Price Increases in Commercial Contracts in Singapore

No. In the absence of an express price adjustment clause, the supplier does not have a right to unilaterally increase prices under Singapore law. 

Under Singapore law, a concluded contract is legally binding on the parties to the contract. As such, any substantive modifications to the contractual terms, including price adjustments, requires the consent of both parties. Parties are then free to decide on terms pursuant to mutual agreement. In upholding the principles of freedom of contract and commercial efficacy, the Singapore courts have demonstrated flexibility in recent decisions regarding contractual variations. For instance, while it is necessary to find consideration for each party’s agreement to a variation, recent case law has reflected the courts’ willingness in finding such consideration to affirm a variation. 1   

That said, where contracts for the sale of goods are concerned, the Sale of Goods Act 1979 (“SGA”) provides a mechanism for determining the price of a contract if there is no express agreement on price or a contractual mechanism for determining the price. In the absence of such agreement, section 8(1) of the SGA provides that the price shall be determined by the course of dealing between the parties. If there is no such course of dealing, then section 8(2) of the SGA provides that the buyer must pay a reasonable price, to be determined on the circumstances of each case. 

Further, contracting parties should be aware that price adjustments, even if agreed, remain subject to statutory controls. For example, if there are third parties to the contract who are conferred contractual benefits or otherwise entitled to enforce contractual terms, contracting parties should take care that any price adjustments do not affect their rights. Section 3 of the Contracts (Rights of Third Parties) Act 2001 (“CRTPA”) provides that contracting parties may not, by agreement, vary the contract in such a way as to extinguish or alter such third-party entitlements without consent if the third party has communicated their assent to the relevant terms or otherwise relied on the relevant terms.

Ordinarily, a proposal for an extreme price increase may be treated as an invitation by the supplier to vary the terms of the subsisting contract, which the customer can either accept or reject. If the customer rejects the price increase, then the contract will continue at the original contractual price.  

However, a customer will have the right to terminate the agreement if the supplier, by its words or conduct, simply renounces the agreement insofar as it clearly conveys to the customer that it would not perform its contractual obligations at all (i.e. by delivering the goods or services at the agreed contractual price). 2  

Yes. Singapore law generally respects parties’ freedom to contract and will give effect to the intention of parties in creating their contract, so long as any agreed terms are not illegal.    

In practice, price adjustment clauses are widely found in construction contracts in light of volatile supply and costs of raw materials, equipment and labour. For instance, the Public Sector Standard Conditions of Contract contractually binds parties involved in public sector construction projects to adjust their contract prices according to prevailing price indices of construction materials. Apart from construction, price adjustment clauses are commonly found in Mergers and Acquisitions (“M&A”) transactions, agency contracts and supply of goods agreements. The following is a list of common clauses concerning price adjustments:  

• Price Variation Clause/Price Escalation Clause to account for change in costs of materials: Such clauses stipulate an adjustment of the contract price to accommodate changes in the cost of materials and labour. To accompany such clauses, mechanisms such as price indices and adjustment formulae are used to determine the price after adjustment.  
• Price Variation Clause to account for changes in law: This clause provides for situations where changes in laws affect the projected costs in the contract. The clause usually stipulates that the risk is to be shared between parties.  
• Price Variation Clause (general): Such clauses allow for an adjustment of the price of goods or services due to factors such as inflation or changes in market conditions.  
• Purchase Price Adjustment (“PPA”) Clause: Prevalent in many M&A transactions under Singapore law, this clause adjusts the sum payable for the purchase of a business in M&A transactions, post-completion. It is a means for buyers to protect themselves against potential decreases in the target’s value from the time of valuation to completion. The most common PPA clause is the Net Working Capital Adjustment clause which is used to account for changes in the target’s working capital. Other PPA clauses include clauses providing for adjustments to other financial statement line items.

Parties should consider the following issues with regard to price adjustment clauses:   

• Precise and clear drafting of unilateral price adjustment clause: A price adjustment clause allowing one party to unilaterally vary the terms of an agreement has been recognised by the Singapore courts as “unusual’ and therefore “clear language to reserve this sort of power” is required. 3.   
• Good faith in exercising price adjustment clause: Parties exercising the right to enforce a price adjustment clause should ensure that their contractual discretion is exercised “honestly and in good faith for the purposes for which [such discretion] was conferred”, and not in a manner that is “capricious or arbitrary or so outrageous in its defiance of reason that it can be properly categorised as perverse”. 4  
• Requirement of reasonableness: The enforceability of a price adjustment clause is subject to the requirement of reasonableness in section 2 of the Unfair Contract Terms Act 1977 (“UCTA”), which extends to B2B contracts where one party deals as consumer or on the other party’s written standard terms of business. 5  

When formulating price adjustment clauses, parties should consider the following additional issues:  

• Compliance with sector-specific regulations: In Singapore, various sectors are to comply with specific regulations and guidelines from the relevant authorities, which could impact the formulation of a price adjustment clause. For instance, the Infocomm Media and Development Authority has released Codes of Practice which regulate pricing in the media and telecommunications industry to preserve and promote competitiveness.  
• Long-term considerations: If the contract is intended to be in operation for a long period, parties should consider inflation, currency and interest rate fluctuations when drafting the price adjustment clause. 
• Worked examples and specificity: For optimal clarity, it is advisable to provide worked examples of any formulae to be used in the price adjustment clause to mitigate the risk of disagreements and litigation. It is also recommended to specify the index to be used for measuring price fluctuations as well as the reference dates for any calculations.  

Yes. The following is a list of additional considerations with regard to the inclusion of price adjustment clauses in business-to-consumer (B2C) agreements:  

• Clarity of price adjustment clause: Particular care must be taken in drafting a price adjustment clause within the context of B2C agreements. Following Section 4(c) of the Consumer Protection (Fair Trading) Act 2003 (“CPFTA”), it is unfair practice for a supplier to take advantage of a consumer if the supplier knows or ought  reasonably to know that the consumer is not in a position to protect his/her own interests or is otherwise not reasonably able to understand the character, nature, language or effect of the transaction or any matter related to the transaction. 
• Reasonableness of price adjustment clause: The price adjustment clause may be unenforceable if it is unreasonable pursuant to UCTA. A key consideration in determining whether a clause is unreasonable is the relative bargaining positions of the parties. In B2C agreements, the bargaining parity between the parties tends to be more asymmetrical than in a B2B agreement. This would increase the risk of the price adjustment clause being found unreasonable, and hence ineffective.  
• Compliance with sector-specific regulations: In accompaniment to the CPFTA, the Guidelines on Price Transparency (“Guidelines”) released by the Competition and Consumer Commission of Singapore seek to help suppliers in Singapore better understand pricing practices that could be in breach of the CPFTA. The Guidelines describe potentially unfair practices and what suppliers can do to avoid committing such unfair practices. 
• Disclosure of price adjustment clause: Businesses should bring the attention of consumers to any price adjustment clause in the contract. According to the CPFTA, it is an unfair practice for a supplier to omit to provide a material fact to a consumer, use small print to conceal a material fact from a consumer or mislead a consumer as to a material fact in connection with the supply of goods or services. Businesses risk being found to have committed an unfair practice under the CPFTA if they fail to disclose the existence of price adjustment clauses to consumers in B2C contracts.