Requirement Contracts and Mutuality Introduction

While it has seldom been doubted that a sale on approval (or a sale or return, for that matter) is a binding contract before the buyer has expressed his approval (U.C.C. §2-326), contracts that give one of the parties an option as to quantity (as contrasted with quality) have had an uphill fight for recognition.^[137] The early Minnesota case of Bailey v. Austrian, 19 Minn. 535 (Gil. 465) (1873), illustrates the predicament of the buyer. Plaintiffs offered evidence that defendant had promised to supply and plaintiffs promised to buy at specified prices all the pig-iron they might want in their foundry during a stated period. A quantity of pig-iron was furnished^[138] but before the contract had expired defendant stopped requested deliveries. In holding that the evidence offered was properly excluded because if admitted it would not have established a contract between the parties, the court had this to say:^[139]

Upon the foregoing state of facts the engagement of plaintiffs was to purchase all of said pig-iron which they might want in their said business during the time specified; but they do not engage to want any quantity whatever. They do not even engage to continue their business. If they see fit to discontinue it on the very day on which the supposed agreement is entered into, they are at entire liberty to do so at their own option, and, whatever might have been defendant's expectation, he is without remedy. In other words, there is no absolute engagement on plaintiffs' part to "want," and of course no absolute engagement to purchase any iron of defendant.

Without such absolute engagement on plaintiffs' part, there is "no absolute mutuality of engagement," so that defendant "has the right at once to hold" plaintiffs "to a positive agreement." . . .

To be a sufficient consideration it is necessary that plaintiffs' promise be a benefit to defendant or an injury to plaintiffs. 1 Parsons, Cont. 431. But so long as. . . plaintiffs are not bound to do anything whatever by virtue of their promise, the promise cannot be such benefit or injury.

Business necessity, however, dictated enforceability of requirement as well as output contracts, i.e., contracts where the quantity sold is measured by either the requirements of the buyer or the output of the seller, (U.C.C. §2-306). The advantages of these types of contract become obvious when we contrast them with contracts providing for fixed quantity terms.^[140] In the latter type of contract the seller is assured that a certain portion of its output is taken care of and the buyer is assured of its supply. But the risk of having surplus goods on hand is not taken care of. Depending on business developments it may fall on either party. Requirement and output contracts, on the other hand, aim at the allocation of this risk. Requirement contracts assure the buyer of supply,

may afford protection against rises in price, enable long term planning on the basis of known costs and obviate the expense and risk of storage in the quantity necessary for a commodity having a fluctuating demand. From the seller's point of view, requirement contracts may make possible the substantial reduction of selling expenses, give protection against price fluctuations, and — of particular advantage to a newcomer to the field to whom it is important to know what capital expenditures are justified — offer the possibility of a predictable market.

Standard Oil Company of California v. United States, 337 U.S. 293, 306- 307 (1949).^[141] In output contracts the situation is reversed. While in a requirement contract the risk of nondisposal because of a drop in the buyer's business as well as the risk of filling increasing needs is on the seller, these risks have to be borne by the buyer in an output contract. The risk of marketing put on the buyer is often paid for by a price concession, which the seller can afford because his selling costs ate-diminished. Maximum and minimum contracts partially limit the risks involved in these types of contract; so do flexible prices. A more detailed discussion of the economic role of such arrangements may be found in Havighurst & Berman, Requirement and Output Contracts, 27 111.1. Rev. 1 (1927). See also K. Llewellyn, Cases and Materials on the Law of Sales 452 (1930); Patterson, Illusory Promises and Promisor's Options, 6 Iowa L. Bull. 129, 209 (1921); Corbin, The Effect of Options on Consideration, 34 Yale L.J. 571, 579-583 (1925); Note, Requirement and Output Contracts Under the Uniform Commercial Code, 102 U. Pa. L. Rev. 654 (1954); Note, Requirement Contracts: Problems of Drafting and Construction, 78 Harv. L. Rev. 1212 (1965). On the treatment of requirement contracts in the British Commonwealth see Howard, Requirements and the Output Contracts, 2 U. Tasmania L. Rev. 446 (1967).

[137] Recognition of such contracts in an early Tennessee case, Cherry v. Smith, 22 Tenn. (3 Hum.) 19 (1822), was rather short-lived.

[138] This fact is mentioned only in the Gilfillan report.

[139] The paragraph closely follows Lavery, The Doctrine of Bailey v. Austrian, 10 Minn. L. Rev. 584 (1926).

[140] On the disadvantages (costs) of having contracts with fixed terms see Coase, The Nature of the Firm, 4 Economica (n.s.) 386 (1937).

[141] For the impact of the antitrust laws on requirement contracts, see further United States v. Richfield Oil Corp., 99 F. Supp. 280 (S.D. Cal. 1951), aff'd percuriam, 343 U.S. 292 (1952); Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320 (1961).