Today's case, like McMichael v. Price, deals with what's called a requirements contract. Harley T. Price sold sand through his business, the Sooner Sand Company. He and McMichael entered into a contract in which McMichael agreed to supply Price with all the sand that Price could resell for the next 10 years at a price of 60 percent of the market price of the sand's destination. So, Price, aka Sooner Sand, is the plaintiff and the purchaser from McMichael. It's a little bit confusing because it seems that the contract speaks as Price as being the seller, but he's actually a reseller of sand that he buys from McMichael. So, after some time under this contract, McMichael refused to continue supplying Price with sand. And so, Price sued to enforce the contract. At the trial, the jury awarded Price $7,500 though the judge reduced that to $5,000 through remittitur order. McMichael argued, in this case, that his contract with Price was invalid because the contract was not mutual. If Price decided to go out of business, he would no longer be obligated to purchase any sand from McMichael. In particular, McMichael pointed out that Price had "no established business and was not bound to sell any sand whatsoever." We are reading the decision from the Oklahoma Supreme Court. That's one reason it's called Sooner Sand because it's the Sooner state. The court must decide whether requirement contracts are void for lack of mutuality because the purchaser can avoid his obligation by going out of business. The court finds that this is not the case. Each of the parties does have an obligation under the contract. Price, the purchaser, reseller, must not buy sand from any one else. If Price does, McMichael could sue him for breach of contract. You should see that this promise, not to buy from anyone else, is a legal detriment that helps satisfy the consideration requirement. McMichael, the seller, must sell Price for its side of the contract, for its promise, all of the sand that Price needs. This form of contract is called a requirements contract, and it's one where a seller agrees to supply all of a purchaser's requirements in exchange for a promise that the purchaser will buy exclusively from that seller. An output contract is, in a sense, the reverse situation. A buyer agrees to purchase all of the supplier's product in exchange for the supplier's promise not to sell to anyone else. In order for requirements and output contracts, and indeed, for other contracts to be valid, the contracts must be mutual. That is, they must bind both parties. Neither party can have a freeway out of the contract. Both must be making actual commitments that might be breached. This is, the consideration for each other's promise must be something that if it's not given, would give rise to a breach of contract action. Courts generally haven't considered the exact level of commitment to be important. That is, it's up to the parties themselves to negotiate just what they are bound to or not bound to. Under the Uniform Commercial Code, the purchaser in the requirements contract, like the one in McMichael v. Price, has a duty to also make reasonable efforts to generate sales. Section 2-306 subparagraph 1 provides that, "A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate may be tendered or demanded." Under the UCC then, McMichael would have a legal claim against Price if he decided to stop selling sand entirely for no good reason. Parties have a responsibility to stick relatively close to any estimates they gave when negotiating the contract for a requirements or an output agreement, though they are allowed to fluctuate somewhat based on their actual business needs. So, under the UCC, which of the following would violate Price and McMichael's contract? A, Price makes no effort to resell and never order sand from McMichael. B, McMichael refuses to sell Price more than half the amount of sand Price had estimated he would need. C, Price orders for McMichael 20 times more sand than he suggested he would need. Or D, all of the above. Well, all of these actions here would violate either the terms of the contract or section 2-306 of the UCC. The estimated amount of sand is presumptively reasonable. And so, McMichael refusal to sell Price more than half the estimated amount violates his promise. If Price requests no sand or 20 times as much sand as he said he would need, a court would likely find that the amount required were unreasonably disproportionate to the earlier estimates. If Price made reasonable efforts and could not sell any sand, that might not be a breach, but important questions arise as to how much effort and whether the resale must be profitable. In McMichael versus Price, we have seen that the requirement of mutuality simply means that both parties must have obligations under a contract in order for that contract to be valid. A good test for whether parties have mutual obligations is whether, judged at the moment of contracting, there is some course of action they could take for which the other party could sue them for breach of contract. In particular, requirement contracts and output contracts are enforceable because of the exclusivity and reasonable efforts promises. These can be violated if you buy or sell from the wrong person. We have also seen that the Uniform Commercial Code requires purchasers and requirement contracts and suppliers and output contracts to make good faith efforts to stick to any estimates they gave when they were negotiating their contracts.
