Long-term Supply Agreements And High Inflation — What Businesses Need To Know

Amid high inflation, a long-term supply agreement ("LTSA") can be an albatross. Exiting LTSAs is difficult but not impossible under Canadian law. Just how difficult depends on the contract: its text and the circumstances surrounding its formation.

Here are some legal principles that apply.

First, consider the provisions of the contract

An LTSA may contain provisions that allow terms to be adjusted to reflect market conditions. For example:

1. A price adjustment clause may empower parties to correct a contract price. Such corrections may be permitted if there are changes in the costs of manufacturing or supply of goods. A purpose of a price adjustment clause may be to ensure that the contract price accounts for market conditions and thus more accurately reflects the bargain struck in the contract. Such adjustments are generally based on pre-agreed terms concerning the adjustment formula and timing. In response to a triggering event, such as high inflation, a