George Mason School of Law Contracts I P. Output Contracts F.H. Buckley fbuckley@gmu.edu

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.

Requirements Contracts Requirements contract: producer agrees to sell as much of his product as buyer requires 3

Output Contracts Output contract: buyer agrees to purchase seller’s entire output

Output Contracts Buyer agrees to buy all of producer’s output Risks to buyer:

Output Contracts Buyer agrees to buy all of producer’s output Risks to buyer: What if market price < contract price

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

Output Contracts Buyer agrees to buy all of producer’s output Risks to seller:

Output Contracts Buyer agrees to buy all of producer’s output Risks to seller: What if market price > contract price

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

Price Changes: Output Contracts Assuming that Contract Price > Market Price Market Price > Contract Price Supplier Buyer

Price Changes: Output Contracts Assuming that Contract Price > Market Price Market Price > Contract Price Supplier Buyer

Price Changes: Output Contracts Assuming that Contract Price > Market Price Market Price > Contract Price Supplier Woo-hoo!!!! Buyer

Price Changes: Output Contracts Assuming that Contract Price > Market Price Market Price > Contract Price Supplier Buyer Wants out

Price Changes: Output Contracts Assuming that Market Price > Contract Price Contract Price > Market Price Market Price > Contract Price Supplier Buyer

Price Changes: Output Contracts Assuming that Market Price > Contract Price Contract Price > Market Price Market Price > Contract Price Supplier Wants out Buyer

Price Changes: Output Contracts Assuming that Market Price < Contract Price Contract Price > Market Price Market Price > Contract Price Supplier Buyer Woo-hoo!!!!

Price Changes: Output Contracts Assuming that Market Price < Contract Price Contract Price > Market Price Market Price > Contract Price Supplier Woo-hoo!!!! Wants out Buyer

What if Seller’s Costs Increase? Contract Price > Cost Cost > Contract Price Supplier Buyer

Output Contracts Cost to Seller Contract Price > Cost Cost > Contract Price Supplier Wants out Buyer

Output Contracts: Feld v. Levy p. 332 Bakery Levy Distributor Feld Bread crumbs

Output Contracts: Feld v. Levy A renewable one-year contract in which Levy agrees to sell all its bread crumbs to Feld for $1.06/lb. Assume Feld thinks he can resell at $1.50/lb.

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 and cancels

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".

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.”

Output Contracts: Feld v. Levy Does it make sense to require the baker to lose money?

Output Contracts: Feld v. Levy Does it make sense to require the baker to lose money? Is there something troubling about the numbers?

Output Contracts: Feld v. Levy

Output Contracts: Feld v. Levy What if the baker could sell elsewhere for $1.50/lb.? Do you think this might do something to his reported costs, if this affords him an out?

Output Contracts: Feld v. Levy How is this case like Empire Gas?

Output Contracts: Feld v. Levy Can a buyer in a requirements contract purchase zero quantities? Empire Gas

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

Output contracts Good faith standards imposed in both cases