Contracts | Law | Law and Economics
Center for Contract and Economic Organization
Center for Law and Economic Studies
Long-term contracts often promise to deliver the seller's full output, the buyer's requirements, or some variation on these. For example, an electric utility might enter into a thirty year contract with a coal mine promising that it will take all the coal needed to supply a particular generating plant. These open quantity contracts have raised two issues. The first is whether the promise was illusory. If the utility had no duty to take any coal, a court could have found that there was no consideration and, therefore, no contract. While there was a time when full output and requirements contracts did not fare well on this ground, nowadays their validity is rarely challenged with success.
The second and more interesting question today concerns the interpretation of the quantity term. What, if anything, limits the buyer's discretion? The answer, both at common law and in UCC §2-306(1), has been "good faith." The Code's Official Comment claims that §2-306 entails "the reading of commercial background and intent into the language of any agreement." In fact, it does nothing of the sort. Rather, it often involves supplanting the parties' careful balancing of various concerns in the initial contract with a wooden, uninformed reading of the agreement. With no theory to guide them, courts have held that good faith required that producers behave in most peculiar ways – for example, running a plant at below full capacity for the life of the contract, or running the plant to satisfy the needs of its waste remover rather than its customers.
Victor P. Goldberg,
Discretion in Long-Term Open Quantity Contracts: Reining in Good Faith,
U. C. Davis L. Rev
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