Output contracts are a special type of contract that concern the sale and purchase of goods. Specifically, in an output contract, the buyer agrees to purchase all of a supplier’s output. Generally speaking, the buyer will buy all of an item that the seller can produce.
For example: Company A produces 10,000 paper clips per year. Company B would like to purchase paper clips from Company A. The parties agree that Company B will purchase all 10,000 paper clips that Company A produces this year. This is an output contract.
Output contracts can be helpful to buyers when there is uncertainty regarding market supply or demand for a particular good. However, if the seller’s output is more than the buyer requires, an output contract may not be exactly the vehicle you need to secure your supplies.
Another similar type of contract for the sale of goods is called a requirement contract. Requirement contracts have an important difference that distinguishes them from output contracts. While output contracts are agreements for the buyer to purchase all of an item that the seller can supply, requirement contracts are agreements for the seller to sell as much of an item as the buyer requires.
In these types of contracts (both output and requirement), the amount of goods being bought or sold is generally determined by the buyer’s requirements or the seller’s production, and not by a particular set number. Requirements contracts often allow sellers to sell their goods to other buyers as well, so long as the contract buyer’s requirements are fulfilled.
Output contracts, however, often include clauses that restrict sellers from selling to other buyers (since the initial seller has agreed to sell all of their production to one buyer, the agreement is exclusive).
Since output contracts regard the sale of goods, these types of contracts are governed by the Uniform Commercial Code (also known as the U.C.C.). The U.C.C. is a body of laws that specifically set forth rules for the sale of goods (as opposed to services). All contracts that concern the sale of goods must follow the rules set forth in the U.C.C. This keeps the sale of goods consistent across jurisdictions, so you can expect the same basic set of rules to apply to your transaction no matter where you are in the country.
Not necessarily. Normally, contracts require certain precise terms in order to be enforceable (such as a term naming the quantity). For example, Company B promises to buy five boxes of paper clips. Five boxes is a specific enough term regarding the quantity of paper clips for the contract to be enforceable.
However, under the U.C.C., sale of goods contracts can get around naming a specific set quantity if the contract is an output contract or a requirement contract. The term indicating the quantity as the “total output” or “total requirement” is sufficient under the U.C.C. to make the contract enforceable.
In the case of output contracts, the U.C.C. requires that both parties to the agreement act in good faith. The idea is that since the terms of the contract don’t specify a set number of goods, both sides will do what they can in order to make sure that the agreement is fair.
In other words, the buyer can’t arbitrarily change their requirements out of the blue or to an unreasonable degree (taking into account any prior dealings the parties have had with one another). Likewise, the seller cannot require the buyer to purchase an output that is wildly out of proportion with their needs.
In many instances, courts may look to prior dealings that the parties have had with one another in order to determine the reasonableness of the contract.
For example: If Company A regularly produces 10,000 paper clips per year, and Company B has an output contract with A agreeing to buy all the paper clips they make in a year, Company A cannot suddenly increase their production to 50,000 paper clips in a year. Unless Company B separately agrees to purchase the 50,000 paper clips, expecting them to follow through on such a sudden and dramatic change in the output may be deemed unreasonable.
Any time you are negotiating a contract, you want to make sure that the terms of the agreement are clear to everyone involved. In many instances, contract law can become detailed, nuanced, and complicated in a very short period of time.
It is in your best interests to consult an experienced contract or business lawyer to help you negotiate the terms and make sure that you are getting the best possible outcome in the agreement. If you are involved in a contact dispute, an attorney can also advise you on the best course of action and help you resolve the dispute.