A requirement contract is a type of contract where the exact quantity of items to be sold and purchased is not specifically determined. Instead, the amount to be sold is dependent on the amount that the buyer “requires”. These types of contracts are common in situations where the buyer’s needs are subject to fluctuation (such as many farming operations which on seasonal factors).
The opposite of a requirement contract is an “output” contract. This is where the buyer agrees to purchase the full amount that the seller is able to produce in a certain time period or season. In such cases, the buyer may purchase a small sample batch of the product to ensure that it is of good quality. Taken together, these two types of contracts are often placed in a category known as “output and requirement contracts”.
The main concern with requirement contracts is that the quantity of goods is not set before the agreement is entered into. This requires a certain amount of trust for the parties. The seller must trust that the buyer will not back out if their demand falls low; also, the buyer must trust that the seller will provide them with their needs even without a specific quantity being listed.
To prevent abuses, breaches of contract, and violations, the following legal concepts are a major part of requirement contracts:
- Good faith: Each party should perform their contractual duties in good faith, meaning that they shouldn’t exercise fraud or intentionally misuse the other party to their advantage
- Prior dealings: The quantity requested should be proportionate or approximate to the amount requested in prior requirement contracts, if applicable. Major deviations from standard contract requests by parties who have had prior dealings with one another may be considered unreasonable
Another common legal issue involved with requirement and output contracts is that of substantial performance. This is a contracts doctrine involving whether a party has fulfilled their contractual duty even if they only performed part of it. This is a significant concern for requirement contracts, because the quantity is not specifically defined. Such legal issues generally require the assistance of an attorney if a dispute arises.
Requirement contracts are a fairly specific sub-set of contracts law. If you need help negotiating, drafting, or reviewing an output/requirement contract, you may wish to contact a qualified contract lawyer in your area. An attorney can help review the documents to ensure that the opposite party is exercising good faith and reasonableness. In the event that a legal claim needs to be filed, your attorney can represent you in court during the trial process.