A requirement contract is where the exact quantity of items sold and purchased is not explicitly determined. Instead, the amount to be sold is dependent on the amount that the buyer “requires.” These contracts are standard in situations where the buyer’s needs are subject to fluctuation (such as in many farming operations on seasonal factors).
The opposite of a requirement contract is an “output” contract. The buyer agrees to buy the total amount that the seller can produce in a specific time or season. In such circumstances, the buyer may purchase a small sample batch of the product to confirm that it is of good quality.
Taken together, these two types of contracts are often placed in a category known as “output and requirement contracts.”
What Are Some Legal Issues Involved With Requirement Contracts?
The main problem with requirement contracts is that the quantity of goods is not set before the agreement. This demands a certain amount of trust from the parties. The seller must trust that the buyer will not back out if their demand falls low; also, the buyer must trust that the seller will supply them with their needs even without a specific quantity being listed.
To prevent abuses, breaches of contract, and violations, the following legal concepts are a significant part of requirement contracts:
- Good faith: Each party should perform their contractual duties in good faith, meaning that they shouldn’t exercise fraud or intentionally misuse the other party to their advantage
- Prior dealings: The quantity requested should be proportionate or approximate to prior requirement contracts. Significant deviations from standard contract requests by parties who have had previous dealings may be considered unreasonable.
Another standard legal issue involved with requirement and output contracts is that of substantial performance. This is a contracts doctrine involving whether a party has fulfilled their contractual duty even if they only performed part of it. This is a considerable concern for requirement contracts because the quantity is not explicitly defined. Such legal issues generally require the assistance of an attorney if a conflict arises.
What is Substantial Performance?
When two parties enter into a contract, each promises the other to perform. For instance, a property owner hires a contractor to complete construction on their property, like building an addition on the back of the house. The contractor will promise to perform the building as agreed upon in the contract, and the property owner will promise to pay for the services rendered.
Normally, there needs to be full performance under the contract to satisfy the contract terms. Yet, in some instances, one party under the contract may still get the promised benefit (like payment) even if they did not completely comply with its specific terms. This is where the contract doctrine of substantial performance can apply.
A party can assert substantial performance when there is only a slight deficiency under the contract terms, a good faith effort was made to reach full performance, and there was no material breach. The outcome will be sufficient enough to warrant payment for services rendered.
Suppose you face a contract issue involving incomplete performance. In that case, it is important to understand how to fulfill all the elements of substantial performance to be successful, what constitutes a material breach, exceptions to the doctrine of substantial performance, and other important legal implications. If you get sued for breach of contract, then you may be able to raise substantial performance with the court and get a ruling that the contract is satisfied.
How Can Someone Successfully Assert Substantial Performance and What Constitutes a Material Breach?
If someone sues a party for breach of contract and substantial performance is asserted as a defense, then a court may allow the contract to be carried out in limited situations.
Here is a recap of what it takes to meet all the elements for substantial performance:
- Most of the contract was performed as promised
- The party facing a breach of contract claim made a good faith effort to complete the contract perfectly but fell slightly short.
- The deviation from the contract was only slight and did not constitute a material breach. Only a minor breach is allowed under the doctrine of substantial performance.
- The reason the contract was not performed fully and specifically must not be based on intent, negligence, or carelessness. These are all grounds for breach of contract and will not excuse minor breaches.
Substantial performance generally only applies to contracts involving construction, building, and property. In an employment context, if there is a time limit placed on receiving a benefit, someone may also be able to assert substantial performance. Lastly, this doctrine is usually considered unacceptable when the contract applies to the sale of goods.
What are Some Exceptions to the Doctrine of Substantial Performance?
There are some exceptions where a party will be unable to assert substantial performance, and the court will not allow this as a means to avoid a breach of contract claim.
Suppose the contract explicitly states that there needs to be a specific and complete performance for the contract to be considered satisfied. In that case, a party must completely fulfill its obligations as noted in the contract. This is why the language of a contract is crucial, and it is important to prepare for potential legal implications when drafting the contract.
If full performance can be achieved by making a minor alteration or easily correcting a mistake, then a substantial performance argument will generally be unavailable. This is because the party can just remedy the small defect and get rid of the need for court intervention. This will save both parties time and money while still carrying out the intent agreed upon under the contract.
For example, a construction contract called for the installation of knobs on all of the cabinets in the new home, but the cabinet installer put different shades of knobs on two of the twenty cabinets. If the cabinet installer can easily switch out these two knobs, substantial performance would not be available.
When you face a breach of contract claim, it is essential to consider these exceptions before asking the court that the contract be considered satisfied under the doctrine of substantial performance.
Are There Defenses to Breaking a Contract?
There may be some defenses to breaking or breaching a contract, as with any legal violation. A party that has breached a contract may provide some justification as to why they breached the agreement.
These may include defenses such as:
- The contract was abusive or illegal;
- The contract was fraudulent, or the other party engaged in fraud during the contract formation and negotiation stage;
- One party failed to exercise good faith and fair dealing;
- There was a waiver in place that affected the parties’ contractual obligations;
- The contract did not meet the contract writing requirement (for instance, contracts for the sale of land must be in writing);
- The defense of laches (basically, the other parted waited too long to file a lawsuit);
- Existence of coercion during contract formation (for instance, if one party uses a threat of harm or even economic pressure to get the other party to agree to a specific term or sign the contract).
Do I Need to Hire a Lawyer for Help With Requirement Contracts?
Requirement contracts are a fairly specific subset of contracts law. If you need help negotiating, drafting, or reviewing an output/requirement contract, you may wish to contact a qualified contract lawyer in your area.
An attorney can help review the documents to ensure that the opposite party exercises good faith and reasonableness. If a legal claim needs to be filed, your attorney can represent you in court during the trial process.
