Contract clause for an automatic update of the price

How could you prepare your contract for possible changes in the economic situation?

The recent rise in inflation and the overall deterioration in the economic climate have raised the question of the adequacy of the price or remuneration in a number of contracts. These may be long-term rental contracts or contracts for the provision of services that take a long time to complete (e.g. construction). In such cases, a few years or a few months can turn an initially profitable contract into a ruinous one for one of the parties.

The law has the tools to solve or at least mitigate such problems. To this end, however, it is necessary to consult with a qualified lawyer before entering into the contract, who can provide the relevant legal mechanisms.

A common approach is the provision of a so-called price indexation clause. Upon signing, the parties agree that the remuneration under the contract will be periodically updated by means of a coefficient chosen by them. The criterion for updating may vary depending on the specifics of the contract and the interests of the parties. The price for the construction of a building may be set according to an index which reflects changes in the relevant market - for example the construction cost index (CGI) maintained by Eurostat.

A more universal and probably therefore more commonly used criterion for indexation is the inflation rate. In addition, inflationary changes are more tangible, including for lay people, making this method of price indexation more understandable, which naturally leads to a lower risk of a subsequent legal dispute.

It is not enough to state in the contract that the price will be updated in accordance with an index - be it inflation or another. It is also appropriate to indicate which source of information the parties will consider relevant for the calculation of indexation. Here again the advantage of inflation rate as such a criterion becomes apparent - most countries maintain official and publicly available inflation statistics. In Bulgaria, the National Statistical Institute (NSI) periodically publishes such data on its website.

In addition to selecting an index and determining the source from which information about it will be drawn, the parties must also provide for the manner of indexing itself. It should be specified when the price will be updated, either once or at set intervals. Perhaps most important: the formula by which the remuneration will be updated must be specified. For example, it could be provided that the price will be updated annually at the end of October, whereas it would be increased by a percentage corresponding to the rate of inflation for that period.

As is understood, if there is a consent, an agreement can be reached to update the price not only upwards. If the parties agree, it can be provided that if there is deflation, the remuneration will be indexed with the "negative" rate of inflation - i.e. it will decrease.

For the price update clause to make practical sense, it is important to explicitly state that the change will occur "automatically" based on changes in the amount of the selected criterion. This means that no further agreement between the parties would be necessary - because if further agreement is required, then the updating clause remains entirely wishful and meaningless - the counterparty would have no interest in agreeing to a price increase if it could prevent it.

Like any other element of the contract, the price update clause must be carefully worded to avoid subsequent legal disputes and the possibility of misinterpretation. Therefore, if you believe that the economic climate may have a serious impact on your contract, do not hesitate to contact an attorney to provide you with the necessary assistance.

This article expresses a personal opinion of the author, which clarifies principle and hypothetical positions - i.e. the positions expressed should not be considered applicable in every particular case. Therefore, the text does not constitute and should not be construed as legal advice. If you require such advice, you may contact me at [email protected] .