What Is an Output Contract?

A contract is generally defined as a legally binding agreement that is made between parties, and that acknowledges the rights and duties that govern the arrangement. Contracts can be formed either through writing or by oral agreement. However, this article only refers to written agreements.

Contract drafting involves writing down the terms and conditions of an agreement. The parties to a contract may go through several drafts and negotiation sessions before the official contract is finalized. The overall goal of contract drafting is to create a legally binding document, in writing, that is clear, concise, and as close to the parties’ intentions as possible.

One benefit of the drafting process is that it allows the parties to discuss the terms of the contract before it becomes legally binding. This can help prevent legal disputes over the contract from arising in the future. If a legal dispute does occur, it can also serve as evidence of the parties’ original intentions and their obligations.

Contract drafting can also be used to ensure that the parties understand their respective duties, and can be used as guidance if any issues arise while they are satisfying the contract. This is especially true in situations where the contract involves complex conditions.

Although contracts may be drafted by any individual, it is generally recommended that a lawyer draft and review the final terms in order to ensure that the contract is legally valid and binding. The parties to a contract will generally be the ones to decide how a contract will be drafted; however, drafting can also depend on the type of contract that is being created. An example of this would be how employment contracts contain provisions and specific terms that differ from the language that would be found in confidentiality agreements.

Generally speaking, most contracts follow a basic format and include standard components, such as:

• Important words that must be defined;
• Technical terms which indicate the beginning and/or signal the end of a contract, such as a signature block;
• The rights and duties of the parties;
• How the parties can terminate the contract without breaching the contract;
• General provisions; and
• Special clauses, such as insurance policies.

Additionally, regardless of the type of contract, all contracts must contain the following elements:

• An offer;
• An acceptance of that offer;
• Consideration, generally money;
• Identification of its parties;
• All parties must have legal capacity to enter into the agreement;
• The subject matter of the contract must be legal;
• Mutual agreement between the parties; and
• The parties must have a mutual understanding of their rights and duties under the contract.

Some examples of common contract drafting terms and conditions include:

• Force majeure;
• Arbitration clause;
• Indemnification;
• Assignment;
• Confidentiality;
• Warranties;
• Choice of law and forum selection;
• Time is of the essence clause;
• Severability; and
• Liquidated damages clause.

These are either:

• Events that trigger conditional consequences;
• Duties that the parties are legally obligated to perform; and/or
• Duties that the parties must refrain from at risk of breaching the contract.

What Is An Output Contract?

Output contracts are a specific type of contract associated with the sale and purchase of goods. Specifically, the buyer agrees to purchase all of a supplier’s output. Generally speaking, the buyer will buy all the items the seller can produce.

An example of this would be how company A produces 10,000 items per year. Company B would like to purchase those items from Company A, so the parties agree that Company B will purchase all 10,000 items that Company A produces this year.

Output contracts can be especially helpful to buyers when there is uncertainty regarding market supply or demand for a specific good. However, if the seller’s output is more than the buyer requires, an output contract may not be useful to secure supplies.

Another similar type of contract for the sale of goods is called a requirement contract. Requirement contracts differ in that while output contracts are agreements for the buyer to purchase all of an item that the seller can supply, requirement contracts are agreements for the seller to sell as much of an item as the buyer requires.

In both types of contracts, the amount of goods that are being bought or sold is generally determined by the buyer’s requirements or the seller’s production, and not by a set number. Requirements contracts allow sellers to sell their goods to other buyers as well, so long as the contract buyer’s requirements are fulfilled. Output contracts, however, include clauses that restrict sellers from selling to other buyers; because the initial seller has agreed to sell all of their production to one buyer, the agreement is exclusive.

What Does The U.C.C. Say About Output Contracts? Do Output Contracts Need A Quantity Term?

Because output contracts govern the sale of goods, these types of contracts are governed by the Uniform Commercial Code or the “U.C.C.” The U.C.C. is a body of laws that specifically set forth rules for the sale of goods, as opposed to the sale of services. All contracts associated with the sale of goods must follow the rules set forth in the U.C.C., as this keeps the sale of goods consistent across jurisdictions. The effect of this is that you can expect the same basic set of rules to apply to your transaction no matter where you are in the country.

Output contracts do not generally need a quantity term. Contracts require certain precise terms in order to be enforceable, such as a term naming the quantity. An example of this would be if Company B promises to buy five boxes of items. Five boxes of items is a specific enough term for the contract to be enforceable.

However, according to the U.C.C., sale of goods contracts can avoid naming a specific set quantity if the contract is an output contract, or a requirement contract. The term indicating the quantity as the “total output” or “total requirement” is sufficient under the U.C.C. in order to make the contract enforceable.

What Is The Duty Of Good Faith In An Output Contract?

In terms of output contracts, the U.C.C. requires that both parties to the agreement act in good faith. Because the terms of the contract do not specify a set number of goods, both sides will do what they can in order to ensure that the agreement is fair.

In other words, the buyer cannot arbitrarily change their requirements or to an unreasonable degree, taking into account any prior dealings that the parties have had with one another. On a similar note, the seller cannot require the buyer to purchase an output that is considerably disproportionate to their needs.

Courts may consider prior dealings that the parties have had with one another in order to determine the reasonableness of the contract. An example of this would be if company A regularly produces 10,000 items per year, and company B has an output contract with A agreeing to buy all of the items they make in a year. Company A cannot suddenly increase their production to 50,000 items in a year. Unless company B separately agrees to purchase the 50,000 items, expecting them to follow through on such a sudden and dramatic change in the output will most likely be deemed unreasonable.

Do I Need A Lawyer For Help With An Output Contract?

If you are negotiating a contract or need help with an output contract, you should consult with a contract lawyer. Your attorney can advise you regarding your legal rights and options according to your state’s contract laws, and will also be able to represent you in court, as needed, should any legal issues arise.