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June 12, 2024
No doubt, many of us have in our standard terms and conditions language that all quantities are estimates only and are not an obligation of purchase. But have you ever been challenged on that term contract requirement? Despite a requirement contract, a buyer can reduce its requirements in good faith. In Dienes Corp. v Long Island Railroad Co. (2002 WL 604043, U.S. Dist. Ct., S.D.N.Y.), the L.I.R.R.’s invitation to bid specified several compressor parts and repair kits but indicated that these were only estimates and that the L.I.R.R. was not obligated to purchase any particular quantity of goods.
The L.I.R.R. and Dienes entered a contract for the compressor parts and repair kits. When the L.I.R.R. reduced its requirements, Dienes claimed that the L.I.R.R. was acting in bad faith and sued for breach of contract.
The quantity of parts ordered by the L.I.R.R. was only a tiny fraction of the estimate in the bid invitation. Dienes pointed to Uniform Commercial Code Sec. 2-306, which states that in a requirements contract, “no quantity unreasonably disproportionate to any stated estimate may be tendered or demanded.” The court, however, held that the section did not apply to a decrease from a stated estimate as opposed to an increase.
In determining whether the L.I.R.R. acted in good faith, the court defined good faith as “honesty in fact and the exercise of reasonable commercial standards of fair dealing in the trade.” If a buyer has a legitimate business reason for eliminating its requirements, as opposed to the desire to avoid the contract, the buyer is said to have acted in good faith. The mere fact that the L.I.R.R.’s actual requirements for parts fell short of the stated estimate was simply that the parts did not need to be replaced as often as initially expected. Thus, the court granted judgment in favor of the L.I.R.R.
Is it possible to Have An Enforceable Contract Even Though The Quantity is Not Precisely Stated?
P.M.C. Corp. v Houston Wire & Cable Co., 2002 WL 966238 (Sup. Ct. of N.H.) illustrates this point. When the seller, P.M.C., sued the buyer, Houston, for breach of contract, Houston contended that the contract was too indefinite to be enforced.
If a contract were silent on quantity, it would be too indefinite to be enforced. However, in the P.M.C. case, the written contract said that the buyer expected to purchase a “major share” or “major portion” of its thermocouple products from the supplier, P.M.C. The words “major share” or “major portion” express a quantity term, albeit imprecise. The court thus rejected Houston’s defense that the contract was unenforceable under the Statute of Frauds.
The court then said that this was a form of requirements contract. In other words, a requirements contract does not need to be a promise to buy all its needs from one supplier. In this case, the parties agreed that Houston would buy exclusively from P.M.C. until the purchases reached a “major share” of Houston’s needs. The court refused to dismiss P.M.C.’s case and held that parol (oral) evidence could be introduced to show the quantity the seller and buyer had in mind at the time of the contract.
In examining the cases of becomes evident that the issue of buyers' rights in contracts with vague quantities is nuanced and multifaceted. On one hand, Dienes highlights the importance of good faith and legitimate business reasons in reducing requirements, ultimately emphasizing the significance of honest dealings and reasonable commercial standards. Conversely, P.M.C. demonstrates that contracts with imprecise quantity terms can still be enforceable, provided there is a clear intent and understanding between the parties, even if expressed through ambiguous language like "major share" or "major portion." These contrasting scenarios underscore the complexities inherent in contractual agreements and the necessity for careful consideration of all terms and conditions. While the Dienes case explains the importance of good faith and reasonableness, the P.M.C. case illuminates the flexibility of contract law in accommodating varying degrees of specificity in quantity terms. Both cases serve as instructive examples, emphasizing the importance of clarity, good faith, and mutual understanding in contractual relationships, regardless of the precision of quantity specifications.
Emphasizing the importance of clarity, good faith, and mutual understanding in contractual relationships, regardless of the precision of quantity specifications.
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