The ongoing oil crisis – driven by escalating Middle East tensions, the continued blockade of the Strait of Hormuz, and deepening uncertainty over the future of OPEC as a cohesive force in global energy markets – is having a profound impact on UK process and industrial manufacturing. Businesses across the chemicals, food processing, oil and gas supply chain, and advanced manufacturing sectors will already be feeling the effects, and there is no clear near-term resolution in sight.
By Dorrien Peters, Partner and Head of the Manufacturing Sector Group at Schofield Sweeney LLP
Soaring operational costs, driven by 60-70% increases in gas and electricity prices, are squeezing margins across energy-intensive process industries, from chemical manufacturing to food processing and precision engineering. Supply chain disruptions, feedstock shortages and elevated raw material costs are compounding those pressures, creating inflationary risk that threatens investment and, ultimately, jobs. The fragmentation of OPEC’s pricing consensus adds a further layer of unpredictability. With member states increasingly pursuing divergent output strategies, the price volatility that process manufacturers are trying to plan around, may persist far longer than earlier forecasts suggested.
But beyond the immediate financial pressure, this crisis is quietly creating serious commercial and legal risks that could catch even the most diligently-run process manufacturer off guard – particularly those operating under long-term supply contracts that were drafted in a vastly different energy environment.
So, what are the key contractual issues that process and industrial manufacturers should be thinking about right now?
The first question most manufacturers ask is whether they can recover their increased energy and raw material costs from their customers. And the answer depends entirely on what your contracts say.
Fixed-price contracts – common in manufacturing – can leave you absorbing significant losses with no legal route to recover them. If your agreement has a price variation or cost escalation clause, you may be able to adjust prices, but only if you follow the correct process and can evidence the increase. If there is no such clause, renegotiation is your most practical option, even though it may be a difficult conversation.
The term ‘force majeure’ is being invoked with increasing frequency across supply chains serving the process industries. Most commercial contracts include a force majeure clause, which can excuse a party from performing its obligations when extraordinary events beyond their control make performance impossible or unlawful. The continued blockade of the Strait of Hormuz – one of the world’s most critical energy chokepoints – is precisely the kind of event that suppliers are citing when seeking to justify non-delivery or price renegotiation.
However, courts interpret these clauses narrowly. Simply being more expensive to perform is not enough, you typically need to show that performance has become genuinely impossible, not just significantly harder or less profitable. If your supplier is invoking force majeure to justify non-delivery, look carefully at the contract and if you are considering invoking it yourself, take legal advice first.
Where there is no force majeure clause, the common law ‘doctrine of frustration,’ may come into play. This applies where an unforeseen event makes the contract radically different from what was agreed, through no fault of either party. It is a high threshold to meet, but in extreme supply chain scenarios it can apply. If a contract is frustrated, both parties are discharged from future obligations. However, the outcome can be unpredictable, so it is not a step to take lightly.
So what can you do to protect your business?
Whether you are dealing with feedstock shortages, supplier failures, or customer demands that your contracts no longer support, the most important thing you can do right now is review your existing contracts. Understand what protections – or risks – are already in place, and whether your force majeure definitions are broad enough to cover the current crisis scenario.
For new contracts, build in appropriate price adjustment mechanisms, indexed where possible to energy benchmarks, alongside longer lead times and clearly drafted force majeure clauses that reflect today’s realities. Keep detailed records of all cost increases, energy invoices and any correspondence with suppliers and customers about the impact of the crisis. That documentary evidence will be critical if a dispute arises.
And, most importantly, do not wait for disputes to escalate.
If a supplier has already told you they cannot deliver, or a customer is refusing to accept a price increase, acting quickly and with the right legal strategy will give you the best chance of a commercially sensible outcome – whether that is through negotiation, mediation, or, if necessary, litigation.
Dorrien Peters is a Partner and Head of the Manufacturing Sector Group at Schofield Sweeney LLP, a full-service Yorkshire law firm. A qualified engineer who spent seven years in the aerospace industry before requalifying as a solicitor, he has specialised in manufacturing and process industry disputes for over 23 years. He advises clients across the UK on complex commercial disputes, supply chain contracts, and energy-related legal risk.
