‘Rising costs will tempt retailers to review commercial contracts – they must be careful’

The UK retail industry is bracing itself for a hike in operational spending as it awaits the implantation of changes to employers’ national insurance contributions (NICs), national living wage and increased employee rights.

While the so-called ‘triple whammy’ won’t take effect until April, businesses don’t need a crystal ball to see what’s coming – just a sensible accountant.

The rules will affect all businesses, but sectors with lower-paid and younger staff, such as retail, will find their position compounded. Major retailers have already hit the headlines with their forecasts of significant cost increases from April. Marks & Spencer, for example, anticipates a £120m rise and Sainsbury’s has indicated that the rise in NICs alone will cost it £140m.

Many businesses, already under economic pressure, will struggle to absorb these costs without resorting to cost-cutting or value-enhancing strategies. Experience of these tougher market conditions tells us that this will lead to a temptation – irresistible to some – to review their existing commercial contracts and identify those with scope to become more economically advantageous.

However, while renegotiation of arrangements can be a legitimate tool for managing financial challenges, it is rare for contracts to provide scope for termination or meaningful renegotiation based purely on changes in economic conditions.

Therefore, parties often need to be more innovative to achieve their desired outcome. Some can leverage their commercial relationships to find a cooperative and mutually acceptable way of recutting the deal. Others need to resort to firmer measures, seeking to force through a change.

Since mid-2020, we have seen parties ‘shaking the tree’ on existing contracts to see if they can exit or squeeze better value out of them, including through relying on force majeure and economic duress, frustration, or other assertions of suspension or termination rights.

In some cases, companies have made threats of non-performance if their renegotiation goals are not achieved. Equally, we have seen suppliers offering an alternative, reduced quality, or delayed product or service for the same price in an attempt to manage cost pressures.

We expect to see more of this type of behaviour as the effects of the autumn Budget take hold, with parties looking to review their supply contracts and renegotiate or exit unprofitable arrangements.

Businesses receiving a threat from their contract counterparty pushing them to renegotiate the arrangement part way through the term should make a careful assessment of the rights relied upon.

Consider whether the threat is serious enough to constitute an anticipatory breach (where a party indicates they will not perform their future obligations) or a repudiatory breach (where a party has already failed to perform obligations that go to the heart of the contract), as this will make the next steps critical.

Where the threat relates to a business-critical product or service, it is always prudent to seek legal advice to ensure the legal position is protected and that avenues of argument are not inadvertently closed off in those early stages of engagement. This is particularly important where there is the potential to compel performance under the existing contract terms, depending on factors like urgency, availability of substitutes, and whether damages would be an appropriate remedy.

As the actions of the leveraging party may constitute a breach of contract, this can in turn have implications for the status of the contract and expose the leveraging party to liability for damages. While force majeure provisions, renegotiation clauses (particularly those expressly requiring good faith negotiations), termination provisions and common law concepts offer appealing opportunities to create leverage, these same areas offer fertile ground for disputes, which could quickly negate the value to be extracted or saved.

Retailers and suppliers seeking to renegotiate or terminate existing contracts part way through their term must tread carefully and – if in doubt – seek legal guidance. While the proverb says fortune favours the brave, in the world of contract law it’s important to remember that bravery without caution can be costly.