Legal Definitions - output contract

An output contract is a specific type of legal agreement where one party (the buyer) commits to purchasing all of the specific goods or services produced by another party (the seller) over a defined period or until a certain condition is met. Essentially, the buyer agrees to take the seller's entire "output" of a particular item or service.

This arrangement offers significant advantages to the seller, providing a guaranteed market for their entire production. This helps ensure a stable income and reduces the risk of unsold inventory. In return for this security, the seller typically agrees not to sell that specific output to any other buyers, thereby committing their full production to the contracting party.

Output contracts often include provisions that require both parties to use their "best efforts" to fulfill the agreement, ensuring the seller produces a reasonable quantity and the buyer accepts it.

• Example 1: Industrial Byproduct Recycling

  A chemical manufacturing plant produces a specific type of non-hazardous liquid byproduct as a regular part of its main production process. A specialized industrial recycling company enters into an output contract with the plant.

  Under this agreement, the recycling company commits to purchasing and collecting all of the liquid byproduct the chemical plant generates for the next five years. This arrangement guarantees the chemical plant a consistent and reliable method for disposing of its byproduct, often turning a waste stream into a revenue stream. For the recycling company, it secures a steady and predictable supply of raw material for its processing operations. The chemical plant, in turn, agrees not to sell this specific byproduct to any other recycling or disposal service during the contract term.

• Example 2: Artisan Food Production

  A small, independent bakery specializes in crafting a unique line of artisanal sourdough breads. A local high-end grocery store, known for sourcing local and specialty products, wants to feature this bread exclusively.

  The grocery store and the bakery sign an output contract where the grocery store agrees to buy all of the artisanal sourdough loaves the bakery can produce each week for the next two years. This provides the bakery with a guaranteed buyer for its entire production, allowing it to focus on baking without worrying about sales or distribution. The grocery store benefits from having an exclusive and consistent supply of a popular, high-quality product that differentiates it from competitors. The bakery, by signing this contract, commits its entire sourdough output to that specific grocery store.

• Example 3: Software Development Services

  A startup company is developing a new mobile application and needs a dedicated team for ongoing feature development and bug fixes. They contract with a small software development agency.

  The startup enters into an output contract with the agency, agreeing to purchase all of the agency's available development hours for their mobile application project for the next 18 months, up to a certain maximum capacity. This ensures the startup has a consistent and dedicated development team fully focused on their product, without having to manage multiple contractors or agencies. The development agency, in turn, has a guaranteed client for a significant portion of its capacity, providing financial stability. The agency commits its specified development resources entirely to the startup's project during the contract period.