Requirements contract
Encyclopedia
A requirements contract is a contract
in which one party
agrees to supply as much of a good or service as is required by the other party, and in exchange the other party expressly or implicitly promises that it will obtain its goods or services exclusively from the first party. For example, a grocery store
might enter into a contract with the farmer
who grows oranges under which the farmer would supply the grocery store with as many oranges as the store could sell. The farmer could sue for breach of contract
if the store were thereafter to purchase oranges for this purpose from any other party. The converse of this situation is an output contract
, in which one buyer agrees to purchase however much of a good or service the seller is able to produce.
. There would technically be no breach of the contract if the buyer bought nothing because the buyer is agreeing to buy only as much as the buyer needs. In the above example, the grocery store might void its obligation to buy from the farmer by deciding not to carry oranges. Court
s generally sidestep the concern that the buyer is not actually required to buy anything by noting that the contract is nonetheless the surrender of the right to buy from another party. Put simply, "[t]he buyer under a requirements contract does not promise to buy as much as she desires to buy but, rather, to buy as much as she needs". However, such a contract would likely be deemed illusory
if the buyer reserved the right to buy from other parties.
of the contract. Conversely, if market conditions make the contract price a windfall for the buyer, that buyer may decide to buy more than it actually needs in order to go into competition against the seller. Courts often look to the past history of dealings between the parties and to the standards within the industry to determine if the buyer is acting in bad faith for breach of contract actions on requirements contracts.
Until fairly recently, requirements contracts were deemed void under the law of France
for lack of defined terms under Articles 1129 and 1583 of the French Civil Code
. In Belgium
, by contrast, court decisions have consistently held such contracts to be valid, despite the Belgian Civil Code having language identical to that of France. In the context of transactions in goods, most jurisdictions in the United States
apply Section 2-306(1) of the Uniform Commercial Code
, which imposes a good faith limitation on purchases under a requirements contract. The Code states:
Simply put, this means that a requirements contract for goods is valid, but might not be enforced if the buyer makes demands that are unreasonable compared to either prior estimates or industry standards. The Uniform Commercial Code
does not apply to sales of services.
concerns sometimes arise because a requirements contract prohibits the buyer from doing business in a particular commodity
with a party other than the seller. This may create an exclusive dealing
arrangement which gives the seller monopoly
power over the buyer, preventing the buyer from seeking a better deal if the market becomes more competitive. Conversely, a buyer able to generate sufficient demand can absorb all of the seller's output, effectively removing that seller from competing on the open market. Requirements contracts have nevertheless been upheld in the face of challenges on antitrust grounds. Robert Bork
, in The Antitrust Paradox
, examines requirements contracts and contends that they are not anticompetitive precisely because they are a product of freedom of contract. He argues that no one would sign a requirements contract with a seller in the first place unless that seller offered a better deal than its competitors, and a better deal could only be offered by a more competitive seller. Bork concludes, "[t]he truth appears that there never has been a case in which exclusive dealing or requirements contracts were shown to injure competition".
Contract
A contract is an agreement entered into by two parties or more with the intention of creating a legal obligation, which may have elements in writing. Contracts can be made orally. The remedy for breach of contract can be "damages" or compensation of money. In equity, the remedy can be specific...
in which one party
Party (law)
A party is a person or group of persons that compose a single entity which can be identified as one for the purposes of the law. Parties include: plaintiff , defendant , petitioner , respondent , cross-complainant A party is a person or group of persons that compose a single entity which can be...
agrees to supply as much of a good or service as is required by the other party, and in exchange the other party expressly or implicitly promises that it will obtain its goods or services exclusively from the first party. For example, a grocery store
Grocery store
A grocery store is a store that retails food. A grocer, the owner of a grocery store, stocks different kinds of foods from assorted places and cultures, and sells these "groceries" to customers. Large grocery stores that stock products other than food, such as clothing or household items, are...
might enter into a contract with the farmer
Farmer
A farmer is a person engaged in agriculture, who raises living organisms for food or raw materials, generally including livestock husbandry and growing crops, such as produce and grain...
who grows oranges under which the farmer would supply the grocery store with as many oranges as the store could sell. The farmer could sue for breach of contract
Breach of contract
Breach of contract is a legal cause of action in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract by non-performance or interference with the other party's performance....
if the store were thereafter to purchase oranges for this purpose from any other party. The converse of this situation is an output contract
Output contract
An output contract is an agreement in which a producer agrees to sell its entire production to the buyer, who in turn agrees to purchase the entire output, whatever that is...
, in which one buyer agrees to purchase however much of a good or service the seller is able to produce.
Consideration
Several problems typically arise with requirements contracts. The first is considerationConsideration
Consideration is the central concept in the common law of contracts and is required, in most cases, for a contract to be enforceable. Consideration is the price one pays for another's promise. It can take a number of forms: money, property, a promise, the doing of an act, or even refraining from...
