Requirements and Output Contracts in California: When Orders Drop or Surge

Last updated: November 2026. Reviewed by Pavel Kolmogorov, California business litigation attorney (State Bar No. 321018).

A requirements contract commits a buyer to purchase all it needs of a product from one supplier, and an output contract commits a buyer to take all that a seller produces. In California the quantity is the actual requirements or output that occur in good faith. (Com. Code, § 2306, subd. (1).) A buyer whose real needs fell has generally not breached. A buyer that moved the same purchases to another supplier usually has. Kolmogorov Law, P.C., a business litigation firm in Irvine, represents buyers and suppliers in these disputes.

Call (909) 235-6116 or contact us online to discuss a supply agreement where the volumes are in dispute.

What a requirements contract and an output contract are

Both are supply agreements that leave the quantity open on purpose. In a requirements contract the buyer's needs set the number. In an output contract the seller's production does. The buyer gets a secure source, or the seller gets a guaranteed customer, and neither has to predict volume years ahead.

For goods, the governing rule is one sentence of the Commercial Code. A term that measures quantity by the seller's output or the buyer's requirements means the actual output or requirements that occur in good faith. No quantity may be tendered or demanded that is unreasonably disproportionate to a stated estimate or, where there is no estimate, to normal or comparable prior volumes. (Com. Code, § 2306, subd. (1).)

Why a contract with no fixed quantity is enforceable

A party sued on one of these agreements may answer that a deal without a number is too indefinite to enforce. California law recognizes requirements contracts as enforceable. In a 2021 decision the Court of Appeal enforced an agreement to supply all the trucked water a business needed. The quantity term was the buyer's needs. The buyer could not get around the deal by hauling the water itself, and the court ordered damages calculated over roughly four years, not three months. (RMR Equipment Rental, Inc. v. Residential Fund 1347, LLC (2021) 65 Cal.App.5th 383.)

The agreement there was titled a service contract, and the parties did not argue the Commercial Code. The doctrine is not limited to goods.

One caution on paperwork. With some exceptions, a contract for goods priced at $500 or more needs a signed record, and it is not enforceable beyond the quantity the record shows. (Com. Code, § 2201, subd. (1).) A requirements term that lives only in conversation invites a defense under the statute of frauds.

The good faith limit: when orders drop

Good faith means honesty in fact and the observance of reasonable commercial standards of fair dealing. (Com. Code, § 1201, subd. (b)(20).) Applied to quantity, the question is why the volume changed.

A packaging buyer whose own sales fell by half needs half the packaging. Its requirements are what its business actually requires, and the statute measures the contract by those. The supplier took the risk that demand would vary.

The analysis changes if the need is still there. A buyer that keeps selling the same volume but fills it from a cheaper source has not reduced its requirements. It has stopped honoring the promise to buy them from the supplier. The same is true of a buyer that brings production in house when the contract did not allow it.

Between those poles are harder cases: a redesign that removes the part, a product line shut down, a sale of the business. The statute gives one test for all of them: whether the lower requirements occurred in good faith.

The proportionality limit: when orders surge

The second limit protects the party who has to perform. Good faith alone does not let a buyer demand any amount it can use.

In a reported California decision applying this limit, a public agency's supply contract estimated 495,000 tons of material and fixed a minimum purchase of 386,000. The agency then demanded about 796,000 tons. The Court of Appeal held that the estimate in the contract counted as a stated estimate, that the demand was unreasonably disproportionate to it, and that the agency had breached. (Shea-Kaiser-Lockheed-Healy v. Department of Water & Power (1977) 73 Cal.App.3d 679, 684-689.)

The dispute can appear when the market moves. A fixed contract price falls below market, and the buyer's orders climb past anything in its history. The statute's words speak of quantities tendered or demanded, and that case involved a demand for more. Whether the same limit applies to a good faith reduction is not answered by those words.

