Pricing Issues In Contracts

Increasing prices makes people angry and litigious. It also makes them ask their attorneys to find creative arguments to terminate contracts. Put differently, inflation makes calling an attorney with both corporate and litigation experience even more important.

The simplest and most practical way to avoid either scenario is to use forms for taking orders, quoting prices, and invoicing that specifically state (A) whether any deviations from pricing are permitted and (B) under what circumstances prices may change. Because these issues can be thorny, an agreement should have an exhibit or other separate written statement that answers these issues clearly.

Pricing terms require special consideration because they are so many sub-issues. Here are my top five issues and commonly used language to address them.

1. Is the price fixed throughout the term? If yes, then the parties should use contract language like: The price for Products shall be as set forth on Exhibit A and shall remain unchanged throughout the Term.
2. Is pricing open for all or a portion of the term? The following language should work for sellers: The price for Products shall be the price shown on Seller’s website on the date Seller accepts Buyer’s purchase order.
3. Are there automatic increases in prices? Annual increases need to be spelled out: Initial prices for Products are set forth on Exhibit A. Prices shall automatically increase by 3% each calendar year, effective January 1st of such year. No other price changes will be permitted during the Term without the mutual agreement of the Parties.
4. Is the price increase variable? An uncapped increase should simply provide notice of the price increase: Prices may be increased at the start of each calendar year by Seller providing written notice to Buyer of such price increase at least ninety (90) days prior to the start of such calendar year.
5. Is there a cap on the price increase? If so, this language at the end of the sentence with the price increase should be helpful: “…provided that any such annual price increase shall in no event exceed 5%.”

Of course, many other terms in a sales contract may impact pricing such as renewal, return, price matching, force majeure, and MFN clauses. Experienced attorneys know pricing issues can be found in places where they are not intended or inadvertently added.

But if in “course of performance” of the agreement the parties disregard the contract’s language, then a Court might (A) consider the parties’ actual conduct to have amended the agreement and (B) find the parties waived certain contract rights and remedies. Therefore, it is important to require employees to follow all SOPs. One of these SOPs should be that all pricing discussions, negotiations, and decisions are written down if a contract dispute occurs.

After a pricing dispute ripens, the delicate balance between business considerations and litigation positioning will dictate strategy. This is particularly true when the parties appear to be digging in for a long-term battle. Business owners and their legal counsel need to discuss many issues including:

1. Litigation avoidance by increasing order amounts, creating an exclusive arrangement, adding value in different ways, spec changes, etc.
2. Importance of the relationship
3. Importance of the product–you might need an injunction to ensure access to an integral part
4. Demands for adequate assurances during the dispute
5. Protection against inadvertently repudiating the entire agreement on unfavorable terms
6. Payment or performance under protest
7. Substantial compliance with the agreement
8. Ability to collect from the other party

Hiring an “experienced” attorney is imperative. In this situation, an experienced attorney is one who understands all aspects of the contracting process.

Photo attribution:  Freepik | All-in-One AI Creative Suite