1. George Mason School of Law
Contracts I
O. Output Contracts
F.H. Buckley

2. 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.

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

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

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

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

7. 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

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

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

10. 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

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

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

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

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

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

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

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

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

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

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

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

22. 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.

23. 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

24. 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?

25. 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".

26. 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.”

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

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

29. Output Contracts: Feld v. Levy

30. 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?

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

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

33. 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

34. Output contracts
Good faith standards imposed in both cases