Requirements Contract

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Requirements Contract

A written agreement whereby a buyer assents to purchase for a sufficient consideration (the inducement to enter into an agreement) all the merchandise of a designated type that he or she might require for use in his or her own established business.

The Uniform Commercial Code (UCC), a body of law adopted by the states that governs commercial transactions, provides that the parties must act in Good Faith where quantity is to be measured by the requirements of the purchaser or, in the case of output contracts, the output of the seller. No quantity that is unreasonably disproportionate to any stated estimate or to any normal or otherwise comparable previous output or requirements can be tendered or demanded.

Although the UCC does not explicitly make output and requirements agreements enforceable as contracts, the implication of validity is clear. The theoretical difficulty with these agreements has been that they border on being illusory. An agreement by a buyer to purchase from the seller all the particular goods that he or she requires can be interpreted to leave the buyer with a choice as to whether he or she wishes to require any goods at all. Similarly an agreement by which a seller assents to sell all of his or her output to a buyer can be interpreted as leaving the seller free to control his or her output. If read in such manner, these agreements appear to leave one of the parties free to perform or not to perform as he or she sees fit. Valid commercial reasons exist, however, for these contracts, and the courts have discovered means of upholding both output and requirements agreements if the only objection to their enforceability is that they are too indefinite. The UCC does not attempt to dictate contract terms, but it contains two rules of construction that further remove these agreements from the contention that they are too indefinite to enforce and that provide guidance to courts in regard to their enforcement.

First, the measure of the quantity entailed must be determined in good faith. The buyer in a requirements agreement or the seller in an output agreement is not free, with an uncontrolled discretion, to determine the quantity of goods that can be demanded or tendered under the agreement. An illustration of a type of agreement in which one of the parties has an uncontrolled discretion would be one in which the buyer can order as much of a specified quantity of goods "as he or she wants." Such an agreement, unless there are unusual circumstances that require a different construction of these words, leaves the buyer free to buy or not to buy at his or her discretion. It does not entail mutual duties and constitutes no more than an offer, a proposal by the seller that would become a contract with each order from the buyer, but that could be revoked by the seller at any time prior to acceptance. The buyer is not free to order or not to order at his or her discretion, if an agreement calls for the seller to sell and the buyer to buy all or a stated portion of the buyer's requirements. When the buyer has requirements, he or she must purchase them from the seller and exercise good faith in ascertaining them. The nonmerchant must act with honesty in fact; the merchant must meet this same test but must also conduct business in accordance with commercial standards of fair dealing in the trade, so that his or her requirements approximate a reasonably foreseeable figure. A seller under an output agreement must meet the same test.

Second, the UCC furnishes a center around which the quantity is to be determined. The buyer cannot demand and, therefore, the seller is not obligated to deliver, and the seller cannot tender and, therefore, the buyer is not required to accept any quantity that is unreasonably disproportionate to any estimate that the parties have stated or if no estimate was stated, to any comparable previous requirements or output. If, for example, a seller has agreed to deliver all of the buyer's requirements of a certain product, and if the buyer has been ordering approximately 500 units each month, the seller would not be obligated to deliver 1,500 units in one month, even though the buyer could prove that 1,500 units were required for his or her business. The determination of which prior period is "comparable" depends upon the nature of the business involved. The UCC does not require that the chosen comparable period be one in which the parties were dealing with each other. If this is the first output or requirements contract between the parties and no estimate is stated, the UCC permits any normal or comparable period involving the seller's output or the buyer's requirements to be employed in measuring the obligations under such an agreement.

Even though output and requirements contracts are sufficiently defined for enforcement, difficult problems of determining the obligations under these agreements arise whenever there is an unexpected shift in the demand for, or the price of, the goods involved. In these instances, a merchant might search for methods of altering production schedules or modifying output (if a seller) or requirements (if a buyer).

Attempts to increase or decrease requirements often result in disputes between the parties that require judicial intervention. In order to resolve these situations, the "unreasonably disproportionate" test of the UCC supplies a tool that, when combined with the requirement of good faith, permits the courts to resolve these disputes. The UCC also provides that a lawful agreement that results in an exclusive dealing in goods imposes, unless otherwise agreed, an obligation by the seller to make his or her best effort to supply the goods and an obligation by the buyer to make his or her best effort to promote their sale. This requirement is a specific application of the general doctrine of good faith.

The legality of output, requirements, or other exclusive dealing contracts depends upon the application of federal or state antitrust acts, laws that protect commerce and trade from unlawful restraints, price discriminations, and price fixing. The UCC provides that only "lawful" agreements may be enforced.

requirements contract

n. a contract between a supplier (or manufacturer) which agrees to sell all the particular products that the buyer needs, and the buyer agrees to purchase the goods exclusively from the supplier. A requirements contract differs from an "an output contract," in which the buyer agrees to buy all the supplier produces. (See: output contract)

References in periodicals archive ?
16) The court then posed the question of whether a requirements contract was essentially a buyer's option contract, and answered the question in the negative.
Further indicative of a distinction between a requirements contract and a buyer's option contract, the court noted that the official comments to section 2-306 provide that "a shut-down by a requirements buyer for lack of orders might be permissible where a shut-down merely to curtail losses would not.
19) Empire thus counsels that the obligations imposed on a purchaser under a requirements contract are greater than those imposed on a purchaser under a buyer's option contract.
27) Plaintiff alleged that the reference to "requirement" made the agreement a requirements contract and the city was therefore required to hire all the operators it required from the plaintiff.
The court rejected the requirements contract theory finding that the city reserved the right to obtain operators from other agencies.
In the absence of such a promise, or some other form of consideration flowing from the buyer to the seller, the requisite mutuality and consideration for a requirements contract is absent.
Decisions from the seventh circuit and the Illinois Appellate Court recognize that, absent terms sufficient to create a requirements contract, a supply agreement that sets forth price terms, product specifications, and a defined time period without mandating the purchase of a fixed quantity of goods is properly characterized as a "buyer's option" contract.
annual requirements contract for the maintenance and repair of a variety of submersible pumps used at City of Arlington (COA) Water Treatment facilities.
The intent and purpose of this invitation to bid is to establish an annual requirements contract for monthly grounds maintenance of specific State and Interstate Highway Rights of Way per the Inventory List, Exhibit A.
Additionally, PRPA's credit rating is supported by court-validated, all requirements contracts with its members to 2040, and financially solid member retail systems with competitive retail rates.
In 2005, Anniston Army Depot awarded BAE Systems various requirements contracts to overhaul other combat systems to include the recovery vehicle.

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