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What is a Requirements Contract?

Many entrepreneurs engaged in the manufacturing of goods for sale must rely on others to provide the raw materials from which those goods are manufactured. When the manufacturing process relies on small quantities of these raw materials, or where these raw materials are common and in abundant supply from a variety of sources, these entrepreneurs simply procure their raw materials from local vendors at market prices and manufacture their goods.

What happens, however, when the raw materials are unique, are not in abundant supply, or where large quantities of those raw materials are required on an on-going basis? Many manufacturers enter into requirements contracts with the vendors of the raw materials needed by them. Black’s Law Dictionary defines the requirement contract as “

[a] contract in writing whereby one agrees to buy, for a sufficient consideration, all the merchandise of a designated type which the buyer may require for use in his own established business. . . . One in which party promises to supply all specific goods or services which other party may need during a certain period at an agreed price, and in which other party expressly or implicitly promises he will obtain his goods or services from the first party exclusively.” Black’s Law Dictionary (West 5th Ed. 1979), page 1172.Requirements contracts are used in a wide variety of circumstances and by a number of both small and large purchasers of goods and services. For instance, the Federal Government utilizes requirements contracts for purchases. In fact, the Code of Federal Regulations describes the requirements contract as a contract that “provides for filling all actual purchase requirements of designated Government activities for supplies or services during a specified contract period (from one contractor), with deliveries or performance to be scheduled by placing orders with the contractor.” 48 C.F.R. 16.503.

While requirements contracts are generally enforceable “and beneficial because they encourage marketing support for the manufacturer’s brand,” Exclusive Dealing or Requirements Contracts, Federal Trade Commission, if they are used to prevent smaller competitors from succeeding in the market place, or to reduce competition, they may be looked upon with disfavor by the courts as well as the Federal Trade Commission.

To ensure your contract will be enforceable in California, you will need the services of a rising star like Michael Leonard, Esq., named “Best of the Bar” by the San Diego Business Journal in 2016. You can arrange for a consultation with Mr. Leonard to discuss creating any type of business agreement or any other business-related matter by visiting San Diego Corporate Law or by telephone at (858) 483-9200. He has the experience, knowledge and unique qualifications to ensure all of your agreements are enforceable in the California Courts.

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Schedule a Consultation: 858.483.9200