Can post EU Referendum price hikes be forced upon Trusts?
Published 3 August 2016
A number of Trusts are facing the threat of price increases in their supply contracts as a result of the diminished value of the Pound, an issue which is also compounded by the Euro falling against the US Dollar. This is affecting Trusts that are buying goods from abroad, or where suppliers' raw material costs are going up and they are passing this on; consequently hampering Trusts' ability to achieve their efficiency savings targets.
There are questions around whether these post EU Referendum price hikes can be forced upon Trusts.
Mary Mundy looks at whether suppliers can force Trusts to accept such price increases and the contractual and procurement implications.
Check the contract
Firstly, Trusts need to check their contracts to see whether their suppliers can force a price increase. Suppliers may rely on variation clauses, however, the customer must usually agree to variations before they are imposed. In complex contracts, there may be a pricing or commercial schedule that deals with price changes, and there may well be currency fluctuation clauses that can be relied on. The NHS Terms and Conditions for the Supply of Goods do not include specific clauses addressing these issues – Trusts are expected to add them if required.
If there is no mechanism to agree a price increase, then it will come down to negotiation, with the option to terminate the contract in some circumstances.
Potential procurement issues
Watch out for procurement issues as price increases could amount to a material change, consequently breaching the Public Contracts Regulations 2015 (the "Regulations"). In this situation, the contract would be classed as an illegal direct award of a new contract and the Trust would be at risk of a challenge and a claim for ineffectiveness (cancellation of the whole contract). In this case, a Court would also have to fine the Trust, award damages to the challenger and possibly to the organisation that has had its contract deemed ineffective.
However, there are permitted variations for price increases under the Regulations: firstly, where the price increase has been clearly provided for in a clause in the initial procurement documents. If this is the case, the clause must state the scope and nature of the possible modification and the conditions under which it might be used, and it cannot alter the overall nature of the contract. Secondly, a variation is permitted where the need for modification has been brought about by unforeseen circumstances, and does not alter the overall nature of the contract and any increase in price does not exceed 50% of the original contract value. It might, however, be difficult to argue this, given that exchange rates will often fluctuate over the lifetime of contract, and exchange rate risk is therefore entirely foreseeable.
Any changes deemed "substantial" under the Regulations are material changes, such as where a modification changes the economic balance of a contract in favour of the contractor, in a manner which was not provided for in the initial contract. In these circumstances, it will not always be the case that the economic balance of the contract is being tipped in the supplier's favour – the supplier should be asked to evidence that without the price increase, the contract price is not viable. Suppliers should not be able to use the current circumstances to improve their economic position under contracts.
Implied right to terminate
For those contracts awarded after the Regulations came into force (26 February 2015), unless expressly stated, there is an implied term allowing the Trust to terminate where there is a substantial modification which would require a new procurement procedure. Therefore, Trusts should not feel forced to accept price increases and may be able to terminate depending on the circumstances.
No other option but to terminate?
There are issues around terminating a contract, especially where there is no alternative for the Trust and yet the products are still required. In this event, it may be that the Trust cannot afford the timescales under the Regulations for an open, restricted or competitive procedure with negotiation. However, in this case, Trusts could procure what is absolutely necessary using a negotiated procedure without advert, but then carry out a procurement process in accordance with one of the other procedures in the Regulations to put in place a longer term contract.
Lessons for future contracts
It may be sensible to include specific terms in future contracts (including the NHS Standard Terms) to cover exchange rate risk, stating expressly that variations in exchange rates cannot in themselves allow for price variation or contract termination. Alternatively, the contract might state expressly what amounts to a material change in one or more specified exchange rates over a minimum period of time, and what the consequences will be, rather than leaving scope for future legal argument.