Supply chain contracts continue to fall victim to market volatility in what remain challenging conditions for global trade. Given the skyrocketing costs at the height of the COVID-19 pandemic, many businesses entered into fixed-price contracts in an attempt to mitigate the impact and establish an element of predictability. Now that market prices are falling significantly below those set in fixed-price contracts, key parts of many supply chains, such as freight forwarders and their customers, are facing a dilemma.

In this article, we consider the risk of fixed-price contracts through the lens of freight forwarders and their customers, and the potential that mediation holds as a long-term solution for parties wanting to remodel their supplier relationships. 

The supply chain and freight forwarders

On the surface, it appears that businesses such as freight forwarders should be benefitting where their customers have been locked into paying "pandemic rates" for services such as detention and demurrage. However, with market prices falling so dramatically, it is proving a sticking point for some, and having a negative effect on the relationship between freight forwarders and their customers. 

Some contracts may contain minimum volume terms and exclusivity clauses, which guarantee a certain level of income. If your contracts do not have these provisions, you may find yourself at a competitive disadvantage compared with others who are offering rates more reflective of the times. Competitors with flexible pricing arrangements will adjust their offering to reflect the falling market value, attracting customers with lower prices. This puts businesses in fixed-price contracts at a disadvantage, potentially leading to reduced market share and profitability.

Customers

The pandemic put a strain on businesses, with many still finding their feet after the financial hit they took during those turbulent times. As the market value falls significantly below fixed prices, customers are bound to pay over the odds for services they could have obtained for less in a more flexible pricing arrangement. This reduces their profit margins and can have long-term financial implications, affecting investment capacity, growth opportunities and overall sustainability. Customers may struggle to meet minimum volume requirements, or pay the contractual rates, and begin to look for alternative options.

What can be done?

Despite the potential disadvantages, a fixed-price contract does not have to be a straitjacket for your business. 

We recognise that companies within a supply chain may take an agile approach and look to adjust the rates or arrangements, such as by reducing prices in exchange for an increase in business. We cannot stress enough the importance of ensuring there is clarity on such changes. A common area of disputes we see is where parties have, by their conduct, agreed to depart from the express wording of a contract, but in hindsight realise that each side had a very different understanding of what the new arrangement would be.

Documenting changes properly also ensures that you have complied with any contractual stipulations about what is needed to vary the contract. This is also a common cause of disputes. 

Mediation can be an effective tool to renegotiate and imbue more flexibility in your supply contracts, without sacrificing valuable relationships and business continuity.

While mediation has often only been considered once parties are entrenched in a dispute, we would recommend considering it as an option earlier on. It can be especially effective in the window before a cause of commercial friction crystallises into something more confrontational. It is more cost-effective than traditional litigation and less adversarial. Approached with the right mindset, mediation also provides an opportunity for businesses to analyse and completely rebuild their supplier relationships to establish more resilient and sustainable supply chains in the long term, rather than relying on temporary "Band-Aid" solutions.

If your supplier contract contains an alternative dispute resolution clause, this provides a natural mechanism, whether or not you consider that a formal dispute has arisen. However, this is not a prerequisite – mediation is open to all and if you can reach agreement on a sensible forum to explore resolution, this can be the first step to getting the relationship back on track.