Output Contract: Definition & Example

Instructor: Jessica Schubert

Jessica is a practicing attorney and has taught law and has a J.D. and LL.M.

After you complete this lesson, you will have an understanding of output contracts. Moreover, you will review laws that relate to output contracts and study some examples of these types of contracts.

Definition

Imagine that Abe bakes peach pies. Barbara wants to buy Abe's pies and sell them in her bakery. Abe tells Barbara that he will make as many pies as he can per day, but she needs to buy all of them. Barbara then agrees to buy all the pies Abe makes. This type of agreement is called an output contract.

An output contract is an agreement where one party agrees to purchase the entire production that the other party supplies. Thus, the buyer will buy all the 'output' the seller makes. Frequently, output contracts are used when a buyer seeks to be an exclusive supplier of a product. The output contract guarantees that the buyer will be the only supplier, since the buyer purchases all of the goods the seller produces.

Another aspect of the output contract relates to exclusivity. Frequently, when a buyer signs an output contract with the supplier, the buyer also includes a provision in the contract that the buyer can advertise as the exclusive, or sole, supplier of the product. This is a benefit for the buyers, because it ensures that they will have full and sole use of the product; it's also a benefit for the sellers, because they will have all their goods bought from them without competing with any other suppliers.

The U.C.C.

The U.C.C., also known as the Uniform Commercial Code, typically governs output contracts. The U.C.C. is a body of laws that oversees the sale of goods. In addition, the U.C.C. requires that for output contracts, both parties act in good faith. This means that a seller will not make an unreasonably disproportionate amount to the estimated amount a buyer plans to purchase. So, if a seller estimates he or she will provide 1,000 items annually to a buyer and then makes 10,000 products in a year, this could be interpreted as an unreasonably disproportionate amount, and the buyer would not be on the line for all 10,000 goods. Moreover, the U.C.C. indicates that when the buyer and seller have an exclusive supplier contract, each party will use their best efforts to supply and sell the products.

Examples

The best way to gain a complete understanding of output contracts is to review a couple of examples. Let's imagine that Mary is an artist who makes unique bottle cap art paintings. Jim owns an art gallery, and he wants to be the only gallery in the U.S. who sells Mary's unique artwork. Mary and Jim enter into an output contract whereby Mary will provide Jim with all of her bottle cap paintings. Because of the contract signed, Jim can be assured that an art gallery competitor will not sell Mary's work, and he will be the exclusive art dealer of her paintings.

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