This is a Cross-Post from American University Business Law Review. Please contact Sarah Rathke with any questions.
The American University Business Law Review recently published an article entitled Why Choose LTAs? An Empirical Study of Ohio Manufacturers’ Contractual Choices Through a Bargaining Lens. In this study Case Western Reserve University Professor Juliet Kostritsky and now-Squire Patton Boggs Associate Jessica Ice address why and when suppliers choose to engage in Long Term Agreements (LTAs) and when they opt-out.
To analyze this question, the researchers conducted a survey of 63 Ohio manufacturers to better understand when and why they use LTAs. The survey results indicated that manufacturers who incurred significant capital expenditures or produced highly customizable goods reported that they used LTAs in a larger proportion of their transactions. However, manufacturers that made fungible goods and did not need to incur significant capital expenditures often operated under more flexible contractual arrangements such as terms and conditions or purchase orders.
LTAs also provided suppliers with information sharing protocol and dispute resolution procedures. Most manufacturers who frequently used LTAs indicated that they would share information with suppliers, even if not required to do so under the LTA. Manufacturers indicated that they were most likely to share information if the buyer was a large company or OEM.
These results indicate that although negotiating long term agreements may incur some costs upfront, there can long term benefits and protections to suppliers, especially if the supplier is producing customizable goods or incurring capital expenditures. Thus, the decision to engage in an LTA can be part of an overall cost minimization strategy for suppliers.
For more information view the article here.
Citation: Juliet P. Kostritsky & Jessica Ice, Why Choose LTAs? An Empirical Study of Ohio Manufacturers’ Contractual Choices Through a Bargaining Lens, 9 Am. U. Bus. L. Rev. 337 (2020).