Key Takeaways

  • A requirements contract is a supply agreement where the buyer agrees to purchase all needed goods exclusively from a seller.
  • These contracts are legally recognized under the Uniform Commercial Code (UCC), provided terms are reasonable and based on good faith.
  • Requirements contracts are frequently used in manufacturing, agriculture, and other industries with fluctuating needs.
  • Key legal issues include lack of quantity certainty, antitrust risks, and bad faith disputes.
  • Courts may enforce these contracts if a pattern of prior dealings or clearly defined performance expectations exist.

A requirements contract is an agreement in which the exact amount of items exchanged isn't specifically determined. The amount that will be sold depends on how much the buyer requires. Requirements contracts are common when the buyer's needs fluctuate, such as in seasonal farming operations.

About Requirements Contracts

For a specified period of time, a buyer is contractually obligated to purchase all of a particular set of goods that it requires from the seller. An essential element in these agreements is exclusivity. Any agreement that doesn't expressly obligate a buyer to purchase a specific quantity of particular materials or goods isn't a requirements contract.

Buyers and sellers share risk in a requirements contract. The seller assumes the risk of a buyer's business changing in such a way that the cost of fulfilling the requirements becomes unduly costly. The buyer runs the risk of changes in its financial situation. Unexpected price fluctuations may drive these risks.

The benefits for the parties include a predictable demand for sellers and a steady supply for buyers.

Enforceability Under the Uniform Commercial Code (UCC)

The UCC allows requirements contracts to be enforceable even without a specific quantity term, as long as both parties act in good faith and the quantity demanded is not unreasonably disproportionate to past needs. UCC § 2-306 outlines these conditions:

  • The quantity must be determined by the buyer’s actual good faith requirements.
  • Any sudden increase or decrease in demand that significantly deviates from prior norms can lead to legal disputes.
  • Courts may compare current orders to historical orders to assess whether demand is "unreasonably disproportionate."

Good faith remains a cornerstone of enforceability. A buyer cannot simply halt purchases or drastically increase them to manipulate the contract's economics.

Practical Uses and Industry Examples

Requirements contracts are commonly used in industries where supply needs fluctuate or demand is difficult to predict. For example:

  • Manufacturing: A car manufacturer may enter a requirements contract to buy all its steel from a specific supplier.
  • Agriculture: A grocery chain may purchase all the strawberries it needs for a season from one farm.
  • Food Services: Restaurants often use these contracts to secure all dairy products or specific ingredients from selected vendors.

These contracts ensure consistent quality, reduce administrative overhead, and stabilize supply relationships—even when exact purchase quantities vary from month to month.

Output Contracts and Requirements Contracts

An output contract is the opposite of a requirements contract. In an output agreement, the buyer agrees to buy the full amount that a seller can produce in a certain season or time period. Buyers may start by purchasing a sample batch to make sure it's good quality.

The Uniform Commercial Code, which governs commercial transactions, provides that contractual parties must act in good faith. While the UCC doesn't explicitly say that output and requirements contracts are enforceable, the validity of these agreements is implied.

An agreement between a buyer and seller where the buyer will purchase all goods it requires from the seller, may be interpreted that the buyer has a choice whether it requires any goods at all. Likewise, an agreement in which a seller agrees to sell all of its output to a buyer may be interpreted that the seller is free to control its output.

If you read these agreements this way, it seems to leave one of the parties free to fulfill its obligations or not.

There are valid commercial reasons for these contracts, and courts have found ways to uphold both requirements and output contracts if the only objection to their validity is that they're too indefinite.

When parties try to increase or decrease requirements, this usually results in disputes that go to court. Courts may resolve these disputes with the UCC's "unreasonably disproportionate" test that is used in conjunction with the good faith requirement.

The UCC also provides that a valid agreement involving an exclusive dealing in goods obligates sellers to do their best to supply goods and buyers to do their best to purchase them. This is an application of the doctrine of good faith.

The legality of requirements, output, or other exclusive dealing agreements depends on the application of state or federal antitrust acts, which protect trade and commerce from illegal restraints, price fixing, and price discrimination. According to the UCC, lawful agreements are the only ones that may be enforced.

Legal Issues

The biggest concern with requirements contracts is that the amount of goods isn't specified before entering into the agreement. This calls for a level of trust between the parties.

The seller has to trust that the buyer won't back out if demand falls. The buyer has to trust that the seller will continue to supply its needs without a set quantity being listed.

To prevent violations, contract breaches, and other abuses, the following concepts are a major part of these agreements: 

  • Good faith: Neither party should exercise fraud or intentionally misuse the other party. Each should perform its duties, therefore, in good faith.
  • Prior dealings: The requested quantity of goods should be about the same quantity that's been previously requested in prior agreements, if applicable. Major deviations by parties who've had dealings in the past may be viewed as unreasonable.

Contracts are best when each party benefits in some way. Because contract law can be complicated, you may wish to consult with a legal professional before signing one. You want to fully understand the contract's terms so that you know exactly what you're agreeing to.

Drafting Best Practices

To minimize risk and enhance enforceability, parties should follow these best practices when drafting requirements contracts:

  • Include performance benchmarks: Reference historical purchasing patterns or forecast ranges to help define acceptable demand variations.
  • Define good faith: Clarify what constitutes a material change in requirements or circumstances that justify renegotiation.
  • Set review periods: Periodically reassess volumes and pricing terms to reflect market realities.
  • Add termination clauses: Provide mechanisms for early termination if there is a breakdown in the supply chain or demand significantly changes.

Additionally, where possible, state law governing the agreement should be clearly identified to avoid jurisdictional ambiguity.

Common Disputes in Requirements Contracts

Disputes often arise in requirements contracts when:

  • The buyer drastically reduces or increases order volume without justification.
  • The seller claims the buyer failed to meet a “best efforts” obligation.
  • A party attempts to terminate the agreement prematurely due to price changes or supply shortages.

Courts typically review:

  • The parties' course of dealing or prior transactions.
  • Whether the change in requirements is commercially reasonable.
  • Any implied duty of good faith and fair dealing.

Antitrust concerns may also emerge if the contract creates exclusive dealing arrangements that substantially reduce market competition. Such arrangements may be reviewed under federal antitrust laws like the Sherman Act or Clayton Act if they create monopolistic tendencies.

Frequently Asked Questions

  1. What is a requirements contract?
    It is a legal agreement in which the buyer agrees to purchase all of its specific needs for certain goods or services exclusively from one seller, without defining a specific quantity in advance.
  2. Are requirements contracts enforceable without a quantity term?
    Yes, under UCC § 2-306, these contracts are enforceable if the buyer's demand is made in good faith and not unreasonably disproportionate to previous patterns.
  3. How does a requirements contract differ from an output contract?
    A requirements contract obligates the buyer to purchase all it needs, while an output contract obligates the buyer to purchase all the goods the seller can produce.
  4. Can requirements contracts violate antitrust laws?
    They can if they unreasonably restrain trade or create exclusive dealing arrangements that harm market competition, particularly under the Sherman or Clayton Acts.
  5. What are some drafting tips for requirements contracts?
    Use historical data to guide expected volumes, clarify good faith obligations, and include mechanisms to terminate or modify the agreement under defined conditions.

If you need help with contracts, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.