Challenging a Supplier Price Increase Under an Illinois Supply Agreement

A regional food packaging distributor signs a five-year exclusive supply agreement with a manufacturer of molded containers. The contract fixes initial pricing but lets the supplier “adjust prices from time to time.” It also carries a minimum purchase commitment and steep early termination charges. Two years in, the supplier announces a 40% increase effective next month, with no explanation beyond the contract’s adjustment clause.

The distributor buys about $100,000 in containers a month, so the increase costs $40,000 a month, or roughly $480,000 a year. Switching suppliers, meanwhile, would trigger the termination charges.

However, a supplier's contractual right to adjust prices does not necessarily mean it can impose any increase for any reason. The agreement's language, applicable good faith requirements, and the supplier's actual exercise of discretion may provide grounds to challenge the adjustment.

The Price Clause Comes First

The analysis begins with the precise language of the price adjustment clause, and those clauses vary widely. Some tie increases to raw material costs, a published index, or scheduled review dates. Others, by contrast, give the supplier broad discretion with no formula. In addition, the clause may require advance notice, supporting documentation, or a cap on increases. Timing matters too: a right to adjust prices going forward doesn’t usually allow repricing goods already ordered, so whether the increase reaches orders already placed can be significant.

The rest of the contract shapes the leverage. Exclusivity, minimum purchase terms, and termination charges don’t make the agreement unenforceable, but they explain why the buyer can’t simply walk away. They also give context to how the supplier used its discretion.

Illinois Requires Good Faith When One Party Sets the Price

For contracts for the sale of goods, Section 2-305(2) of the Illinois Uniform Commercial Code provides that a price to be fixed by the seller or the buyer must be fixed in good faith. The official commentary to the UCC rejects the idea that a contract letting the seller set the price allows it to charge any price it wishes.

Good faith does not mean, however, that every price increase must be modest or that a court may rewrite an unfavorable commercial bargain. For example, a 40 percent increase supported by legitimate changes in market conditions may present a different issue from an increase imposed to force a customer out of an otherwise binding supply arrangement.

However, what good faith requires is less settled. For instance, in Oshana v. Buchanan Energy, No. 11 C 4135 (N.D. Ill. 2012), a federal district court permitted a claim involving allegedly bad faith fuel pricing under Illinois UCC § 2-305(2) to proceed. The allegations involved more than the size of the increase; they concerned the supplier's alleged use of pricing discretion to undermine the commercial relationship.

On the other hand, several courts, including the Texas Supreme Court in Shell Oil Co. v. HRN, Inc. (2004) and the Ohio Supreme Court in Casserlie v. Shell Oil Co. (2009), have held that a price that is commercially reasonable and applied to buyers without discrimination generally satisfies the duty, without inquiry into the seller’s motives. The Fifth Circuit in Mathis v. Exxon Corp. (2002) took a broader view, allowing a claim where the seller allegedly set prices to drive its dealers out of business.

Whether Section 2-305 applies at all depends on the transaction. A contract for services, or one with a fixed formula, may raise different questions. Separately, Illinois contract law limits how a party exercises discretion the contract gives it. That principle doesn’t override clear terms, but it can matter when discretion is used for a purpose the parties never contemplated.

Building the Record

The size of the increase alone rarely proves bad faith. Instead, the stronger evidence typically shows how the supplier treated other customers, whether its stated reasons match its actual costs, whether the contract required supporting data, and how the increase fits with the supplier’s other conduct. The supply agreement, invoices, pricing notices, purchase orders, and every communication about the increase are the starting point. In addition, market data on input costs during the same period can show whether the increase tracks real changes.

Performing While Objecting

Refusing to buy or withholding payment can turn a pricing dispute into a breach claim against the buyer. A safer course in many cases is to keep performing while objecting in writing, reserving rights, and documenting that the higher payments are made under protest. Continued payment without objection can later support arguments that the buyer accepted the new price.

Before any move, the contract’s dispute resolution, notice, and termination provisions also need attention. After all, the goal isn’t only to show that the increase is painful; it’s to show that the supplier exceeded the authority the contract gave it, or used that authority in a way the law doesn’t allow.

We help businesses evaluate supplier pricing provisions, exclusive supply agreements, and disputes involving unilateral price increases. If your supplier claims unrestricted authority to change your prices, contact us to review the agreement, supporting records, and available legal options.

This article provides general information and does not constitute legal advice. For guidance concerning a specific matter, see our contract review and advisory services. Contract language should be assessed alongside the business arrangement and the consequences of enforcing it. To discuss potential representation, request a consultation. Submitting an inquiry does not establish an attorney-client relationship.