Price Increases in Commercial Contracts in United Kingdom

Under English law, a supplier is not entitled to unilaterally increase prices under an agreement that it has entered into with a customer if that agreement does not contain an explicit right to do so. English law generally requires contracting businesses to perform their contract as agreed, even if it becomes difficult or unprofitable (Cavendish Square Holding BV v Makdessi, and ParkingEye Ltd v Beavis [2015] UKSC 67). In the absence of a price adjustment clause, any increase in price would need to be mutually agreed between the parties as a variation to the terms of the existing agreement.

Generally speaking, it will depend on the terms of the agreement as to whether an increase in the price by one party (whether extreme or not) will entitle the other party to terminate the agreement. If the agreement does not contain an explicit right for the supplier to increase prices, then, as specified above, any increase would need to be mutually agreed between the parties. If the supplier attempted to unilaterally increase prices (where it does not have a contractual right to do so), then, depending on the terms of the agreement, this may trigger certain termination rights in favour of the customer.

Yes, it is common practice to include an explicit price adjustment clause in long-term B2B agreements governing by English law. This is to allow for the price of the goods and/or services supplied to be adjusted in certain circumstances over the life of the agreement.  

Typically, price adjustment clauses take the form of an indexation clause, whereby the price charged under the agreement is linked to an identified index such as the UK Retail Prices Index or the UK Consumer Prices Index published by the Office for National Statistics. This enables the price to be automatically adjusted at regular intervals (typically annually) in line with the percentage change in the relevant index.  

Other price adjustment clauses exist to allow the supplier to either unilaterally or with the consent of the customer increase prices if certain trigger events occur. These may include (for example) where the supplier’s cost of raw materials or cost of production increases or there is a change in applicable laws impacting the cost of supplying the goods and/or services. Where such clauses are included in a B2B agreement, it is important to specify how exactly the price adjustment will be determined, by whom and when this review will take place, in order to reduce the risk of a dispute arising. 

Where a price adjustment clause is included in an agreement, customers may attempt to negotiate caps or other limitations on the extent to which the price may be increased. Customers may also seek to use an indexation clause to decrease prices if there is a reduction in the relevant index. Whether such negotiating tactics are successful will depend on the bargaining power of the parties involved.

Various legal issues need to be considered when drafting a price adjustment clause to ensure that it is enforceable. We have highlighted key legislation and case law below. However, as their application will be context-specific, it is advisable for the parties to obtain appropriate legal advice.  

In certain cases, including (for example) where an agreement is based on written standard terms of business, terms which give the supplier discretion to make changes to the price payable by the customer after the parties have entered into the agreement will be subject to a ‘reasonableness test’ under UCTA 1977.  

To pass this test, the relevant term must have been fair and reasonable to have been included in the agreement considering the circumstances which were (or ought reasonably to have been) known or contemplated by the parties when the agreement was made. Factors affecting reasonableness include (but are not limited to) the relative strength of the parties’ bargaining positions, whether the other party received any inducement to accept the term, and whether the other party knew or should have known that the term was included. Terms that fail the reasonableness test will be of no effect. 

Price adjustment clauses need to be clear and specific. Vaguely drafted clauses have been held by the English courts to be unenforceable (Amberley (UK) Ltd v West Sussex County Council [2011] EWCA Civ 11 and Esso Petroleum Co Ltd v Addison [2004] EWCA Civ 1470).  

Where the price adjustment is to be mutually agreed between the parties, the English courts expect the parties to avoid acting in an arbitrary, capricious, dishonest or irrational way; there must be an element of good faith in making the variation (Braganza v BP Shipping Ltd [2015] UKSC 17).

Yes, there may be other issues that are relevant in the circumstances. We have highlighted some key examples below. However, as their relevance will be context-specific and there may also be wider considerations, it is advisable for the parties to obtain appropriate legal advice. 

