Law Case Study on Requirements and Output Contracts

Question 1: Requirements and output contract

Output and requirements contracts address two different aspects of the contract agreement. A requirements contract stipulates that the buyer will purchase all materials of a particular kind that the buyer needs from a certain supplier. Through the requirements contract, the buyer is assured that they will have a constant supply of inventory that they need. The buyer does not promise to buy all the materials they desire to buy. Rather, they would only buy what they need. This ensures that there are no costs incurred in inventory management as a result of excess inventory. Moreover, the buyer may not lose customers as a result of lack of raw materials. The main limitation of requirements contracts is that they do not indicate a promise by the seller to always make available the materials needed by the buyer. For instance, the seller may produce material they consider surplus given the demand trends by the buyer and sell the rest only for the buyer to require more than projected by the seller.

Output contracts on the other hand, entail a promise by the seller to sell all materials of a particular type that they produce to a particular buyer. Such kind of a contract provides the seller with an assured market for all products of a particular type. Just like in the requirements contract, the seller under an output contract promises to sell all material and not just as much as they desire to sell to the buyer. Requirements and output contracts subject the buyer and seller respectively to good faith limitations in which business contracts are implemented willfully and with a potential for mutual benefits.

Question 2: Effects of the Good Faith Requirement on Contracts

Requirements and output contracts as mentioned, subject the seller and the buyer to good faith limitations, which imply that the productivity of the supply or the demand of the buyer cannot be changed following either of the contracts. For instance, a seller producing 1000 tons of products cannot increase its production to 2000 MT after an output contract has been signed. Similarly, a buyer cannot reduce their demand from 1000 to 500 tons after the signing of a requirements contract. The good faith condition requires that businesses be transacted in honesty and integrity in dealing with transactions in business. Good faith requires fair dealing in trade and the observance of all the reasonable commercial standards. For instance, commercial agreements may entail a condition that the seller sets the prices for the goods. In such a case, prices have to be set in good faith.

Although good faith is used as comprehensive term in commercial transactions, it generally means that whatever agreements or conditions are reached to transact in business, they must be without malice or intention to defraud. The good faith limitation for sellers and buyers and output and requirements contracts respectively imply that buyers can purchase products from the sellers even without title as long as the seller can demonstrate that their actions are in good faith. The conditions for meeting this standard are that the seller must have been in business for some time, should have transacted agreements in good faith before and has demonstrated honesty before. The transactions are considered to be under good faith when they take place in a usual business environment rather than in a suspicious environment.

Question 3: Did ABC act ethically?

Parties subject to requirements and output contracts are required to act in good faith throughout all decision making processes. Considering the nature of interactions between business parties, the fundamental principles of ethic al business conduct include integrity, promise keeping and concern for others. In terms of integrity, it can deduced that ABC’s actions did not correspond to every tenet of honesty in that the promises were made based on existing needs. Furthermore, the aspect of promise keeping goes hand in hand with integrity. Those of high integrity should be able to keep their promises and be accountable for their actions. The fact that ABC made a promise it ultimately failed to keep is reflective of lack of reliability by the company.

Ethical business practice also requires participants to a contract to be able to communicate and follow stipulated procedures in the termination of contracts. Since ABC seemingly terminated the contract implicitly, they failed to communicate in good time hence can be said to have breached the contract. As much as the company did not change their supplier but rather reversed the decision to convert their cars, the fact that they had made a promise to purchase converters and propane for 3000 vehicles and did not bother to cancel the agreement is indicative of unethical behavior. Specifically, the company acted without concern for others in that they did not give consideration into the potential loss that Empire would incur as a result of their unfulfilled promises. Evaluating the behaviors exhibited by ABC shows that the company neither cared about the outcomes of their actions, nor the impacts of the same on others. The best approach towards managing such an incidence is through a court of law.

Question 4: Court’s Decision

The agreement between ABC and Empire to be purchasing propane and converter units can be described as a requirements contract. In such a contract, the buyer promises to purchase all the materials that they need of a particular type from the seller. In this regard, the evaluation of need is based on the projected demand as given by the customer. This implies that with the contract in place, the seller is obliged to produce an amount equal to the demand from the customer. In this regard, reducing the demand after getting into a requirements contract is considered unethical and not out of good will. In the case of ABC and Empire, a similar scenario is presented. The agreement to purchase at least slightly more or less of the required buyer needs is a confirmation of the need to continue producing converters and propane at Empire.

As such, it can be deduced that the court’s decision was accurate and in consideration of the terms of agreement between the two parties. As much as it had been stated that the amount of purchase was to be what the company needed or either slightly less or slightly more, the decision not to purchase at all is reflective of lack of good will. The court was therefore right to demand a compensation for empire to the tune of approximately $3.2 million, as this would cater for the costs incurred in production and inventory management. It is only through such precedence that sellers and buyers can get to stick to the good will practice in commercial transactions.