These price review clauses ensure that over time, the price for goods and services supplied reflect changes in the market. Price review clauses are generally used to adjust the price or cost of goods and or services supplied under a long term contract.
Generally a party may initiate the process to adjust all or part of the contract price for the goods or services supplied. The following issues are the important considerations to be taken into account in drafting price review clauses. Structure of a price review clause Price review clauses commonly contain the following features:
1. A trigger event.
2. A procedure for arriving at the adjusted price.
3. A description of the factors or guidelines to be taken into account when adjusting the price.
4. The consequences if an agreement on price is not reached, and:
5. A description as to how the adjusted price is to apply under the contract.
Price review clauses can be either:
• Non-prescriptive (eg a clause based on an agreement to negotiate in good faith an equitable revision to the price if market circumstances have changed); or
• Explicit and prescriptive (eg a clause requiring arbitration with adjustments only to be made with reference to pre-defined criteria).
Often a buyer will prefer to make it as hard as possible to revise the price (on an assumption that the price trend is increasing), while a seller will prefer a formal and binding mechanism to permit price increases. An example An example of a price review clause is below.
Price and Price Review. For the deliveries during 1st half 2007 the price FOB Nyborg/ Denmark or Pt Clarence, UK is EUR 432 per MT.
For shipment and delivery into Buyer’s storage tanks at Mosjøen in the year 2007, Buyer shall pay a freight cost of EUR /Mt (Bitfjord) or EUR /Mt (Viscaria) or EUR /Mt (Tarco Sea) from Nyborg. The same freight rates applies from Pt. Clarence to Mosjøen..
Pricing for each period of 6 (six) months commencing January 1 and July 1 of each year after 2007, shall be mutually agreed upon as set forth below. A shorter or longer period may be agreed in writing.
Seller shall, not later than 1 November and 1 May of each year during the term of this contract, give notice to Buyer of its asking price for the next half year period. Not later than 15 (fifteen) days thereafter, Seller and Buyer shall meet and agree upon the price and whether the pricing period shall be 6 (six) months or shorter or longer.
If the parties fail to agree on a new price for the next half year period prior to 10 December or 10 June, as the case may be, deliveries shall continue for 3 months of the new period at the last agreed price. During the first thirty (30) days of this period Seller and Buyer shall negotiate in good faith and in the spirit of this long-term agreement as well as in view of the general market situation for anode grade binder pitch. If during these thirty (30) days no new price agreement can be reached, Seller and Buyer shall not be obliged to deliver or receive the product after the expiration of the said three (3) months period. Delivery of smaller volumes than the contracted minimum volume may be agreed in writing between the parties for the remainder of the pricing period.
Notwithstanding the foregoing, the contract shall continue to be in effect (except to the extent the contract has terminated in accordance with clause ..(Term) hereof) and prior to the next pricing period commencing either 1 January, or any other date as agreed for the actual pricing period, the parties shall agree upon a price to be valid for that period. If no agreement can be reached prior to the 1st of the month preceding the start of that pricing period, the contract may be terminated by either party by giving written notice of termination to the other party with effect from the start of the next pricing period.
Below are some issues to be considered when considering the form of price review clause you may want.
Trigger events
A trigger event describes the circumstances in which a party can initiate a price review under the contract. Events that are often used as triggers include:
1. A stated date (eg every second year).
2. A stated date to take account of CPI rises.
3. On the occurrence of external events constituting a change in the circumstances which existed between the parties, or
4. When one party believes that such an external event has occurred.
Trigger events which depend on the occurrence of an external development are more likely to give rise to disputes. For instance, a price review triggered by a specified change in a particular index is unlikely to be open to subjective interpretation, and disputes are less likely to arise.
However, a trigger expressed to be an event which causes the cost of production of the goods or services supplied to be substantially varied from the cost at the date of the contract, provides ample room for disagreement about whether the trigger (condition) has been satisfied.
Some clauses seek to avoid disputes by providing a trigger that is not the occurrence of the event itself, but the belief by a party that the event has occurred.
This trigger can still give rise to disputes, where there is doubt about whether the belief is honestly (and reasonably) held by the relevant party.
An agreement to agree on a revised price will not be enforceable. Agreements to agree are too uncertain for courts to enforce. It is appropriate that parties seek to reach an agreement on a revised price but if not agreement is reached for the contract to be binding the parties need to ensure that the contract contains within it a mechanism for the revised price to be set. The mechanisms for this include agreeing to a price adjustment formula, arbitration or referring the question out for expert determination.
Steven Brown is chairman at Etienne Lawyers. Contact him at sbrown@etiennelaw.com
