Cost of Living Concerns in Commercial Contracts for the Supply of Goods or Services or in Leases #6

By Gerry Neely
B.A. LL.B.

The recently reported record increase in the cost of living reinforces everyone's concern as to the method by which they can protect themselves against the decreasing value of the dollar. This concern arises particularly in commercial contracts for the supply of goods or services, or in leases, where the term of the contract or lease is for a number of years. The method most often used to ensure that payments made say in 1985, will provide a dollar return roughly equivalent to the value of the 1981 dollar, is to tie the basic cost to the supply of the goods or services, or the basic rent, to what is commonlv referred to as the cost of living index. The importance of describing correctly the index to be used is illustrated by a decision in an Ontario case, where the Court was asked to interpret the phrases "cost of living" and "cost of living index". The case involved the interpretation of a clause in a lease for a term of 10 years commencing August 1, 1973, at a monthly rental of $1,100.00. The rent for the second five year period beginning July 31, 1978 was to be adjusted in accordance with changes in the cost of living as measured by the cost of living index.

The court examined a number of definitions of the phrase "cost of living", but was unable on the evidence to determine what was intended as the source for the number or numbers of figures that constituted the "cost of living index". It was argued that the Consumer Price Index was intended by the parties as the source of these figures. The Court was unable to conclude, without doubt, that this was what the parties intended. It held that the references to "cost of living" and "cost of living index" were too vague and imprecise to be enforceable. Since there was no provision within the lease for arbitration, the landlord found himself in each year through to 1983, receiving rental set ten years earlier.

The following formula would have been successful.Increase Rent (1978-1983) = $1,100.00 x C.P.I. (1978)
                                                    C.P.I. (1973)

(C.P.I. means the Consumer Price Index for Vancouver, B.C. as determined by Statistics Canada, or such other Index as may be substituted for it by Statistics Canada or the then recognized Statistical Branch of the Canadian Government).

The definition of C.P.I. forms part of the formula. Instead of the index for Vancouver, the index for Canada could have been used. In addition, Statistics Canada maintains indexes for the price of products and those indexes could be used. If for e.xample you are dealing with the sale of a printing business where the cost of paper forms a substantial part of the cost of doing business, the index for pulp and paper could be substituted in the above formula.

The table below indicates the variations in the Consumer Price Index for Canada and Vancouver:

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