Requirements contract

Last updated May 05, 2019

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.^[1] 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.

Contract agreement having a lawful object entered into voluntarily by multiple parties

A contract is a legally-binding agreement which recognises and governs the rights and duties of the parties to the agreement. A contract is legally enforceable because it meets the requirements and approval of the law. An agreement typically involves the exchange of goods, services, money, or promises of any of those. In the event of breach of contract, the law awards the injured party access to legal remedies such as damages and cancellation.

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, or cross-defendant. A person who only appears in the case as a witness is not considered a party.

Grocery store retail store that primarily sells food and other household supplies

A grocery store or grocer's shop is a retail shop that primarily sells food. A grocer is a bulk seller of food.

Problems

Consideration

Several problems typically arise with requirements contracts. The first is consideration. 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. Courts 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".^[2] However, such a contract would likely be deemed illusory if the buyer reserved the right to buy from other parties.^[3]

Consideration is a concept of English common law and is a necessity for simple contracts but not for special contracts. The concept has been adopted by other common law jurisdictions, including the US.

A court is any person or institunot truetion with authority to judge or adjudicate, often as a government 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. In both common law and civil law legal systems, courts are the central means for dispute resolution, and it is generally understood that all people have an ability to bring their claims before a court. Similarly, the rights of those accused of a crime include the right to present a defense before a court.

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. In common law countries this usually results from failure or lack of consideration.

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 rescission 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 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.

Rescission (contract law) Remedy which allows a contractual party to cancel the contract

In contract law, rescission is an equitable remedy which allows a contractual party to cancel the contract. Parties may rescind if they are the victims of a vitiating factor, such as misrepresentation, mistake, duress, or undue influence. 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.

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.^[4] 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.^[5] 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.^[6] The Code states:

In academic terms, French law can be divided into two main categories: private law and public law. This differs from the traditional common law concepts in which the main distinction is between criminal law and civil law.

The Belgian Law is very similar to that of neighbouring France, as a result of Belgium having adopted the Napoleonic code which governs French society. It also derives from the Constitution of Belgium and the European Convention on Human Rights.

The United States of America (USA), commonly known as the United States or America, is a country comprising 50 states, a federal district, five major self-governing territories, and various possessions. At 3.8 million square miles, the United States is the world's third or fourth largest country by total area and is slightly smaller than the entire continent of Europe's 3.9 million square miles. With a population of over 327 million people, the U.S. is the third most populous country. The capital is Washington, D.C., and the largest city by population is New York City. Forty-eight states and the capital's federal district are contiguous in North America between Canada and Mexico. The State of Alaska is in the northwest corner of North America, bordered by Canada to the east and across the Bering Strait from Russia to the west. The State of Hawaii is an archipelago in the mid-Pacific Ocean. The U.S. territories are scattered about the Pacific Ocean and the Caribbean Sea, stretching across nine official time zones. The extremely diverse geography, climate, and wildlife of the United States make it one of the world's 17 megadiverse countries.

§ 2-306. Output, Requirements and Exclusive Dealings.

(1) A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded.

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.

The Uniform Commercial Code (UCC), first published in 1952, is one of a number of Uniform Acts that have been established as law with the goal of harmonizing the laws of sales and other commercial transactions across the United States of America (U.S.) through UCC adoption by all 50 states, the District of Columbia, and the Territories of the United States.

Antitrust concerns

Finally, antitrust 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.^[7] 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.^[8] 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".^[9]

In economics, a commodity is an economic good or service that has full or substantial fungibility: that is, the market treats instances of the good as equivalent or nearly so with no regard to who produced them. Most commodities are raw materials, basic resources, agricultural, or mining products, such as iron ore, sugar, or grains like rice and wheat. Commodities can also be mass-produced unspecialized products such as chemicals and computer memory.

In competition law, exclusive dealing refers to an arrangement whereby 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. When the sales outlets are owned by the supplier, exclusive dealing is because of vertical integration, where the outlets are independent exclusive dealing is illegal due to the Restrictive Trade Practices Act, however, if it is registered and approved it is allowed.

A monopoly exists when a specific person or enterprise is the only supplier of a particular commodity. This contrasts with a monopsony which relates to a single entity's control of a market to purchase a good or service, and with oligopoly which consists of a few sellers dominating a market. Monopolies are thus characterized by a lack of economic competition to produce the good or service, a lack of viable substitute goods, and the possibility of a high monopoly price well above the seller's marginal cost that leads to a high monopoly profit. The verb monopolise or monopolize refers to the process by which a company gains the ability to raise prices or exclude competitors. In economics, a monopoly is a single seller. In law, a monopoly is a business entity that has significant market power, that is, the power to charge overly high prices. Although monopolies may be big businesses, size is not a characteristic of a monopoly. A small business may still have the power to raise prices in a small industry.

