Tucked among the many nuances of the Uniform Commercial Code is a special species of commercial arrangement known as a “requirements contract.” These contracts go beyond the isolated sales of goods and control ongoing expectations between the parties. A purchaser under a requirements contract agrees to satisfy all of its needs for a specified material exclusively from one supplier. In exchange for that exclusivity, the supplier must stand ready to fill all of the purchasers’ orders for that material during the term of the contract.
The Seventh Circuit has recently provided important guidance exploring the parameters of when a “requirements contract” comes into being under the UCC. In BRC Rubber & Plastics, Inc. v. Continental Carbon Company, the court resolved a dispute between a rubber manufacturer and its supplier of a key component known as carbon black. The parties’ contract stated that “it is the intent of this agreement that Continental Carbon Company agrees to sell to BRC Rubber & Plastics approximately 1.8 million pounds of [carbon] black annually.” After the supplier failed to fill some orders, the purchaser sued and claimed that the parties had a requirements contract that compelled the supplier to provide all of its carbon black needs. The district court agreed, finding that the supplier breached a requirements contract between the parties.
The Seventh Circuit reversed in an opinion that sheds important light on when parties will be deemed to have created a requirements contract. The court provided key guidance in at least five independent respects.
First, the court explained that whether a UCC contract rises to the level of a “requirements contract” is an issue of law. This treatment of the issue renders it uniquely suited for a determination through a dispositive motion early in the case.
Second, the Seventh Circuit made clear that to be a requirements contract, an agreement must: (1) require the buyer to buy goods, (2) obligate the buyer to buy goods exclusively from the seller and (3) require the buyer to buy all of its requirements for goods of a particular kind from the seller. Unless a contract meets all three requirements, the special obligations of a requirements contract are not triggered.
Third, the Seventh Circuit rejected a claim that a so-called “meet or release” clause obligated the buyer to purchase any goods under the contract. This clause provided that “[i]f during the term of this agreement BRC receives an offer that they believe is better tha[n] the terms offered in this agreement, Continental Carbon will have the right to meet this agreement or release BRC from any further obligation.” Recognizing that this language operated as a “right of first refusal” that allowed the supplier to match any price offered by a third-party vendor, the Seventh Circuit concluded this “match or release” clause did not obligate the purchaser to buy anything. Instead, it merely set a right of first refusal if the purchaser found a better price from another vendor: “The provision is more naturally read as a ‘right of first refusal,’ meaning if BRC sought to buy carbon black from another seller at a lower price, Continental had to be given the chance to meet that price. [N]othing in the ‘Meet or Release’ provision prevented BRC from manufacturing its own carbon black or abandoning its use of carbon black altogether. In other words, the provision did not obligate BRC to buy carbon black from Continental.” Id. (emphasis in original).
This key holding provides instruction for parties looking to create or enforce requirements contracts. This holding instructs that the intent to create a requirements contract must be expressed clearly in the actual language used in the requirements contracts. The Seventh Circuit declined to infer a requirements contract from a single, isolated phrase in the agreement. Instead, the court required a firm expression of intent from the parties to establish each of the elements of a requirements contract.
Fourth, the court rejected a claim that the pricing terms of the contract created an obligation to purchase goods. The contract provided discounts if the purchaser bought higher amounts of carbon black. While the supplier claimed these terms indicated an obligation to buy, the Seventh Circuit again refused to read such a requirement into the contract. Instead, the court held that the price terms applied if the purchaser opted to purchase carbon black from the seller.
Finally, even if there was an obligation for the purchaser to buy goods, the Seventh Circuit found as a matter of law that the exclusivity element for requirements contracts was not satisfied. Again, the “meet or release” clause proved pivotal. The Seventh Circuit declined to find an exclusive sales agreement when the same contract expressly allowed the purchaser to find alternative suppliers. Because the meet-or-release clause allowed the purchaser to accept materials from a third party, the contract did not have the requisite exclusivity. This was true even though (1) the supplier could technically “meet” the price offered by the interloper supplier and ensure that it was the sole provider of carbon black; and (2) its failure to do so would effectively result in the supplier’s release from the contract.
Again, the court declined to infer exclusivity in order to create a requirements contract. Instead, the Seventh Circuit’s message remained consistent – parties wishing to create requirements contracts must make use plain language indicating that intent as to each of the required elements under the UCC.