If you are the buyer

Document the reason before the supplier asks. Sales reports, customer cancellations, and engineering changes show that the lower volume reflects real need.

Check the contract for a minimum purchase, a forecast you signed, or a take-or-pay term. A minimum or take-or-pay term can override the flexibility the statute gives. A forecast may count as the stated estimate, and whether it binds you to more depends on the contract's wording. Check also what the exclusivity covers: one product, one plant, or every affiliate.

If the supplier is the one failing to deliver, your remedies are on the buyer's side of the Commercial Code. A separate dispute arises when a supplier demands a higher price mid-contract, a subject covered on our page about supplier price increases.

If you are the supplier

Ask for information before you accuse. Request the buyer's sales and purchasing data for the affected product, and keep a record of the answer.

Look for substitution. Proof that the buyer is purchasing the same goods elsewhere turns a volume dispute into a breach claim. For goods, the supplier's damages are then generally the difference between the market price and the unpaid contract price or, where that measure is inadequate, the profit lost on the diverted purchases. (Com. Code, § 2708, subds. (1), (2).) Lost profit must be shown with reasonable certainty, as our page on lost profits explains.

Facing a surge, compare the demand with the estimate in the contract and with prior years. Say in writing which quantity you will supply and why.

Exclusivity and best efforts

A requirements or output contract may also be exclusive in one direction or both. Unless the parties agree otherwise, an exclusive dealing agreement obligates the seller to use best efforts to supply the goods and the buyer to use best efforts to promote their sale. (Com. Code, § 2306, subd. (2).) Our pages on best efforts clauses and on distribution agreement termination take those subjects further.

What to bring to the first meeting

• The supply agreement, with any forecasts, estimates, and amendments.
• Purchase orders and invoices showing volume by month for the life of the deal.
• Sales or production data that explains the change in volume.
• Any evidence of purchases from, or sales to, another company.
• Emails in which either side raised the shortfall or the surge.

Frequently asked questions

We agreed to buy all our packaging from one supplier and our orders dropped by half. Can they sue us?

They can sue, but a drop that tracks your real needs is usually not a breach. Under California Commercial Code section 2306, a requirements contract covers the actual requirements that occur in good faith. If your own sales fell, your requirements fell. The risk is different if you still need the packaging and buy it from someone else, or if the contract has a minimum purchase.

Our supplier promised to fill all our requirements at a fixed price and now refuses our larger orders. Can it do that?

Possibly. California law lets a requirements buyer order what it needs in good faith, but not a quantity unreasonably disproportionate to a stated estimate or, where there is none, to normal prior requirements. A supplier may be able to refuse the excess above that line but remains bound to fill orders within it. Compare your recent orders with the contract's estimate and with your purchase history.

What is a requirements contract?

It is an agreement in which a buyer promises to purchase all, or a stated share, of its needs for a product from one seller. The quantity is not fixed in advance. In California it is measured by the buyer's actual requirements occurring in good faith. A demand may not be unreasonably disproportionate to a stated estimate or, where there is none, to normal prior volumes.

What is an output contract?

It is the reverse arrangement: a buyer agrees to take everything a seller produces of a given product. California's Commercial Code measures the quantity by the seller's actual output occurring in good faith. A seller may not tender a quantity unreasonably disproportionate to a stated estimate or, where there is none, to its normal or comparable prior output.

Is a requirements contract enforceable without a stated quantity?

Yes. California courts treat the buyer's needs as the quantity term, and the Court of Appeal has enforced a requirements agreement that named no number. For goods priced at $500 or more, the agreement should appear in a signed record, because the statute of frauds limits enforcement to the quantity the record shows.

Talk to a California breach of contract attorney

If a supply relationship has turned into a dispute over volume, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is located in Irvine, California. Related reading: our breach of contract practice page and our overview of sale of goods disputes.

This page provides general information about California law and is not legal advice. Outcomes depend on the contract, the reasons for the change in volume, and the court.