Price Adjustment in Supply Contracts

In Wagners Cement v Boral the court considered a price adjustment clause benefitting the purchaser as follows in a long-term contract for the supply of cement:[1]

Example

7.2 If at any time and from time to time the Purchaser gives notice to the Supplier (a Pricing Notice) setting out Market Pricing Evidence in respect of any type of Product which provides for a price for that type of Product (per tonne and excluding GST) which is lower than the then prevailing price under this Agreement, then subject to clause 7.4 the price for that type of Product under this Agreement will from the date of the Pricing Notice be reduced to the price specified in the relevant Market Pricing Evidence.

The Pricing Notice was defined in the contract to require pricing which was current at the date of the notice, for products available to purchase.[2] As the purported notice did not contain information meeting that description, it was held that no valid Pricing Notice was issued, and so the clause had no application.[3] Similarly, where the clause only allows a price review to be triggered in a specific time period, late delivery will result in a loss of the right.[4] An adjustment to market pricing clause may refer such a determination to an expert or other decision maker. This in turn, controversially, may entitle the parties to seek evidence of current market pricing from their competitors through subpoenas.[5]

In ABC v Australasian Performing Right Association the High Court considered a consumer price index review (CPI) clause as follows in an agreement to license musical works:[6]

Example

… the payments referred to …shall be subject to … rise or fall by a percentage equal to the percentage movement in the cost of living in each financial year. For the purpose of assessing any variations, the movement in the cost of living is to be taken to mean the percentage movement in the  consumer price index  issued by the Commonwealth Statistician and this shall be taken for the December quarter in a financial year and compared with the previous December quarter, then where a variation is evident such variation shall be applied to determine the rate applicable for the whole of the then current financial year.

The ABC argue the fixed payment was subject to adjustment each year, without ratcheting up cumulatively, as the words were unambiguous.[7] The Association argued the fixed amount must increase each year, so that changes were cumulative, as the intent want to maintain a constant value over time.[8] The majority held the ABC’s view was correct on the words used, notwithstanding the “curious” operation of the clause.[9]

Modern drafting solves this issue in one of two ways. First, the index adjustment to the base price is applied by comparing the CPI index number at the commencement date to the CPI index number at the time of the review. Alternatively, the index adjustment is written so that the base price itself ratchets upwards each time the adjustment is undertaken. The CPI is published quarterly, and in addition to publishing a headline Australian CPI number (“All Groups CPI”) the Bureau of Statistics also publishes sub-indexes for different product types and different capital cities.[10] Other published indexes may be suitable for different supply arrangements. For example, interest rate movements or wage rate movements.[11] Many clauses seek to provide a back-up calculation mechanism should the relevant index not be published for any reason.

An adjustment clause will be more controversial if it gives on party the unilateral right to vary the price, without any limitation. A determination of price may be left to the party entitled to receive the price only where there are criteria, express or implied, which require the new price to be “fair and reasonable”.[12] An example of a clause held to be unenforceable is below.[13]

Example

Special condition 7: if commencement begins after the anticipated start date, the builder may increase the base price component of the contract price to the builder’s then current base price for the same house type and increase the contract price by the same amount.

[1] Wagners Cement v Boral Resources (Qld) [2020] QCA 289, [11].

[2] Ibid, [19].

[3] Ibid, [27].

[4] Chevron (TAPL) v Pilbara Iron Company (Services) [2021] WASCA 193.

[5]  Mobil Oil Australia v Guina Developments [1996] 2 VR 34, 38; Boase v Axis International Management [No 3] [2012] WASC 498, [19] – [21].

[6] ABC v Australasian Perf. Right Assoc [1973] HCA 36; (1973) 129 CLR 9, [2].

[7] Ibid, [5].

[8] Ibid.

[9] Ibid, [13] (Barwick CJ); [6] (Stephen J).

[10] See Bureau of Statistics, Consumer Price Index, Australia, https://www.abs.gov.au/statistics/economy/price-indexes-and-inflation/consumer-price-index-australia.

[11] See for example Reserve Bank or Australia, Australian Cash Rate Target, the Bank Bill Swap Rate (BBSW), or Bureau of Statistics, Wage Price Index, and

[12] Perpetual Nominees Ltd v Parist Holdings Pty Ltd [2005] NSWSC 1345, [30]; Kabwand Pty Ltd v National Australia Bank Ltd [1989] FCA 131; (1989) ATPR 40-950.

[13] Perera v Bold Properties (QLD) Pty Ltd [2023] QDC 99, [33], [49].