What Is Forward Purchase Agreement

A forward purchase agreement (FPA), also known as a forward contract, is a legal agreement between a buyer and a seller to purchase or sell a specific asset or product at a predetermined future date and price.

In an FPA, the buyer and seller agree on the terms of the future transaction, including the asset or product in question, the agreed-upon price, the delivery date, and any other relevant terms and conditions. Once the FPA is signed, both parties are obligated to fulfill their respective roles in the transaction at the agreed-upon time.

FPAs are typically used to hedge against future price fluctuations or to secure a supply of a particular product or asset. For example, a party may enter into an FPA to lock in a fixed price for a commodity that is expected to increase in value over time, such as oil or precious metals.

Similarly, a business may enter into an FPA with a supplier to guarantee a steady supply of a particular raw material or component at a fixed price, ensuring stability in the supply chain and mitigating the risks associated with price volatility.

While FPAs can provide a valuable tool for managing risk and ensuring supply chain stability, they do carry some risks of their own. For instance, if market conditions change significantly from the time the FPA was signed to the delivery date, the agreed-upon price may no longer be favorable to one or both parties.

In addition, if one party fails to fulfill the terms of the FPA at the agreed-upon time, legal action may be necessary to enforce the agreement and protect the interests of the other party.

Overall, FPAs can be a valuable tool for businesses and individuals alike, providing a means to lock in prices and secure supply chain stability in an uncertain world. However, it is important to carefully consider the potential risks and benefits of entering into an FPA before doing so, and to work with a qualified legal professional to ensure that the agreement is sound and enforceable.