Related Research Articles

Sales are activities related to selling or the number of goods or services sold in a given time period.

The just price is a theory of ethics in economics that attempts to set standards of fairness in transactions. With intellectual roots in ancient Greek philosophy, it was advanced by Thomas Aquinas based on an argument against usury, which in his time referred to the making of any rate of interest on loans. It gave rise to the contractual principle of laesio enormis.

In business or commerce, an order is a stated intention, either spoken or written, to engage in a commercial transaction for specific products or services. From a buyer's point of view it expresses the intention to buy and is called a purchase order. From a seller's point of view it expresses the intention to sell and is referred to as a sales order. When the purchase order of the buyer and the sales order of the seller agree, the orders become a contract between the buyer and seller.

A real estate broker or a real estate agent is a person who represents sellers or buyers of real estate/real property. While a broker may work independently, an agent must work under a licensed broker to represent clients. Brokers and agents are licensed by the state to negotiate sales agreements and manage the documentation required for closing real estate transactions. In North America, some brokers and agents are members of the National Association of Realtors (NAR), the largest trade association for the industry. NAR members are obligated by a code of ethics that go above and beyond state legal requirements to work in the best interest of the client. Buyers and sellers are generally advised to consult a licensed real estate professional for a written definition of an individual state's laws of agency, and many states require written disclosures to be signed by all parties outlining the duties and obligations.

Competition law is a law that promotes or seeks to maintain market competition by regulating anti-competitive conduct by companies. Competition law is implemented through public and private enforcement. Competition law is known as "antitrust law" in the United States for historical reasons, and as "anti-monopoly law" in China and Russia. In previous years it has been known as trade practices law in the United Kingdom and Australia. In the European Union, it is referred to as both antitrust and competition law.

Letter of credit document issued by a financial institution

A letter of credit (LC), also known as a documentary credit or bankers commercial credit, or letter of undertaking (LoU), is a payment mechanism used in international trade to provide an economic guarantee from a creditworthy bank to an exporter of goods. Letters of credit are used extensively in the financing of international trade, where the reliability of contracting parties cannot be readily and easily determined. Its economic effect is to introduce a bank as an underwriter, where it assumes the credit risk of the buyer paying the seller for goods.

In contract law, a warranty is a promise which is not a condition of the contract or an innominate term: (1) it is a term "not going to the root of the contract", and (2) which only entitles the innocent party to damages if it is breached: i.e. the warranty is not true or the defaulting party does not perform the contract in accordance with the terms of the warranty. A warranty is not guarantee. It is a mere promise. It may be enforced if it is breached by an award for the legal remedy of damages.

Gazumping occurs when a seller accepts a verbal offer on the property from one potential buyer, but then accepts a higher offer from someone else. It can also refer to the seller raising the asking price or asking for more money at the last minute, after previously verbally agreeing to a lower one. In either case, the original buyer is left in a bad situation, and either has to offer a higher price or lose the purchase. The term gazumping is most commonly used in the UK, Ireland and Australia, although similar practices can be found in some other jurisdictions.

Implied warranty in common law jurisdictions, certain assurances presumed to be made in the sale of products or real property, due to the circumstances of the sale; e.g. fitness for a particular purpose, merchantability for products, workmanlike quality, habitability

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Risk of loss is a term used in the law of contracts to determine which party should bear the burden of risk for damage occurring to goods after the sale has been completed, but before delivery has occurred. Such considerations generally come into play after the contract is formed but before buyer receives goods, something bad happens.

Lost volume seller is a legal term in the law of contracts. Such a seller is a special case in contract law. Ordinarily, a seller whose buyer breaches a contract and refuses to purchase the goods can recover from the breaching buyer only the difference between the contract price and the price for which the seller ultimately sells the goods to another buyer.

Cover (law) in law: alternate sources to replace undelivered goods from a repudiated contract

Cover is a term used in the law of contracts to describe a remedy available to a buyer who has received an anticipatory repudiation of a contract for the receipt of goods. Under the Uniform Commercial Code, the buyer is permitted to find another source of the same type of goods. The buyer may then file a lawsuit against the breaching seller to recover the difference, if any, between the cost of the goods offered and the cost of the goods actually purchased.

