Fluctuating Prices, Uncomfortable Contracts

A contract may be thought of as a promise for a promise.

You promise to provide products or services, I promise to pay for them. You’ll make some money, and I’ll make some money.

But what if prices change dramatically after we’ve exchanged these promises? What if one of us is going to have to lose money to keep his or her promise? Our once happy win-win bargain is now a win-lose deal.

In this article we look at an example of such a scenario and discuss the parties’ rights and responsibilities. We’ll also discuss opportunities for salvaging some win-win from the transaction.

Uncomfortable

It can be an uncomfortable conversation: a truck broker calls and explains that due to market conditions beyond his control, he cannot secure the freight you booked for $6,000 yesterday.

“But we agreed to $6,000.”

“We quoted you way too low; no way we can get freight at that price. Nobody can do it for that.”

Although you do not want to pay more, you knew the market was tight and the main concern is taking care of your customer. “Well, how much are you looking for here?”

“Maybe we can book you something for $8,500—maybe.”

“Huh? You expect me to pay $8,500 for freight I booked for $6,000 yesterday?”

“Well, we aren’t going to lose money on this deal. Call anyone you like and see if you can do better.” Click.

At this point, you might start to wonder if you’re being reasonable—you didn’t intend for anyone to lose money on this deal—and you believe the broker that freight is simply not available for $6,000 at the moment.

But you’re not being unreasonable. A contract is a promise: the broker promised to provide freight at $6,000 without any special terms in the event of market fluctuation. He promised to provide a service for $6,000 and you have every right to expect that service for that price.
If the broker reneges, you would be within your rights to book substitute freight and bill the broker the difference, provided the services are comparable and the price paid is reasonable given present market conditions.

Similarly, had freight prices fallen, the broker would be entitled to payment from you at $6,000 and would not have been obligated to call you up and say, “You know what? I ended up making more margin on this deal than I thought, just pay me $5,000 and we’re good.”

You would, of course, be expected to honor your commitment to pay $6,000 with the understanding that the market will do what it’s going to do, but your rate is locked in. Contracts, at least in theory, take spot market variability out of the equation.

Salvaging a Win-Win

So, you got a great deal, while the broker got burned.

But chances are this is not the last time you will need transportation service. Therefore, working with the broker, to avoid a losing deal, makes sense—particularly when the broker has been reliable the past.

At the same time, however, there is nothing more frustrating than making a concession to help out, only to discover the person is not appreciative, but upset you aren’t willing to concede more.

To avoid this, before giving a concession it would seem to be a good time to discuss your rights and responsibilities with the broker to confirm a mutual understanding. A broker who “just doesn’t get it,” even when you’re trying to work it out, may not be a reliable business partner.

Not only will this help make it clear that you’re willing to help, which should be appreciated, but it will help ensure that any concession you make in this instance is not expected as a matter of course in the future.

A one-time concession to establish goodwill combined with an open and clear discussion of expectations for future transactions may just salvage a win-win from the deal after all.

Conclusion

Business decisions like this can take on a personal tone and perhaps there is no right answer.

Do you give a little now in hopes of long-term success? Or are your interests better served by fully asserting your rights and setting a clear “don’t tread on me” standard for any future dealings?

In our experience, it seems veteran industry professionals generally know how to strike the right balance: willing to make occasional concessions, but also ready to walk away when the give-and-take gets out of balance.