What is a Price Agreement Contract?
A price agreement contract is a contract that ensures that the price of the goods and services a buyer purchases will be the same for the duration of the contract, regardless of the status of the market. This means that even if the supply or demand of a substance or service changes drastically, the price per transaction will remain the same.
Let’s say, for example, that you own a restaurant that uses a large amount of pasta in its dishes. The market for pasta significantly diminishes and becomes too low for your needs . Without a price agreement contract in place, the price that you would have to pay to continue buying your preferred kind of pasta could increase substantially. If this were to happen, your bottom line would suffer. On the other hand, a benefits your restaurant if the market for pasta becomes more competitive and you are able to pay less than the agreed price for your pasta. In both cases, you would miss out on an opportunity for significant savings should the market prices become advantageous.
The Elements of a Price Agreement Contract
At the core of a price agreement are the price terms. In order to agree on, and account for, all the factors that may impact these terms, suppliers may, and often do, choose to include allowances and/or price protection. Such considerations that are provided for in price agreement contracts are generally complementary of the most common price terms that include the price per unit, quantity per month/year, currency, unit of measure deliveries, and guaranteed minimum/maximums.
The duration of the contract is also critical to ensuring that the contract’s terms are fulfilled. The time for which the suppliers are required to provide the goods, as well as the time allowed for them to make the goods available to the purchaser (including a grace period), are thus typically provided for under the "Term" section of the price agreement contract. Under this section, suppliers will generally agree to place such goods at the purchaser’s disposal and keep the goods available for pick up for a specified period of time. Important considerations here are that an adequate term be provided for the supplier to place the goods at the purchaser’s disposal, and that the contract includes a grace period to allow for a pick up of the goods after the contract has expired, even in the absence of a contract extension. As is demonstrated by the increased prevalence of long-term contracts, there is an increasing tendency to enter into contracts with longer terms and grace periods. This is often the case in the retail industry, where price agreement contracts have terms of 4-6 months, and grace periods of several months. While there are no substantial legal implications for having a term greater than one year in price agreement contracts, the parties should note that the provisions of the Sale of Goods Act (Ontario) (the "SGA"), O. Reg. 211/01 (the "Regulations") and the Consumer Protection Act (the "CPA"), 2002, S.O. 2002, c. 30 (the "Consumer Protection Act") may apply to price agreement contracts with terms exceeding one year. The SGA contains various implied terms and warranties. For example, Subsection 16(1) of the SGA provides that the goods delivered under the price agreement must be fit for the purpose intended by the parties, if they intended a specific purpose. Section 17(1) of the Regulations further provides that if a price agreement between the parties is for a period exceeding one year, the interval during which the goods must conform to the implied warranties of fitness or merchantable quality is one year. A failure to conform may thus give rise to a right to claim damages or a right of rescission. Given the broad range of matters to which the SGA and the Regulations apply, it is recommended that parties wishing to exclude its application to their price agreement contract obtain specific legal advice. The Consumer Protection Act also contains various provisions in relation to a consumer’s rights in transactions involving a commitment for more than one year. Subsection 30(1) of the CPA prohibits suppliers from being able to enforce any provision giving rise to an obligation of a consumer under a consumer agreement (including a price agreement contract), unless the consumer has intentionally and knowingly waived this right to a twelve month period. A waiver signed by the consumer is thus often included as part of a price agreement contract. Despite the practice set forth above, the legality and extent of such waivers (when contained in a contract) remains an open question, and as such, counsel should be consulted.
Advantages of Price Agreement Contracts
Price agreement contracts can provide businesses with financial and operational advantages, too. For businesses who are in a long-term or repeat relationship with a third party, price agreement contracts can be a good match.
Cost Certainty
Because the price has been specified at the time of entering into the price agreement contract, the buyer can have degree of certainty about the cost of the goods or services. The price remains fixed for the term of the agreement or until a renegotiation of price has been made.
Relationship Building
Having a fixed price often provides benefits to both parties in the agreement. A seller may provide a discount on the sale price of goods to foster a long-term relationship or because they perceive that the profit from the sale of the goods will be sufficiently large enough to absorb the smaller amount charged for the quality and volume of the goods. A buyer purchasing on a the basis of a long-term agreement can make forecasts and plans based on the cost of the goods.
Risk Management
Price agreement contracts can help parties manage their risk. The certainty of the price provides businesses with the ability to accurately budget and plan for purchases and expenses.
Common Terms and Conditions
Like most contracts, price agreement contracts will contain provisions that are specific to each business involved in the agreement. Still, there are some common clauses that you will come across frequently.
Of the most common clauses included in contracts, an escalation clause is the one most businesses are familiar with. An escalation clause enables the seller to increase the price of the good or service after submitting an initial price agreement. If a price agreement contract includes an escalation clause, the buyer generally has the option to purchase the good or service or cancel the order after the price has been increased.
A termination clause will also be a common addition in most price agreement contracts. The termination clause will generally outline the conditions under which either party is permitted to terminate the contract and what penalties there may be for such termination.