Business brokers, also called business transfer agents, or intermediaries, assist buyers and sellers of privately held businesses in the buying and selling process. They typically estimate the value of the business; advertise it for sale with or without disclosing its identity; handle the initial potential buyer interviews, discussions, and negotiations with prospective buyers; facilitate the progress of the due diligence investigation and generally assist with the business sale.

An output contract is an agreement in which a producer agrees to sell his or her entire production to the buyer, who in turn agrees to purchase the entire output. Example: an almond grower enters into an output contract with an almond packer: thus the producer has a "home" for output of nuts, and the packer of nuts is happy to try the particular product. The converse of this situation is a requirements contract, under which a seller agrees to supply the buyer with as much of a good or service as the buyer wants, in exchange for the buyer's agreement not to buy that good or service elsewhere.

Restraints of trade is a common law doctrine relating to the enforceability of contractual restrictions on freedom to conduct business. It is a precursor of modern competition law. In an old leading case of Mitchel v Reynolds (1711) Lord Smith LC said,

it is the privilege of a trader in a free country, in all matters not contrary to law, to regulate his own mode of carrying it on according to his own discretion and choice. If the law has regulated or restrained his mode of doing this, the law must be obeyed. But no power short of the general law ought to restrain his free discretion.

Escape clause portion of a contract which specifies how a party may be permitted to avoid fulfilling one or more terms

An escape clause is any clause, term, or condition in a contract that allows a party to that contract to avoid having to perform the contract.

The Sale of Goods Act 1979 is an Act of the Parliament of the United Kingdom which regulated English contract law and UK commercial law in respect of goods that are sold and bought. The Act consolidated the original Sale of Goods Act 1893 and subsequent legislation, which in turn had codified and consolidated the law. Since 1979, there have been numerous minor statutory amendments and additions to the 1979 Act. It was replaced for consumer contracts from 1 October 2015 by the Consumer Rights Act 2015(c 15) but remains the primary legislation underpinning B2B transactions for selling / buying goods.

Competition law theory covers the strands of thought relating to competition law or antitrust policy.

Contract law regulates the obligations established by agreement, whether express or implied, between private parties in the United States. The law of contracts varies from state to state; there is nationwide federal contract law in certain areas, such as contracts entered into pursuant to Federal Reclamation Law.

References

↑ Roger LeRoy Miller, Gaylord A. Jentz, Business Law Today: The Essentials (2005), p. 336.
↑ Richard A. Mann, Barry S. Roberts, Smith and Roberson's Business Law, (2005) p. 210. See also Roger LeRoy Miller, Gaylord A. Jentz, Business Law Today: The Essentials (2005), p. 336.
↑ Roger LeRoy Miller, Gaylord A. Jentz, Business Law Today: The Essentials (2005), p. 336.
↑ James Gordley, The Enforceability of Promises in European Contract Law (2001), p. 193-197.
↑ James Gordley, The Enforceability of Promises in European Contract Law (2001), p. 197-199.
↑ Richard A. Mann, Barry S. Roberts, Smith and Roberson's Business Law, (2005) p. 210.
↑ Jonathan M. Jacobson, American Bar Association, Section of Antitrust Law, Antitrust Law Developments (2007), p. 248.
↑ Robert Bork, The Antitrust Paradox (1978), p. 304-05.
↑ Robert Bork, The Antitrust Paradox (1978), p. 309.

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[1] Roger LeRoy Miller, Gaylord A. Jentz, Business Law Today: The Essentials (2005), p. 336.

[2] Richard A. Mann, Barry S. Roberts, Smith and Roberson's Business Law, (2005) p. 210. See also Roger LeRoy Miller, Gaylord A. Jentz, Business Law Today: The Essentials (2005), p. 336.

[3] Roger LeRoy Miller, Gaylord A. Jentz, Business Law Today: The Essentials (2005), p. 336.

[4] James Gordley, The Enforceability of Promises in European Contract Law (2001), p. 193-197.

[5] James Gordley, The Enforceability of Promises in European Contract Law (2001), p. 197-199.

[6] Richard A. Mann, Barry S. Roberts, Smith and Roberson's Business Law, (2005) p. 210.

[7] Jonathan M. Jacobson, American Bar Association, Section of Antitrust Law, Antitrust Law Developments (2007), p. 248.

[8] Robert Bork, The Antitrust Paradox (1978), p. 304-05.

[9] Robert Bork, The Antitrust Paradox (1978), p. 309.