Nearly anyone involved in supply chain activity today knows that for the last several years dating back to the COVID-19 pandemic, we have seen significant inflation in the U.S. and around the world. Manufacturers have faced rising costs for materials, labor, energy, transportation, and more. However, many manufacturers find themselves tied to long-term contracts that may not match up with the realities of the current economic climate. Such contracts often limit a seller’s ability to simply increase prices to align with their rising costs. This dynamic has led to significant friction and a rising number of disputes as manufacturers in unprofitable contracts seek to raise prices while buyers push back and attempt to keep their costs from rising further. This article addresses some key issues and contractual provisions that parties must account for in such disputes.

UNDERSTAND THE TERMS OF THE CONTRACT

The first (and perhaps most important) step for any party involved in a pricing dispute is simply understanding which documents and terms constitute the contract that governs the parties’ relationship. In cases where the parties have a clear, negotiated, and signed written agreement, this may be easy. However, that often is not the case. In many relationships, the parties will have discussions and exchange various documents — such as requests for quotation or proposal, quotations, purchase orders, acknowledgments, and invoices — all of which may contain different and sometimes contradictory terms without ever truly reducing their agreement to a final form signed by all parties.

The Uniform Commercial Code (UCC),¹ which governs contracts for the sale of goods, provides a very broad standard for recognizing the existence of a contract. Under the UCC, “[a] contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract”² and “[a]n agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined.”³ However, confirming that a contract exists leaves open the question of what terms are actually included in the contract, which may require a separate analysis under the UCC “battle of the forms” provisions.⁴

Most pricing disputes hinge on three specific issues.

Pricing provisions

Perhaps the most obvious (but sometimes overlooked) contractual terms when reviewing a pricing dispute are the pricing provisions themselves. Parties must consider whether the contract truly is a pure fixed-price contract or whether there are other pricing provisions that need to be considered. If the contract includes specific provisions allowing the seller to increase prices, effect needs to be given to those rights. Some contracts may include provisions for indexing — adjusting the price based on a publicly available index. Such provisions are common in contracts in which raw material costs form a significant portion of the production cost. In contracts including these provisions, the parties must ensure they have accounted for any required changes in price. Finally, some contracts may include general statements or requirements that, while short of providing a clear and objective mandate to increase prices, indicate some intent by the parties that pricing might be revisited in the future. For example, some contracts might specify that the parties “review” or “discuss” pricing at certain points during their relationship. While there is limited case law addressing the impact of such clauses, they cannot be disregarded entirely. Generally, all contract provisions must be interpreted to give them some meaning.⁵ In addition, any negotiation or pricing review is subject to the general obligation of good faith and fair dealing under the UCC.⁶

Quantity terms

Aside from the pricing provisions, the most critical term in any contract for the sale of goods is the quantity term. Under the UCC, a written quantity term is the only provision that must appear in the contract.⁷ Absent a written quantity term, any contract for the sale of goods over $1,000 is not enforceable to require the purchase or sale of any additional quantities and where such a provision otherwise exists, courts cannot require the purchase or sale of quantities in excess of those provided for in the written term.⁸ If the seller does not have an ongoing obligation to supply additional quantities, it can require the buyer to agree to pay a higher price in exchange for the seller agreeing to accept orders for additional quantities.

In relationships where the parties operate on an order-by-order or spot-buy basis, the seller may be obligated to supply orders it has accepted at the contract price but is not obligated to accept further orders without agreeing on revised pricing. However, the written quantity term need not be expressly set forth as a specific number. A writing signed by the parties from which a quantity can be determined is sufficient, even if doing so requires reference to extrinsic evidence.

In many supply chain contracts, including in the automotive industry, it is common for the quantity to be based on the buyer’s requirements.⁹ However, when doing so, it is important that the parties properly draft the language of their written contracts to capture this intention, otherwise they risk creating a situation in which the contract may not actually have an enforceable provision. This is particularly true given a series of recent court decisions that have upended many common assumptions about the language necessary to create a requirements contract.

In 2023, the Michigan Supreme Court addressed the question of whether a purchase order designated as a blanket order, without more, was sufficient to form a requirements contract; it held that it was not.¹⁰ Last year, the U.S. Sixth Circuit Court of Appeals examined language stating that an order “covers” the buyer’s “requirements” but found that such language was insufficient; the court could not imply the term “all” in the buyer’s requirements, leaving the language too indefinite.¹¹ In the face of these and other decisions in this realm involving the interpretation of contracts, it is critical that parties be updated of the latest developments.

Term and termination

Parties must consider the duration of the contract and any rights of early termination. If the contract expires and the seller has no further supply obligation, the seller has the power to set new pricing (or other terms) as a condition for entering into a new contract. When engaging in discussions regarding pricing, both buyers and sellers must be mindful of the remaining term and expiration date for the contract. Even if obligated to supply for a certain period, the seller maintains leverage if the buyer expects the need for continued purchases beyond the contract’s expiration date. The seller can condition any future extension or new contract on the buyer’s agreement to an immediate increase. Conversely, buyers that grant a price increase may want to condition that increase on the seller’s agreement to extend the term of the contract.

In addition to the default duration, parties must be mindful of whether the agreement includes any rights of early termination. Of particular note, where the contract provides for successive performances but does not include a duration, the UCC generally permits for such contracts to be terminated by either party with reasonable notice.¹²

BUYER’S RESPONSES TO A REQUEST FOR INCREASE

When faced with a request for a price increase, buyers have a range of possible actions it can take in response. Assuming the buyer has evaluated the contract and believes that the seller’s request is not warranted, the buyer likely will want to push back on the price increase request. If the seller has made a simple request for an increase, a firm, polite reminder that the seller has a contract and the buyer will not agree to a price increase is usually the right approach. However, if the seller has conditioned its performance on the buyer accepting the increase, the buyer may need to issue a notice stating that the seller’s demand constitutes a breach of contract. The buyer may also demand “adequate assurance” under the UCC requesting the seller to confirm that it will perform its obligations and supply at the contract price when the time arises.¹³ If the seller does not provide the requested assurances, the buyer may treat such failure as an immediate breach and exercise its remedies accordingly.¹⁴

When parties are unable to resolve a dispute through negotiation, it may be necessary for the buyer to take legal action to enforce its rights. Such actions usually take one of two forms. In one, the buyer has the option to pay the seller its demanded increase under protest while reserving its right to pursue a lawsuit for recovery of the delta. In the second, depending on the circumstances, the buyer may seek an injunction obligating the seller to continue supplying the product at the contract price. The buyer’s ability to obtain an injunction can vary significantly depending on the facts of the specific situation. However, a request for an injunction generally requires the buyer to demonstrate a combination of the following factors:

• The buyer is likely to succeed on the merits of the dispute;

• the buyer will suffer irreparable harm without the injunction;

• the balance of harms favors issuance of the injunction; and

• where the public interest lies.¹⁵

CONCLUSION

With rising costs expected in many areas for the foreseeable future, both buyers and sellers should be mindful of their rights and obligations with respect to prices under their contractual agreements. Following the best practices and key terms addressed above will assist parties as they work through any disputes that may arise with respect to pricing.