. There would technically be no breach of the contract if the buyer bought nothing because the buyer is agreeing to buy only as much as the buyer needs. In the above example, the grocery store might void its obligation to buy from the farmer by deciding not to carry oranges. Court
Court
A court is a form of tribunal, often a governmental institution, with the authority to adjudicate legal disputes between parties and carry out the administration of justice in civil, criminal, and administrative matters in accordance with the rule of law...
s generally sidestep the concern that the buyer is not actually required to buy anything by noting that the contract is nonetheless the surrender of the right to buy from another party. Put simply, "[t]he buyer under a requirements contract does not promise to buy as much as she desires to buy but, rather, to buy as much as she needs". However, such a contract would likely be deemed illusory
Illusory promise
In contract law, an illusory promise is one that courts will not enforce. This is in contrast with a contract, which is a promise that courts will enforce. A promise may be illusory for a number of reasons...
if the buyer reserved the right to buy from other parties.
Defined terms
Another problem is the lack of a defined term. Contracts must have terms that are sufficiently defined for a court to be able to determine where a breach has occurred. It would be difficult to determine whether the buyer in a requirements contract is falsely claiming that his needs are lower than they actually are as a ploy to achieve a renegotiation or rescissionRescission
In contract law, rescission has been defined as the unmaking of a contract between parties. Rescission is the unwinding of a transaction. This is done to bring the parties, as far as possible, back to the position in which they were before they entered into a contract .-In court:Rescission is an...
of the contract. Conversely, if market conditions make the contract price a windfall for the buyer, that buyer may decide to buy more than it actually needs in order to go into competition against the seller. Courts often look to the past history of dealings between the parties and to the standards within the industry to determine if the buyer is acting in bad faith for breach of contract actions on requirements contracts.
Until fairly recently, requirements contracts were deemed void under the law of France
Law of France
In academic terms, French law can be divided into two main categories: private or judicial law and public law .Judicial law includes, in particular:*civil law ; and*criminal law ....
for lack of defined terms under Articles 1129 and 1583 of the French Civil Code
Napoleonic code
The Napoleonic Code — or Code Napoléon — is the French civil code, established under Napoléon I in 1804. The code forbade privileges based on birth, allowed freedom of religion, and specified that government jobs go to the most qualified...
. In Belgium
Law of Belgium
The law of Belgium is very similar to that of neighboring France, with Belgium having adopted the Napoleonic code which governs French society. Belgian law also derives from the Constitution of Belgium and the European Convention on Human Rights....
, by contrast, court decisions have consistently held such contracts to be valid, despite the Belgian Civil Code having language identical to that of France. In the context of transactions in goods, most jurisdictions in the United States
United States
The United States of America is a federal constitutional republic comprising fifty states and a federal district...
apply Section 2-306(1) of the Uniform Commercial Code
Uniform Commercial Code
The Uniform Commercial Code , first published in 1952, is one of a number of uniform acts that have been promulgated in conjunction with efforts to harmonize the law of sales and other commercial transactions in all 50 states within the United States of America.The goal of harmonizing state law is...
, which imposes a good faith limitation on purchases under a requirements contract. The Code states:
Simply put, this means that a requirements contract for goods is valid, but might not be enforced if the buyer makes demands that are unreasonable compared to either prior estimates or industry standards. The Uniform Commercial Code
Uniform Commercial Code
The Uniform Commercial Code , first published in 1952, is one of a number of uniform acts that have been promulgated in conjunction with efforts to harmonize the law of sales and other commercial transactions in all 50 states within the United States of America.The goal of harmonizing state law is...
does not apply to sales of services.
Antitrust concerns
Finally, antitrustAntitrust
The United States antitrust law is a body of laws that prohibits anti-competitive behavior and unfair business practices. Antitrust laws are intended to encourage competition in the marketplace. These competition laws make illegal certain practices deemed to hurt businesses or consumers or both,...
concerns sometimes arise because a requirements contract prohibits the buyer from doing business in a particular commodity
Commodity
In economics, a commodity is the generic term for any marketable item produced to satisfy wants or needs. Economic commodities comprise goods and services....
with a party other than the seller. This may create an exclusive dealing
Exclusive dealing
Exclusive dealing refers to when a retailer or wholesaler is ‘tied’ to purchase from a supplier on the understanding that no other distributor will be appointed or receive supplies in a given area...
arrangement which gives the seller monopoly
Monopoly
A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity...
power over the buyer, preventing the buyer from seeking a better deal if the market becomes more competitive. Conversely, a buyer able to generate sufficient demand can absorb all of the seller's output, effectively removing that seller from competing on the open market. Requirements contracts have nevertheless been upheld in the face of challenges on antitrust grounds. Robert Bork
Robert Bork
Robert Heron Bork is an American legal scholar who has advocated the judicial philosophy of originalism. Bork formerly served as Solicitor General, Acting Attorney General, and judge for the United States Court of Appeals for the District of Columbia Circuit...
, in The Antitrust Paradox
The Antitrust Paradox
The Antitrust Paradox is a 1978 book by Robert Bork that criticized the state of United States antitrust law in the 1970s. A second edition, updated to reflect substantial changes in the law, was published in 1993....
, examines requirements contracts and contends that they are not anticompetitive precisely because they are a product of freedom of contract. He argues that no one would sign a requirements contract with a seller in the first place unless that seller offered a better deal than its competitors, and a better deal could only be offered by a more competitive seller. Bork concludes, "[t]he truth appears that there never has been a case in which exclusive dealing or requirements contracts were shown to injure competition".