What Is an Output Contract?

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What Is an Output Contract?

An output contract involves a contract for the sale and purchase of goods. It is governed by the Uniform Commercial Code (UCC). In an output contract, the producer or seller agrees to sell his entire production to the buyer.

For example, if a farmer enters into an output contract with a grocery store, then the farmer agrees to sell his entire output of farm produce to the store. In turn, the store agrees to purchase all of the farmer’s agricultural produce.

Output Contract vs. Requirement Contract

In a requirement contract, the seller agrees to sell as much as the buyer would require, not as much as the seller would produce. For example, with a requirement contract, the farmer will agree to sell as much produce to the store as the store will require.

Do Output Contracts Need a Quantity Term?

Both output and requirement contracts are still enforceable even though they lack a precise term concerning quantity. Under the UCC, sale of goods contracts need to have at least an essential term of quantity, yet this requirement may be overcome by using output or requirement contracts.

The Duty of Good Faith

Since the quantity is not stated in an output or requirement contract, the buyer’s requirements or the seller’s outputs can only be changed in good faith.

In another words, the buyer cannot increase its requirements unexpectedly or out of proportion to regular requirements in the course of prior dealings. Similarly, a seller may not require a buyer to purchase an output that is out of proportion to the buyer’s needs.

As a general rule, variation in outputs and requirements may not be "unreasonably disproportionate" to the estimated or prior outputs or requirements.

Seeking Legal Help

Since mistakes or disagreements often occur in the context of contract formation, you should considering contacting a qualified contract lawyer. If you are involved in a dispute over an output contract, an attorney can represent your side of the argument and help you settle your dispute.

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Last Modified: 08-24-2016 10:17 PM PDT

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