George Mason School of Law
Contracts I
O. Output Contracts
F.H. Buckley
[email protected]
1
Output and Requirements
contracts
 UCC § 2-306(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.
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Requirements Contracts
 Requirements contract: producer
agrees to sell as much of his product
as buyer requires
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Output Contracts
 Output contract: buyer agrees to
purchase seller’s entire output
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Output Contracts
 Buyer agrees to buy all of producer’s
output
 Risks to buyer:
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Output Contracts
 Buyer agrees to buy all of producer’s
output
 Risks to buyer:
 What if market price < contract price
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Output Contracts
 Buyer agrees to buy all of producer’s
output
 Risks to buyer:
 What if market price < contract price
 What if buyer can’t use the output
 Weak demand for buyer’s product
 Higher costs for buyer
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Output Contracts
 Buyer agrees to buy all of producer’s
output
 Risks to seller:
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Output Contracts
 Buyer agrees to buy all of producer’s
output
 Risks to seller:
 What if market price > contract price
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Output Contracts
 Buyer agrees to buy all of producer’s
output
 Risks to seller:
 What if market price > contract price
 What if seller’s cost > contract price
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Price Changes: Output Contracts
Assuming that Contract Price > Market Price
Contract Price
> Market Price
Supplier
Buyer
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Market Price >
Contract Price
Price Changes: Output Contracts
Assuming that Contract Price > Market Price
Contract Price
> Market Price
Supplier
Buyer
12
Market Price >
Contract Price
Price Changes: Output Contracts
Assuming that Contract Price > Market Price
Contract Price
> Market Price
Supplier
Buyer
13
Woo-hoo!!!!
Market Price >
Contract Price
Price Changes: Output Contracts
Assuming that Contract Price > Market Price
Contract Price
> Market Price
Supplier
Buyer
14
Wants out
Market Price >
Contract Price
Price Changes: Output Contracts
Assuming that Market Price > Contract Price
Contract Price
> Market Price
Supplier
Buyer
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Market Price >
Contract Price
Price Changes: Output Contracts
Assuming that Market Price > Contract Price
Contract Price
> Market Price
Supplier
Buyer
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Market Price >
Contract Price
Wants out
Price Changes: Output Contracts
Assuming that Market Price < Contract Price
Contract Price
> Market Price
Market Price >
Contract Price
Supplier
Buyer
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Woo-hoo!!!!
Price Changes: Output Contracts
Assuming that Market Price < Contract Price
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Contract Price
> Market Price
Market Price >
Contract Price
Supplier
Woo-hoo!!!!
Wants out
Buyer
Wants out
Woo-hoo!!!!
What if Seller’s Costs Increase?
Contract Price
> Cost
Supplier
Buyer
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Cost > Contract
Price
Output Contracts
Cost to Seller
Contract Price
> Cost
Supplier
Buyer
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Cost > Contract
Price
Wants out
Output Contracts:
Feld v. Levy p. 332
Bakery Levy
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Bread crumbs
Distributor Feld
Output Contracts:
Feld v. Levy
 A renewable one-year contract in
which Levy agrees to sell all its bread
crumbs to Feld for $0.06/lb.
 Assume Feld thinks he can resell at
$0.10/lb.
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Output Contracts:
Feld v. Levy
 A renewable one-year contract in
which Levy agrees to sell all its bread
crumbs to Feld
 Levy discovers that the marginal cost
exceeds the contract price ($0.06)
and cancels
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Output Contracts:
Feld v. Levy
 A renewable one-year contract in
which Levy agrees to sell all its bread
crumbs to Feld
 Levy discovers that the marginal cost
exceeds the contract price ($0.06)
and cancels
 Do you think Levy wants to stop all
production?
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Output Contracts:
Feld v. Levy
 Held: It would be bad faith for Levy
to stop crumb production just
because their profits aren't as high as
they expected, but it would be good
faith for Levy to stop crumb
production if they incurred losses
from such production that were "more
than trivial".
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Output Contracts:
Feld v. Levy
“A bankruptcy or genuine imperiling of the very
existence of its entire business caused by the
production of the crumbs would warrant cessation
of production of that item; the yield of less profit
from its sale than expected would not. Since
bread crumbs were but a part of defendant's
enterprise and since there was a contractual right
of cancellation, good faith required continued
production until cancellation.”
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Output Contracts:
Feld v. Levy
 Does it make sense to require the
baker to lose money?
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Output Contracts:
Feld v. Levy
 Does it make sense to require the
baker to lose money?
 Is there something troubling about the
numbers?
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Output Contracts:
Feld v. Levy
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Output Contracts:
Feld v. Levy
 What if the baker could sell elsewhere
for $0.10/lb.?
 Do you think this might do something to
his reported costs, if this affords him an
out?
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Output Contracts:
Feld v. Levy
 How is this case like Empire Gas?
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Output Contracts:
Feld v. Levy
 Can a buyer in a requirements
contract purchase zero quantities?
 Empire Gas
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Output Contracts:
Feld v. Levy
 Can a buyer in a requirements
contract purchase zero quantities?
 Empire Gas
 Can a seller in an output contract sell
zero quantities?
 Feld v. Levy
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Output contracts
 Good faith standards imposed in both
cases
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