In its most basic form, the “price protection contract” ploy works like this: the vendor’s marketing representative tells his customer, “You are a great customer and we’re here to look after your best interest. We want to give you the capability to protect your company from the price increases we expect to announce later this year. Why don’t we evaluate your equipment needs for the next 12 to 24 months and get the items you may need on order now, before the price increase takes effect?” (This ploy is even more effective if the vendor can convince the customer that this approach will also allow the customer to have a good position on the vendor’s production and delivery schedules.) If the customer seems hesitant, the vendor often offers reassurance by noting, “Of course, since the contracts are for price protection only, they can be cancelled by you at any time.” Alternatively, the vendor may state that 90 days notice is required for this type of cancellation.
This approach holds several risks for the customer. First, the customer almost always signs the price protection contract without any serious negotiations over price or terms. In most cases, the customer simply signs the vendor’s standard form agreement, without additions or deletions. Needless to say, the customer leaves important legal, financial, and substantive concessions lying on the table.
Second, the customer generally signs the contract without carefully considering whether the equipment involved is really needed or, if it is, whether the mode of acquisition proposed is in the customer’s best interests. As a result, the customer often ends up with equipment that is not needed or with a high-cost rental agreement when a third party lease would be preferable.
Third, the customer often executes the contract without proper review and approval by its senior management and board of directors. This oversight can be particularly hazardous if the transaction “blows up” in the future or if a board member learns of the contract indirectly.
Fourth, canceling the contract may be considerably more difficult than executing it. In far too many cases, the contract used simply does not contain any mention of cancellation. Although the vendor’s marketing representative may nevertheless permit cancellation in the future, the binding legal agreement does not require the vendor to do so. If the customer decides to change vendors or take other action against the incumbent vendor, the vendor may resurrect the price protection contract and threaten to enforce it. More than one customer has learned this lesson the hard way. Although the customer might well claim “fraud in the inducement” in such a situation, few customers can readily afford the time, trouble, and expense of litigating this type of issue.