Businesses may be contractually obliged to cut prices as RPI falls

 01/03/2009

Businesses across the region could be facing unexpected price freezes or even price cuts in the coming weeks, as the reality of the retail prices index begins to bite.

Leading Midlands law firm Higgs & Sons made the claim in the wake of the retail prices index falling to zero per cent for the first time in 49 years. 

Many commentators expect this index to slip into negative figures as the economic crisis deepens and Higgs' associate Kate Legg believes this may have significant, unexpected consequences for businesses.

She said: "Many commercial contracts, such as supply or distribution agreements, contain default price mechanisms whereby prices are fixed initially, with an automatic increase linked to the RPI increase each year. 

"A zero or negative RPI may mean that in the coming months, suppliers are contractually bound by price freezes or even price cuts."

The downward pressure on the RPI has been largely caused by lower mortgage repayments as a result of falling interest rates.  As a result, the RPI may no longer be an appropriate measure for price increases in commercial contracts.  Although the RPI is falling, the actual cost to the business of supplying its goods or services may well be increasing.

Kate added: "The situation could be of benefit to customers, but if you are a supplier, then it is more important than ever to know what drives your business's costs.

"Businesses should review supply agreements, particularly those which continue for more than a year, to check whether they contain RPI price clauses and amend those documents as necessary. 

"Alternatives may include replacing the RPI with an alternative index such as the consumer price index or an index related to labour costs or a fixed percentage. 

"From the supplier's point of view, the contract should contain an effective "get out" if the price becomes so low that it is simply uneconomic to continue to supply the goods or services at the contractual rate."

For more information about Higgs & Sons' corporate services and the implications of the retail prices index, call Kate Legg on 01384 342100.