Businesses operating in certain sectors may be subject to specific restrictions on the extent to which they may increase prices charged to other businesses. Sector-specific restrictions are generally more common in the business-to-consumer context (see Q3 below) but may arise in a B2B context from time to time in response to certain events.  

The Competition Act 1998 (as amended) prohibits the direct or indirect imposition of unfair selling prices. This includes excessive pricing where the price bears little relation to underlying costs.  

The Competition and Markets Authority (the UK’s competition regulator) has powers to examine and investigate excessive pricing, especially in circumstances which may adversely affect competition in any UK market. Businesses found to have used excessive pricing may be required to take corrective action and/or be subject to other enforcement action. 

The Insolvency Act 1986 (as amended) (“IA 1986”) contains provisions that may have a bearing on how a price adjustment clause is formulated, depending on the nature of the B2B agreement, the goods or services supplied under it, and the parties to it.  

In particular, the IA 1986 provides that, subject to certain exceptions and conditions, where a company enters into certain prescribed insolvency procedures (including administration, liquidation and the coming into force of a moratorium under Part A1 of the IA 1986), and where specified steps occur under certain restructuring procedures in respect of a company (such as the approval of a Company Voluntary Arrangement), a provision of a contract for the supply of goods or services to that company will cease to have effect if it provides that, because the company becomes subject to a relevant insolvency procedure either: (a) the contract or supply would terminate, or any other thing would take place; or (b) the supplier would be entitled to terminate the contract or supply, or do any other thing. This would include a provision which provides that the relevant insolvency procedure triggers a change in payment terms. This restriction would likely also extend to provisions relating to price increases and the changing of credit periods, where those rights arise as a result of the commencement of the relevant insolvency procedure.  

For public sector contracts, there are special requirements for price adjustments due to raw material price increases. Please refer to our CMS Expert Guide on rising raw material prices.

Yes, additional considerations apply.  

Under English law, terms in B2C agreements which give a business the discretion to decide the price payable after the consumer has become bound by the agreement, where no price or method of determining the price is agreed when the consumer first becomes bound, will be subject to the ‘fairness test’ under the Consumer Rights Act 2015 (as amended) (“CRA 2015”).  

The CRA 2015 deems a term to be unfair if it is contrary to the requirement of good faith and if it causes a significant imbalance in the parties’ rights and obligations under the agreement to the detriment of the consumer. Whether or not a term is fair is determined by reference to all the circumstances existing when the rights or obligations to which it relates arose and to the terms and nature of any agreement on which it depends. Unfair terms will not bind the consumer. In practice, this means that price adjustment clauses in B2C agreements should, for example, include:  

• reasons for any future price increases;  
• the method of calculating the price increase;  
• a notice period before any increase takes effect; and 
• an option for the consumer to “escape” the increase, such as by turning off auto-renewal or cancelling the subscription. The cancellation right should also be capable of being exercised freely – the consumer should not be left worse off for having entered the contract, whether by experiencing financial loss (for example, forfeiture of a prepayment) or serious inconvenience, or any other adverse consequences. 

Consumer protection law in the UK also imposes other requirements on businesses that are relevant in the context of price adjustment clauses, including (amongst other things) that: 

• businesses provide pre-contractual information to consumers on the total price that will be charged (including taxes) or, if this cannot be worked out in advance, information on how the price will be calculated;  
• businesses must not mislead consumers by giving false information or omitting information about the price or the manner in which the price is calculated. If a consumer enters into a contract because of such behaviour, they have a right to rescind the contract, receive a discount or receive damages (in each case, subject to certain conditions being satisfied); and 
• all terms in B2C agreements must be transparent (i.e., in plain and intelligible writing), as a lack of transparency may indicate unfairness. 

In addition, businesses operating in certain sectors may be subject to specific restrictions on the extent to which they may increase prices charged to consumers in the UK. For example, in the energy sector, an energy price cap has been imposed by law to limit the cost of energy for consumers.