George Mason School of Law

1. George Mason School of Law Contracts I XVI. Output Contracts and Distributors F.H. Buckley fbuckley@gmu.edu

2. Output and Requirements contracts • UCC § 2-306(1) A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded.

3. Requirements Contracts Requirements contract: producer agrees to sell as much of his product as buyer requires 3

4. Requirements Contracts • Requirements contract: producer agrees to sell as much of his product as buyer requires • Strategic behavior: misincentives as to quantity 4

5. Requirements Contracts and Incentives as to Quantity

6. Requirements Contracts and Incentives

7. Output Contracts • Output contract: buyer agrees to purchase seller’s entire output

8. Output Contracts • Buyer agrees to buy all of producer’s output • Risks to buyer:

9. Output Contracts • Buyer agrees to buy all of producer’s output • Risks to buyer: • What if market price < contract price

10. Output Contracts • Buyer agrees to buy all of producer’s output • Risks to buyer: • What if market price < contract price • What if buyer can’t use the output • Weak demand for buyer’s product • Higher costs for buyer

11. Output Contracts • Buyer agrees to buy all of producer’s output • Risks to seller: • What if market price > contract price • What if seller’s cost > contract price

12. Price Changes: Output Contracts Assuming that Contract Price > Market Price

13. Price Changes: Output Contracts Assuming that Contract Price > Market Price

14. Price Changes: Output Contracts Assuming that Contract Price > Market Price

15. Price Changes: Output Contracts Assuming that Market Price > Contract Price

16. Price Changes: Output Contracts Assuming that Market Price > Contract Price

17. Price Changes: Output Contracts Assuming that Market Price < Contract Price

18. Price Changes: Output Contracts Assuming that Market Price < Contract Price

19. What if Seller’s Costs Increase?

20. Output ContractsCost to Seller

21. Output Contracts: Feld v. Levy p. 332 Bakery Levy Distributor Feld Bread crumbs

22. Output Contracts: Feld v. Levy • A renewable one-year contract in which Levy agrees to sell all its bread crumbs to Feld • Levy discovers that the marginal cost ($1.06) exceeds the contract price ($1.00) and cancels

23. Output Contracts: Feld v. Levy • See excerpt on 345

24. Output Contracts: Feld v. Levy • Held: It would be bad faith for Levy to stop crumb production just because their profits aren't as high as they expected, but it would be good faith for Levy to stop crumb production if they incurred losses from such production that were "more than trivial".

25. Output Contracts: Feld v. Levy • Does it make sense to require the baker to lose money? • Is there something troubling about the numbers?

26. Output Contracts: Feld v. Levy

27. Output Contracts: Feld v. Levy • What if the baker could sell elsewhere for $1.20 • Do you think this might do something to his reported costs, if this affords him an out?

28. Output Contracts: Feld v. Levy • What if the cost of production is now $1.50?

29. Output Contracts: Feld v. Levy

30. Output Contracts: Feld v. Levy • Can a buyer in a requirements contract purchase zero quantities? • Posner J. in Empire Gas

31. Output Contracts: Feld v. Levy • Can a buyer in a requirements contract purchase zero quantities? • Empire Gas • Can a seller in an output contract sell zero quantities? • Feld v. Levy

32. Output contracts and distributorships • Can resemble each other if the distributor is given the right to sell his client’s products

33. Exclusive DealingWood v. Duff-Gordon p. 341 Lady Duff Gordon

34. Exclusive DealingWood v. Duff-Gordon • Wood to have the exclusive right to market her clothes or endorsements • In return to receive one-half of all “profits and revenues” • One year term, renewable unless cancelled on 90 days notice

35. Exclusive DealingWood v. Duff-Gordon • Is this a binding contract?

36. Exclusive DealingWood v. Duff-Gordon • Is this a binding contract? • Is it too uncertain?

37. Exclusive DealingWood v. Duff-Gordon • Is this a binding contract? • Is it too uncertain? • Does it lack consideration?

38. Exclusive DealingWood v. Duff-Gordon • Is this a binding contract? • Cardozo: an instinct with an obligation by Wood to use reasonable efforts • The Moorcock: Bowen L.J.: imply a term to give business efficacy to an agreement

39. Exclusive DealingWood v. Duff-Gordon • What is the economic rationale for finding a binding contract here?

40. Exclusive DealingWood v. Duff-Gordon • What is the economic rationale for implying duties by the distributor? • Consider Wood’s incentive to make contract-specific investments

41. Exclusive DealingWood v. Duff-Gordon • How would you formulate the duties of the parties, as a matter of legal drafting?

42. Exclusive DealingWood v. Duff-Gordon • How would you formulate the duties of the parties, as a matter of legal drafting? • Good faith by Duff-Gordon • Best efforts by both

43. Exclusive DealingWood v. Duff-Gordon • UCC § 2-205. Every contract imposes upon each party a duty of good faith and fair dealing in its performance and enforcement."

44. Exclusive DealingWood v. Duff-Gordon • UCC § 2-306(2) A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.

45. What are Good Faith Standards • Van Valkenburgh p. 354

46. What are Good Faith Standards • Van Valkenburgh p. 354 • Just where did the publisher cross the line?

47. What is best efforts? • Bloor v. Falstaff 343

48. Bloor v. Falstaff

49. Bloor v. Falstaff

50. Bloor v. Falstaff • What was the deal?