price increase of only 20 percent is not considered sufficient by case law in any case. Here, the institute of frustration of contract (§ 313 BGB), which is anchored in German civil law, is used.
If the UN Convention on Contracts for the International Sale of Goods is applicable, there are in principle only very limited possibilities for statutory price adjustments. According to § 79 I CISG, a unilateral release from the contract is nevertheless possible if a price increase of 150 to 200 percent has occurred within a short period of time.
English law is even more restrictive and, in accordance with the principles of the “doctrine of frustration,” only accepts non-economic reasons for a contractual adjustment. Changes in prices fall under the risk of condition and do not allow a contract adjustment by law. Not entirely unproblematic is the fact that the legal institution of the “doctrine of frustration” is not codified in English law and is solely the product of judicial law.
The situation is similar in Chinese law, which, according to Art. 533 of the Chinese Civil Code, fundamentally excludes economic reasons and thus changes in market prices as grounds for a contract adjustment.