Stuck in a contract that no longer makes a profit?
17 August 2022
With the ever-increasing cost of running vehicles, many operators have found themselves in a position where they are stuck in a contract which no longer make a profit.
A recent spate of enquiries has shown that this is particularly the case for a lot of operators servicing public contracts for fixed-term school contracts.
So, what can be done?
Firstly, you will need to review the contract for any clause which allows you to increase prices. For example, there may be a clause which allows for an annual price increase, or a clause which allows the operator to request a price review.
In some cases, the contract may provide for a fixed rate of increase, and in that instance, it should be fairly straightforward just to notify the Council of the increased charges. However, in other cases the contract may just leave the rate of increase to be agreed between the parties. If this cannot be agreed, then the contract may stipulate how disputes between the parties are to be resolved.
If there is no specific clause in the contract allowing for general price increases, then it may also be worth checking for a fuel escalator clause which allows you to increase prices in line with the current price of fuel.
If the contract does not allow for any price increase, then it may still be worth having a discussion with the Council and making it clear as a business it is costing you money to run the contract. If you outline the additional cost to you of providing the service, you may be able to appeal to the Council’s better nature to agree to a price increase despite the contract not providing for this.
Failing that, you may want to consider the termination provisions in the contract to check whether you are entitled to terminate the contract early.
Operators do need to be careful however that they are not in breach of contract by terminating the contract when they are not entitled to do so. You could end up in a position where the Council has to find another operator to service the contract and if their charges are higher, you may have to pay the additional costs incurred by the Council using the new operator.
If you do find yourself stuck in a contract which is no longer profitable and would like some assistance, then please contact a member of our commercial litigation team on 01254 828300. More details about our team can be found here.
The points outlined above are also important terms to look out for when negotiating a new contract with a local Council or a customer in general. Therefore, if you require any assistance to review and negotiate a new contract, then please call our corporate and commercial team on 01254 828300. More details about our team can be found here.
