Contracts in Inflationary Markets – Is Imprévision doctrine the solution?

Inflation has been hitting new peaks globally in the last few months, reaching 8.6% in US, 9.1% in UK, 8.8% in EU and 7.8% in India in the months of May/June 2022. As per the predictions of IMF, the global prices are likely to rise by 7.4%, which is significantly more than the price rises in last few years. Even if it is not backed with data, the pressure of unprecedented inflation can be felt by us in our daily lives.

As a Procurement professional, the biggest challenge in these extraordinary times is to ensure the business continuity by getting the existing Contracts executed or enter into new Contracts while minimizing the impact of inflation on the EBIT. The first step in this direction for the Businesses is to accept the fact that this unusual high inflation is for real, which hasn’t happened in the last 40 years and its impact on the existing Contracts and the new Contracts needs to be dealt accordingly. I will be focusing my discussion on the existing Contracts only which are more challenging to be handled.

The Contracts which have been finalized prior to the sky rocketing surge in the prices need to re-negotiated in some cases as the prices of raw materials, commodities, and fuel etc. have risen sharply and even if the Contracts have an in-built price adjustment mechanism, the same may be insufficient to address the impact of such sharp rise. The procuring entities while re-negotiating the prices should ensure that the increased prices are either linked to suitable indices or a provision is included to re-negotiate for reduction in the prices, when the inflationary pressure eases out.

The counter-argument could be that if the Contract has a fixed price, why not push the Supplier / Contractor to execute the work as per the terms & conditions of the Contract. In my experience, if the Contract doesn’t remain viable, it is unlikely the Supplier/Contractor would complete the work and there would be high chances of commercial disputes emanating in the contract execution leading to large delays, additional claims, arbitrations /litigations etc. which is a lose-lose situation for both the parties.

Many Suppliers resort to Contract provisions like Force Majeure or Doctrine of frustration to seek excuse of performance on account of unprecedented price rise, which in my opinion, is not the appropriate premise for seeking relief for price increase. The parties can either resort to mutual re-negotiation of the prices or the relief could be explored under the ‘Imprévision (hardship) doctrine’ which is different from Force Majeure or Doctrine of Frustration or Impracticability of performance doctrine in US (UCC 2-615). As per my understanding, increased cost alone doesn’t excuse performance under the Uniform Commercial Code (UCC) unless the rise in cost is due to some unforeseen contingency which alters the essential nature of performance.

On the other hand, article 1195 of the French Civil Code, which came into existence in October 2016, states that “If a change in circumstances, unforeseeable at the time of conclusion of the contract, makes performance excessively onerous for a party who had not agreed to bear the risk, that party may request the other party to renegotiate the contract.” This article of French Civil Code primarily deals with the hardships faced by a party which were unforeseeable.

The principles of “Imprévision doctrine” can de adopted by the companies, organizations and public sector entities to provide relief beyond the provisions of the Contract for the unprecedented price rise by mutually negotiating the prices. For example, the Government of France, in the month of March, issued a series of recommendations to support the public entities in the re-negotiation of prices in the public contracts by providing time extension, waiving Liquidated Damages and granting the increase in prices in existing contracts.

Though, Indian jurisprudence doesn’t envisage the “Imprévision doctrine” directly (sec 56 of the act is focused towards impossibility), the Private and Public entities can be considerate and can mutually re-negotiate the Contracts based on the doctrine of hardship. Government of India can issue some guidelines in this regard to laydown a frame-work.

However, the above approach should be adopted with a caution that this doctrine should not be misused by the Suppliers/Contractors for profiteering .

Disclaimer: The author is not a legal expert and the views expressed in this article are completely personal. The views expressed here do not purport to reflect the opinions or views of the Company where the author works.?