Best pricing clauses (Part 2)

Two things come into play with best pricing clauses. They are extremely difficult, if not impossible, to enforce. The second issue is the potential impact on the Supplier, if a supplier provides best pricing for one customer without meeting all the conditions require under anti-trust law, they would be obligated to offer that same price to all customers or be in violation of the act. The net result is few suppliers are willing to accept best pricing clauses. Most, if not all, would not allow you audit rights to verify it for enforcement. It would require them opening up to audit not just pricing the offer others, but the terms, and any analysis of whether the party is similarly situated, etc. Without audit rights the clause is useless.

One of the problems that exists when individuals try to write best pricing clauses is they are unaware of the applicable anti-trust laws the sellers much follow. Under U.S. the Robinson-Patman Act requires a company to offer you similar pricing if it meets several criteria:
1. The buyers must must be equal or similarly situated companies. The similarly situated requirement would allow a supplier to price an item higher if a company is a higher credit risk.
2. You must be purchasing like quantities.
3. The purchases must be under like terms.
In addition a company is excused from offering the same pricing if:
a) There is a cost justification (such as cases where it costs more money to deal with one company versus another).
b) The seller needed to offer that price to match the price of a competitor in a competitive situation.
It is unlawful to knowingly to induce or receive discrimination in price.

On LinkedIN someone posted the following best pricing language:
“Supplier shall treat City of Los Angeles as a most favorable customer. Supplier represents that the prices for storage and services furnished to City of Los Angeles under this Agreement are not less favorable than the prices and provisions offered to any of the supplier’s other customers, unless the other customer receives lower prices or more favorable non-price treatment because of the higher volumes of storage and services, after taking into account the cost structure in a single district and the service requirements profile of other customers. If supplier offers lower prices or more favourable provisions to any other customers than those offered to City of Los Angeles under this Agreement (taking into account volume, account cost structures in single district and service requirement profiles) for similar storage and services, then supplier agrees to concurrently extend such prices or provisions to City of Los Angeles and this Agreement at City of Los Angeles’ option, shall be deemed amended to provide such terms to the City of Los Angeles.

Let’s look at what is wrong with this:
“Supplier shall treat City of Los Angeles as a most favorable customer. This is asking for most favored treatment without needing to meet the three requirements - Equal or similarly situated companies; purchasing like quantities; under like terms".

“Supplier represents that the prices for storage and services furnished to City of Los Angeles under this Agreement are not less favorable than the prices and provisions offered to any of the supplier’s other customers, unless the other customer receives lower prices or more favorable non-price treatment because of the higher volumes of storage and services, after taking into account the cost structure in a single district and the service requirements profile of other customers”. This is asking for both most favorable price and terms treatment, with the sole requirement for that being the difference of higher volumes. There is no link to the other requirements that the buyers must be similarly situated or that the purchases must be under the same terms. There is also ability to excuse that commitment under the circumstances listed in a) and b) above.

If supplier offers lower prices or more favorable provisions to any other customers than those offered to City of Los Angeles under this Agreement (taking into account volume, account cost structures in single district and service requirement profiles) for similar storage and services, then supplier agrees to concurrently extend such prices or provisions to City of Los Angeles and this Agreement at City of Los Angeles’ option, shall be deemed amended to provide such terms to the City of Los Angeles. Here the commitment to provide best pricing and best terms is only linked to account volume and cost structures for similar services. It doesn’t take into account the requirement that they be similarly situated, that they be based on similar terms and that it not apply if b) above applied. It further doesn’t take into account the fact that the company getting a more favorable terms in one area may also be getting a less favorable term on another area. It’s an attempt to cherry pick the best, when under anti-trust law the terms offered must be similar and that means that to get better terms in one area, they would need to accept worse terms in another area for the two to be similar.
Another problem is the first commitment was structured as a representation. It should have been structured as a warranty. Representations apply to facts that are in effect at the time of the representation. In this case that would be at the signing of the contract. Future pricing would not apply to this measure. Warranties are used for on-going commitments where you want a specific commitment to be maintained throughout the agreement term. This means that as long as the statement was true at the time of signing of the contract, the supplier will not have breached that section if they offer better pricing or terms to others in the future.

A further problem is while there was a commitment to make adjustments there was no mechanism in place to check or verify that they were getting the best price or better terms. If failed to identify how it will be administered and verified taking into account the standards set (like quantities under like terms) and the possible exceptions. My opinion is it would be legally enforceable.

My last concern with the way this was structured is the focus was strictly on purchase price.I guess that if that’s all you want to manage that’ may work, but I would always prefer to also address the total cost or total life cycle cost of the purchase.

I don't like best pricing clauses for a number of reasons. They are difficult to administer and validate. People think that they will automatically get savings, which they won't. They especially won't if the best pricing if the requirement violates anti-trust law. I prefer to use price-benchmarking clauses especially when you have longer term contracts. A price-benchmarking clause allows you to periodically get quotes from other suppliers under the same terms and quantities. This makes everything equal. Normally you would seek enough quotes to be able to throw out the high and low prices and average the remaining quotes to establish the benchmark price. The contract would require the supplier to adjust their price if their pricing is higher than the benchmark. An alternative would be if they aren't willing to meet the benchmark, the buyer would have the right to terminate the agreement with notice but without any liability. The advantage of price benchmarking is you don’t need to audit the supplier to verify their actions. If they need to adjust their price, they can do that without creating an anti-trust problem as the adjustment would fall under the exception of having to meet a competitive situation.