Definition: An arm’s length transaction is when the seller and buyer act without offering or demanding conditions that influence the other to offer or demand something different.
An arm’s length transaction occurs when a buyer and seller engage in mutually beneficial, mutually consistent conduct designed to achieve a mutual goal. There is no transaction where either buyer or seller has the power to set the terms and conditions. Buyer enjoys the benefit of buying the good or service, seller enjoys receiving cash in exchange for his good or service, and both sides benefit from mutually beneficial business relationships. The seller has no power to set the terms and conditions as he is not able to negotiate with the buyer directly or indirectly about the price of the good/service. Therefore, though both buyer and seller may claim that they are acting in their self-interest, they are only acting by the social contract theory, which says that each individual has an incentive to maximize his gain and minimize his loss.
Real estate sales often have arm’s length terms. This means that the seller requires a down payment to close the deal. The down payment must be paid in full before closing the deal. The seller then requires any funds remaining after paying for the property and anything left over after paying off the original outstanding balance on the credit card to close the transaction.
A transaction is considered arm’s length if valued at the market rate for the type of good or service being sold. If you are buying kitchen equipment at a regular price, the transaction would be considered arm’s length because it is valued at the market rate for kitchen equipment. Sellers may also wish to include insurance within an arms-length transaction to protect themselves against unexpected costs or losses. However, this is not always required as sellers often have financial connections to their buyers, which will enable them to negotiate directly with insurance companies.
The purpose of the AFMT is to encourage fair and reasonable business practices and protect the public by encouraging everyone to act honestly and in good faith. The practical effect of AFMT is that it makes it harder for companies to take advantage of their customers – by making dishonest practices more challenging to pull off, it can also discourage fraudulent behavior among employees or drive up standards among those who work for companies.
Suppose a business engages in any Arm’s Length Transaction that is not fully disclosed to the buyer at the time of purchase and likely affects the buying decision. In that case, the business could be subject to liability under the FCPA.