Legal Definitions - Requirements contract

A requirements contract is a specific type of agreement between a supplier and a purchaser. In this contract, the supplier commits to providing all of a particular good or service that the purchaser needs, and in return, the purchaser agrees to buy those specific goods or services exclusively from that supplier.

Key aspects of a requirements contract include:

• The buyer must request quantities in good faith, meaning they cannot suddenly demand an unreasonably large or small amount compared to their usual needs or any initial estimates.
• The supplier must use their best efforts to provide the agreed-upon goods or services as needed by the buyer.

This type of contract ensures a steady supply for the buyer and a guaranteed customer for the supplier, fostering a long-term business relationship.

Here are some examples to illustrate a requirements contract:

• Example 1: Automotive Manufacturing

  A major car manufacturer enters into a requirements contract with a tire company. The agreement states that the tire company will supply all the specialized tires needed for a specific car model's production line for the next five years. In exchange, the car manufacturer commits to purchasing only these specialized tires from this particular tire company for that model during the contract period. This ensures the manufacturer has a consistent supply of critical components, and the tire company has a guaranteed customer for a significant portion of its production.

• Example 2: Restaurant Chain Supplies

  A national chain of fast-casual restaurants signs a requirements contract with a produce distributor. Under the terms, the distributor agrees to provide all the fresh vegetables (like lettuce, tomatoes, and onions) that the restaurant chain's locations in a particular region will need for their daily operations over the next two years. The restaurant chain, in turn, agrees to source all its fresh vegetable requirements for those regional locations exclusively from this distributor. This arrangement helps the restaurant chain maintain consistent quality and pricing across its many outlets.

• Example 3: Office Supply for a Large Corporation

  A large multinational corporation establishes a requirements contract with an office supply vendor. The vendor agrees to supply all the standard office supplies (such as paper, pens, printer ink, and staplers) that the corporation's headquarters and its satellite offices in a specific country will need for a three-year period. The corporation, in return, agrees that all its purchases of these standard office supplies will be made exclusively through this vendor. This streamlines procurement for the corporation and provides the vendor with a predictable, high-volume client.