A requirements contract is a

contract A contract is a legally enforceable agreement between two or more parties that creates, defines, and governs mutual rights and obligations between them. A contract typically involves the transfer of goods, services, money, or a promise to tran ...

in which one

party A party is a gathering of people who have been invited by a host for the purposes of socializing, conversation, recreation, or as part of a festival or other commemoration or celebration of a special occasion. A party will often feature f ...

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 A grocery store ( AE), grocery shop ( BE) or simply grocery is a store that primarily retails a general range of food products, which may be fresh or packaged. In everyday U.S. usage, however, "grocery store" is a synonym for supermarket, a ...

might enter into a contract with the

farmer A farmer is a person engaged in agriculture, raising living organisms for food or raw materials. The term usually applies to people who do some combination of raising field crops, orchards, vineyards, poultry, or other livestock. A farmer mig ...

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 is a legal cause of action and a type of civil wrong, 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 ...

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.

Problems

Consideration

Several problems typically arise with requirements contracts. The first is

consideration Consideration is a concept of English common law and is a necessity for simple contracts but not for special contracts (contracts by deed). The concept has been adopted by other common law jurisdictions. The court in ''Currie v Misa'' declared ...

. 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 A court is any person or institution, 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 ...

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, " e 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.

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 Rescission is the noun form of the verb "to rescind." It may refer to: * Rescission (contract law) * Rescission bill, a procedure to rescind previously appropriated funding in the United States * A synonym for repeal in parliamentary procedure * ...

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. Until fairly recently, requirements contracts were deemed void under the

law of France The Law of France refers to the legal system in the French Republic, which is a civil law legal system primarily based on legal codes and statutes, with case law also playing an important role. The most influential of the French legal codes is t ...

for lack of defined terms under Articles 1129 and 1583 of the French Civil Code. In

Belgium Belgium, ; french: Belgique ; german: Belgien officially the Kingdom of Belgium, is a country in Northwestern Europe. The country is bordered by the Netherlands to the north, Germany to the east, Luxembourg to the southeast, France to th ...

, 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

good In most contexts, the concept of good denotes the conduct that should be preferred when posed with a choice between possible actions. Good is generally considered to be the opposite of evil and is of interest in the study of ethics, morality, ph ...

s, most jurisdictions in the

United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country primarily located in North America. It consists of 50 states, a federal district, five major unincorporated territorie ...

apply Section 2-306(1) of the

Uniform Commercial Code 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 through UC ...

, which imposes a good faith limitation on purchases under a requirements contract. The Code states: Simply put, this means that a requirements contract for

s is valid, but might not be enforced if the buyer makes demands that are unreasonable compared to either prior estimates or industry standards. The

does not apply to sales of services.

Antitrust concerns

Finally,

antitrust Competition law is the field of 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. It is also known as antitrust l ...

concerns sometimes arise because a requirements contract prohibits the buyer from doing business in a particular

commodity In economics, a commodity is an economic good, usually a resource, 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. The price of a comm ...

with a party other than the seller. This may create an

exclusive dealing In Economics and Law, exclusive dealing arises when a supplier entails the buyer by placing limitations on the rights of the buyer to choose what, who and where they deal. This is against the law in most countries which include the USA, Austra ...

arrangement which gives the seller

monopoly A monopoly (from Greek language, Greek el, μόνος, mónos, single, alone, label=none and el, πωλεῖν, pōleîn, to sell, label=none), as described by Irving Fisher, is a market with the "absence of competition", creating a situati ...

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 Heron Bork (March 1, 1927 – December 19, 2012) was an American jurist who served as the solicitor general of the United States from 1973 to 1977. A professor at Yale Law School by occupation, he later served as a judge on the U.S. Court ...

, in ''

The Antitrust Paradox ''The Antitrust Paradox'' is an influential 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. Bork has cred ...

'', 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, " e truth appears that there never has been a case in which exclusive dealing or requirements contracts were shown to injure competition".

, ''

'' (1978), p. 309.

References

{{reflist Contract law