This contract tip is about adding flexibility to fixed purchase commitments.
Customers prefer having options to reduce what they have to purchase, either by reducing the commitment or terminating the contract. Many customers are uncomfortable locking themselves in when circumstances and business cycles change quickly. While the vendor may offer some flexibility, many refuse to allow random termination for convenience.
When I'm representing the customer and can't get termination for convenience, my best alternative is a right to reduce the purchase commitment. It's easier to find compromises when these events are objective and measurable.
These triggering circumstances are distinct from your force majeure events. These circumstances don't prevent or delay performance. Instead, they reflect a situation when we may have a lesser need for the vendor's product or service.
Here are three events that I regularly use to reduce our purchase commitment and, in more extreme cases, terminate the contract.
1. Change in law - Customers may want to reduce their purchases if there is a change in law that affects their business or product strategy. To narrow this concept, the provision could provide the right only if the change has a material adverse impact on the customer's business.
2. Change in sales - Another option gives customers the right to reduce their purchases if they experience a percentage drop in sales over a previous month or quarter.
3. Change in the market price—Customers could also reduce their commitment if the market price drops significantly. The provision could allow the customer to source from alternate suppliers if the vendor refuses to reduce pricing proportionately.
Are there any other objective criteria that you see used in this situation?
