≡ Menu

Announcement: The Common Draft public catalog of contract clauses is posted (in draft); I plan eventually to turn the annotations and commentary into a book. If you’d like to be notified of significant updates, send your email address to me at dc@toedt.com. Don’t worry, I won’t spam you or sell your email address.

When you can’t just say no in a contract: Three creative compromises

Companies often don’t have the bargaining power to get their way in contract negotiations. When that’s the case, they have to think of other ways to help protect their business interests. Imagine, for example, that a customer is negotiating a master purchasing contract with a vendor.

  • The customer would love to flatly prohibit the vendor from raising prices without the customer’s consent. But the vendor’s negotiators won’t go along with such a prohibition.
  • The vendor would love to have the unfettered discretion to raise the customer’s prices whenever it wants. But the customer’s negotiators insist on at least some protection on that score.

What to do? In no particular order, here are three possible approaches that the parties could consider trying.

Non-discrimination language

A non-discrimination requirement at least brings a bit of overall-market discipline into the picture.

EXAMPLE: Vendor will not increase the prices it charges to Customer except as part of a non-targeted, across-the-board pricing increase by Vendor, applicable to its customers generally, for the relevant goods or services.

COMMENT: Vendor might want to qualify this language, so as to limit how general a price increase must be before it can be applied to Customer.

Advance-warning requirement

An advance-warning requirement can buy time for its beneficiary to look around for alternatives (assuming of course that the contract doesn’t lock in the beneficiary somehow, for example with a minimum-purchase requirement or a “requirements” provision).

EXAMPLE: Vendor will give Customer at least X [days | months] advance notice of any increase in the pricing it charges to Customer under this Agreement.

Transparency requirement

Requiring a party to provide information justifying its action, upon request, can force that party to think twice about doing something, even though it technically has the right to do it.

EXAMPLE [UPDATED]: If requested by Customer within X days after notice of a pricing increase, Vendor will seasonably provide Customer with documentation showing, with reasonable completeness and accuracy, a written explanation of the reason for the increase, including reasonable details about Vendor’s relevant cost structures. relevant to the pricing increase. Customer will maintain all such documentation in confidence any nonpublic information in such explanation, will not disclose the nonpublic information to third parties, and will use it only for purposes of making decisions about potential purchases under this Agreement.

COMMENT: Note the if-requested language, which relieves Vendor from the burden of continually managing this requirement — although a smart vendor would plan ahead and have the required documentation ready to go.

The above examples are specific to price increases, but the concepts can be adapted to a variety of needs.

Comments on this entry are closed.

  • Simon April 13, 2010, 8:32 pm

    Good post. Language to allow compromise is always useful.

    But – seasonably ? Is that a typo ?

  • Anonymous April 14, 2010, 4:28 pm

    As a buyer, if those alternatives were the best I could do, I’d probably try to get a termination right for material changes.

    The other alternative that’s not listed here, which is weird because it has to be the most-common, is capping price increases at CPI.

  • D. C. Toedt April 14, 2010, 7:14 pm

    @Anonymous, these are intended to be generic possibilities; you’re right that for price increases a CPI cap is very common.

    Also, if you’re the buyer, unless you’re locked into a purchase commitment, you can simply cease buying from that seller.

  • D. C. Toedt April 14, 2010, 7:16 pm

    @Simon, seasonably is defined in the [U.S.] Uniform Commercial Code — basically, it means at (or within) the specific time agreed, or if no time is agreed, at (or within) a reasonable time.

  • Anonymous April 15, 2010, 8:30 am

    Yes, I could always stop buying, but I like to make the salesperson explain to his boss that an entire contract is being canceled. That’s a little more unpalatable for a seller than a buyer that just disappears, so it gives me one more opportunity to get them to reconsider.

    In addition to the CPI cap, another limiter is usually that there can be no more than one price increase every [insert period - typically a year].