You either love it or hate it. This could apply to both Brexit and Marmite, two very British phenomena – but because of the former, you may soon be unable to get your hands on the latter, at least in some shops.
The decline in the value of the British currency since the referendum on Britain’s membership of the EU returned a result in favour of an exit has been dramatic and, some now begin to think, irreversible. While everyone has noticed the slide in the value of sterling in travel exchange shops, its impact on daily life had not been fully appreciated until Britons picked up morning newspapers bearing headlines of doom, threatening the disappearance of British staples such as Marmite and Dove soap from supermarket shelves. In the most notable case, Tesco reportedly refused to agree to a price hike demanded by Anglo-Dutch company Unilever, leading to a supply problem involving some Unilever products.
What these headlines reveal is a very real legal problem that is about to hit British businesses and their counterparts around the world. Cross-border commercial contracts specify the currency in which payments are due to be made. What happens, however, when the value of the specified currency changes drastically and the amount to be paid no longer reflects the value of the goods to be supplied?
To return to the recent headlines, Unilever, the owner of Marmite, produces a number of products overseas which are then brought to sale in the UK. If it costs Unilever, for example, 0.20 euros to produce in France a bar of soap and deliver it to a British supermarket which buys it for 0.25 pounds, the recent drop in sterling presents the company with a big problem.
Before the referendum, one could exchange sterling for euro, getting perhaps 1.25 euros to the pound. Using the above hypothetical figures, this means that each bar of soap bought by the supermarket in early June 2016 would have given Unilever 0.31 euros, a profit of 11 cents on each bar. The same transaction with October 13’s price of 1.09 euros to the pound, however, means that Unilever would get 0.27 euros, a profit of just seven cents.
To maintain its profit margin, Unilever will want to raise the price at which it sells its goods to the supermarket – and has defended its recent price hikes. But the supermarket will not be pleased with this, as it will not want to pass on the burden to the consumer by raising prices on the shelf. Hence the spat between Tesco and Unilever – dubbed #Marmitegate – that threatens us with a temporary lack of common goods.
But is it legal to demand a price increase? A lot will depend on what the contract between the supplier and the retailer actually says. It is common to have price variation clauses in contacts that allow the supplier to raise prices if their manufacturing costs increase, or on the basis of other variables.
Think of your energy bills, for example. In the absence of a variation clause, or similar contractual mechanism, energy companies would face big losses if supply costs wildly fluctuated. Perhaps the most relevant historical precedent is the oil crisis of the 1970s. The severe disruption caused by rapid increases in oil prices led to high inflation and turmoil in the currency markets.
Many businesses found themselves in the unhappy situation described above, seeing the real value of their foreign currency gains decrease. In the eyes of the law, an extreme alteration in exchange rates could be considered an external event (such as a natural disaster or fire that destroys goods about to be shipped) that prevents the performance of a contact, known as a “frustrating event”. This, however, can only work when the contract itself does not make provision for the consequences of external shocks in what is commonly described as a force majeure clause. Most contracts do apportion losses and costs of an extreme occurrence, offering lists of events that would qualify.
It is unlikely that the recent drop in sterling would qualify as a frustrating event that allows parties to suspend performance of their obligations. It is also unlikely to trigger force majeure clauses that would apportion losses according to pre-agreed principles. Before Brexit officially takes place, one could not even argue that any detrimental consequences are due to a change in law, triggering remedial provisions in most contracts.
What can a business do, therefore, when faced with dwindling profits? One could trigger termination clauses (if present) and once contracts are ended, renegotiate new ones with different pricing mechanisms. If the damage sustained by continued performance of the contact is too severe, one could even choose to breach the contract. Compensation for the victim of the breach is assessed on the basis of the loss they are actually suffering, not on how much money the perpetrator is saving. There may be some relief to those expecting payments of compensation for legal disputes already resolved. If a compensation award is denominated in sterling and the value of it has been significantly reduced, 1970s-era jurisprudence suggests an increase of the amount payable may be possible.
But are you likely to see Marmite and your favourite bath products on the shelves again? Most certainly, yes. You are also most certain to find them to be more expensive. After all, someone will have to pay for the loss of profits and the lawyers’ fees.