A force majeure clause is also a fairly common occurrence among price agreement contracts. A force majeure clause will excuse the seller for failing to deliver the good or service as a result of unforeseen circumstances, such as fire, theft, a natural disaster, or other events beyond the control of the seller. Whether a force majeure clause is included and the language used will depend on the situation and the parties involved in the agreement.
How to Draft a Price Agreement Contract
In the creation of a price agreement contract, the first item to focus on is determining whether any external statutes or major agreements may prohibit the pricing model. One example of this is the order of an administrator in the specific industry, for example the Residential Care and Community Support Division by the Ministry of Children and Family Development. The next step is to confirm that there are no litigation or alternate price determination processes already established, such as reconciliations or audits. These processes can be complex, so it is advised to work closely with the billing staff to ensure that processes currently in place are updated in the new contract .
The initial drafting should encompass a detailed description of the requirements for a client’s history of services, with sufficient information to identify the starting point of the contract. After the scope has been determined, the costs should be described, including monthly payments based on the frequency of the services and what services are included in each specific payment. Next, a section should describe the requirement of written notice if the contract does not contain a specified number of annual visits for the client, and how the matter is to be resolved if the written notice requirements are not met. The final step is to describe evaluation and reporting requirements for the services provided in the underlying contract, including any supported funding documents.
Legal Implications of Price Agreement Contracts
A crucial legal consideration for businesses is whether the contract requires or allows the filing of a Uniform Commercial Code (UCC) financing statement. Not all contracts are secured transactions under the UCC. A secured transaction requires the debtor to grant the creditor a security interest in the collateral. On the other hand, a price agreement contract creates a common law or statutory lien on the products sold. The important distinction between these two forms of contractual arrangements is emphasized when the debtor files for bankruptcy protection. Under the UCC, a creditor must properly file a financing statement with the state before the debtor files for bankruptcy. If the creditor does not adhere to these strict legal requirements, the creditor will lose its ability to pursue any lien against the assets of the debtor.
Another legal consideration is whether the price agreement contract should be filed as a UCC financing statement, in conjunction with a secured financing statement, and/or incorporated into a blanket security agreement.
With respect to the contract pricing mechanism, two very important legal considerations are (1) the possible impact of a price decrease on the contracts must be considered, and (2) the responsibilities related to contingent charges must be clearly defined in the price agreement contract.
Examples of Price Agreement Contracts Across Various Industries
Price agreement contracts are a versatile option that can be used in many different contexts. They are particularly common in the commercial sector, where they provide the buyer with the promise of being able to purchase a particular good or service at a set rate in the future. The nature of these contracts can vary based on the good or service being provided, and the needs of the parties involved.
Manufacturing is just one example of how price agreement contracts play out in the business world. It’s common for manufacturers to be required to purchase raw materials from particular suppliers over a period of time. In some cases, the contract will set a rate for standard materials, while allowing for negotiated rates for any special materials the manufacturer may require over that period. The supplier provides the promise that it will make these materials available to the manufacturer at that rate.
Software businesses also often rely on this type of arrangement. For example, a software company may be working on a particular product, such as cloud-based hosting. They may want to pay a known rate for that service in their budget, even if the rates for those services changes and increases over that time period. They would enter into an agreement with the provider of that service that protects them from these changes.
In the shipping industry, logistics and transportation companies regularly enter into price agreement contracts with their clients. The client agrees to ship a certain number of items, and the logistics company agrees to make shipping arrangements for that per-item rate. In return, the client guarantees that they will be providing that business to the shipping company, even if the volume of work increases. In most cases, this will also increase the rates, but they are still guaranteed to be no higher than those outlined in the agreement.
These are just a few examples of how price agreement contracts are implemented in the business world. They are a crucial tool for many different types of companies, allowing them to predict their financial situation and secure a good deal for themselves.
How to Negotiate a Price Agreement Contract
A critical component of successful price agreement contracts is the negotiation process that occurs prior to finalizing the agreement. It is crucially important to approach the negotiation of these agreements armed with adequate information to support the value of your products or services and to take time during the negotiation to understand the needs of the other party. This can help you better anticipate their concerns and objections, and provide an opportunity to consider any additional incentives you may be able to provide so that they will sign the agreement.
To negotiate compelling and fair price agreement contracts, you should:
Establish the Need for Contract: Understand the risks associated with not entering the contract to better justify its existence.
Identify the Best Price: Conduct market research to determine a reasonable range of prices for your products or services, such as competitor pricing or average costs within your industry.
Cooperate with Buyer: Take time to learn the needs of the buyer so that you can explain the benefits of the price agreement for both parties.
Use Neutral Windfall Mechanisms: For example , including escalating prices in the event that demand for the product skyrockets, such as price increases due to increased demand, price protection, or a tiered scale of incentives freed up as sales combine or reach a milestone.
Include Indemnification Provisions: If applicable, try to craft clauses that account for unforeseeable circumstances that reduce the expected benefits of the price agreement or require significant concessions by one party.
Price agreement contracts are often the result of careful negotiations between the parties, and to make sure that you are able to negotiate agreements that benefit your business, it is critical to anticipate the issues that may come up in negotiations. By arming yourself with the details that need to be in the agreement, your desired price strategy, and an understanding of your market, you will be able to negotiate an agreement that can help you bring about the tangible results you deserve.