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c. Determining Quantity in Requirements and Output Contracts A promise to buy all requirements or all output from a seller seems, at first blush, fairly open-ended. Yet this seeming open-endedness is considerably circumscribed by (1) the requirement of good faith and (2) the rules on stated estimates or prior normal or comparable outputs or requirements. [ See 2 Hawkland UCC Series § 2-306:2, Westlaw (database updated June 2021).] Good Faith in Requirements and Output Contracts In requirements and output contracts, the general definition of good faith applies. Here, the touchstone is the parties’ reasonable expectations at contracting. Ideally, each party should modulate its requirements or output to align with what was reasonably foreseeable at contracting. This standard, however, is not so rigid as it may seem at first blush. It permits even substantial variations from prior requirements or outputs, provided there is a good-faith basis for them. For instance, if the seller shuts down or reduces output simply to curb losses, she acts in bad faith. But if the seller shuts down or reduces output due to lack of demand, she likely acts in good faith. Conversely, a normal, foreseeable expansion would be in good faith, but a sudden, extreme expansion might not be. A key factor here is whether the market price has fluctuated to warrant a
departure from prior requirements or outputs. [U.C.C. § 2-306, cmt. 2 (1951); 2 Hawkland UCC Series § 2-306:2, Westlaw (database updated June 2021).]
Note : Courts seem especially inclined to find bad faith if one party acts to “arbitrarily and unilaterally change certain conditions prevailing at the time of the contract so as to take advantage of market conditions at the [other party’s] expense.” [ Orange & Rockland Utilities, Inc. v. Amerada Hess Corp. , 59 A.D.2d 110 (N.Y. App. Div. 1977).] Example : An oil company contracted to supply an electric company’s oil requirements for five years at a stated price per barrel. At the time, the parties anticipated demand of about 1.5 million barrels per year. Shortly after, electricity usage skyrocketed, and the price of oil nearly doubled. Thus, to satisfy this demand at the contract price per barrel, roughly half the market price of oil, the electric company began demanding quantities of oil that, if continued, would call for 3 million barrels per year. On similar facts, an appellate court found that the increase in the electric company’s requirements was in bad faith. The increased demand more than doubled the parties’ initial predictions. The facts fairly clearly demonstrated that the electric company sought to exploit the contract price to assure a steady supply of inexpensive oil (roughly half the market price) to meet its rising demand. [ Orange & Rockland Utilities, Inc. v. Amerada Hess Corp. , 59 A.D.2d 110 (N.Y. App. Div. 1977).]
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