The Indefinite Supply Contract and the Price Escalation Clause
Buyer and Seller signed a two-year requirements contract for industrial resin. The contract stated Buyer would purchase 'all resin Buyer requires at its Ohio plant,' at a unit price of $12.50 per pound, with a clause: 'Seller may adjust price quarterly to reflect documented increases in raw material costs, not to exceed 8% per year.' In month 3, Seller raised the price to $13.40 (7.2%) and provided invoices showing feedstock cost increases. Buyer objected but continued ordering. In month 8, Seller raised the price again by 8%, compounding on the first increase, and Buyer refused to pay the increase. Buyer also discovered Seller was selling identical resin to a competitor at $11.00 and had capped Buyer's orders at 80% of prior volume while telling Buyer it was a 'supply constraint.' Buyer sues for breach; Seller counterclaims for the unpaid increases.
1. Is the requirements contract enforceable, and how does the quantity term affect the dispute?
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Enforceability. UCC 2-306 permits requirements contracts; the quantity term is measured by the buyer's good-faith requirements, not a fixed number. Courts enforce them where the buyer operates in good faith and the estimate is not wildly disproportionate.
Apply.
- 'All resin Buyer requires at its Ohio plant' is a permissible requirements term. The contract is enforceable.
- The implied duty of good faith limits both parties: Buyer cannot drastically reduce requirements to evade the contract; Seller cannot unreasonably refuse to fill good-faith requirements.
- Seller's 80% cap, if not justified by actual supply constraints, breaches the requirement to satisfy Buyer's good-faith needs. If Seller had genuine shortages, allocation among customers must be made in good faith and without discrimination (UCC 2-615).
Conclusion. Contract is enforceable. Seller's volume cap is actionable if pretextual; Buyer's continued performance after the first increase does not waive later breaches.
2. Did Seller's second price increase comply with the escalation clause?
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Interpretation. The clause permits quarterly adjustments reflecting documented raw-material cost increases, capped at 8% per year. Two issues: the compounding method and the documentation.
Apply.
- First increase: 7.2%, documented. Valid.
- Second increase: 8% applied to the already-raised price produces an annual effective increase above 8% of the original baseline. The phrase 'not to exceed 8% per year' most naturally caps the annual aggregate increase at 8% of the base price. A compounding reading would exceed the cap ($12.50 to $14.47 is 15.8%).
- Documentation: Seller must show raw-material cost increases supporting the second adjustment. If feedstock costs did not rise correspondingly, the increase fails independently.
- Price discrimination: The $11.00 competitor price is not itself a breach unless the contract contains a most-favored-customer or non-discrimination term. It is relevant to good faith but not dispositive.
Conclusion. The second increase likely violates the annual cap. Buyer owes the first increase but may recover or withhold the excess above the cap.