HOW TO RE-NEGOTIATE COMMERCIAL TERMS: NAVIGATING INFLATIONARY CHALLENGES
February 16, 2024 at 10:10 am
How to Re-negotiate Commercial Terms in an Inflationary World | Legal Gym Series
In today’s inflationary and unpredictable economic environment, the ability to re-negotiate commercial terms has become essential for safeguarding profitability and maintaining contractual balance. Commercial terms influence pricing strategies, cash flow, indexation logic, renewal cycles, and the overall structure of a company’s contractual portfolio.
As inflation persists, understanding how to re-negotiate commercial terms has become a critical part of a business lawyer’s role and a strategic priority for management teams.
As inflation persists, understanding how to re-negotiate commercial terms has become a critical part of a business lawyer’s role and a strategic priority for management teams.
Contractual Safeguards: Hardship and Force Majeure Clauses
Hardship clauses as renegotiation tools
Commercial terms are rarely immutable. Many companies include hardship clauses—also called renegotiation clauses—to restore contractual equilibrium when economic changes make performance excessively burdensome. These clauses have become increasingly important during periods of high inflation.
Force majeure and protection from unforeseeable events
Similarly, force majeure clauses provide protection when extraordinary, unforeseeable events prevent contractual performance. Unlike hardship clauses, force majeure generally does not create an obligation to renegotiate. Instead, it temporarily releases the supplier from liability, ensuring business continuity during disruptive events.
How to Transition to New Commercial Terms
Renegotiation as the correct legal mechanism
Commercial terms cannot be changed unilaterally. When agreements are binding, adjustments require a structured renegotiation process. This applies both to modifying existing contracts and drafting new ones that reflect current market conditions.
Inflation clauses and implementation timelines
Contracts containing inflation or indexation clauses allow companies to adjust pricing more efficiently. Without such clauses, adding an inflation mechanism may take months or even years, depending on contract duration, renewal terms, and customer-specific arrangements.
Proactive planning is therefore essential to ensure that commercial terms remain aligned with economic reality.
Proactive planning is therefore essential to ensure that commercial terms remain aligned with economic reality.
Challenges of Long-Term Contracts
Inflation’s cumulative impact
Long-term supply and service agreements are particularly vulnerable to inflation. Over time, rising costs may significantly distort pricing, reduce cash flow, and weaken profitability.
Companies operating under long-term contracts should regularly review their contractual portfolio to identify inflation risks early and initiate renegotiations before economic imbalance becomes too severe.
Companies operating under long-term contracts should regularly review their contractual portfolio to identify inflation risks early and initiate renegotiations before economic imbalance becomes too severe.
Management’s Role in Navigating Economic Shifts
Continuous monitoring and updating of commercial terms
Effective contract management requires ongoing tracking of both micro- and macroeconomic developments. Management teams should regularly update terms relating to pricing mechanisms, indexation, renewal periods, and volume commitments.
By doing so, companies can maintain commercial balance, avoid financial losses, and stay competitive even in volatile market conditions.
By doing so, companies can maintain commercial balance, avoid financial losses, and stay competitive even in volatile market conditions.
The Economic Model of Contract Damages
Why the model matters in renegotiation
The economic model of contract damages highlights two primary functions:
1) incentivising efficient breach, and
2) allocating risk between contracting parties.
During renegotiation, the focus often lies on determining when continued performance under the original terms has become economically inefficient. Understanding this model helps companies navigate renegotiations strategically while minimising liability exposure.
During renegotiation, the focus often lies on determining when continued performance under the original terms has become economically inefficient. Understanding this model helps companies navigate renegotiations strategically while minimising liability exposure.
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If you have questions about contract renegotiation, integrating inflation clauses, or strengthening your contractual portfolio, our experts Liene Krumina and Oscari Seppälä are available to assist.
Get in touch for business-oriented legal advice designed to protect your commercial interests.
Get in touch for business-oriented legal advice designed to protect your commercial interests.
About Us | LKOS Law Office – Leading Business Law Services in Finland
LKOS Law Office is an internationally awarded business law firm based in Finland. We assist companies with day-to-day legal challenges by providing practical and business-savvy solutions tailored to demanding commercial environments.
Our team advises clients on complex contract law matters, including renegotiation, drafting, and optimisation of commercial terms.
Our team advises clients on complex contract law matters, including renegotiation, drafting, and optimisation of commercial terms.
Get in touch — we are happy to help.
*This article is for information purposes only and does not constitute legal advice.*