U.S. Court of Appeals for the Seventh Circuit
Docket: 14-1555 and 14-1416 Opinion: November 5, 2015
In this opinion the 7th Circuit Court of Appeals sets the record straight about an alleged Output-Requirements Contract and settles a dispute based on the terms of a supplier agreement.
Continental Carbon Company (CCC) sells carbon black, a material used in rubber products. BRC Rubber & Plastics (BRC) makes rubber products for the auto industry. In 2010 the companies entered into a contract under which CCC agreed to supply about 1.8 Million lbs./yr. of carbon black to BRC. In 2011 however, Continental could no longer keep up with demand from other customers and had to refuse certain orders from BRC, which inturn put BRC in a bind with its customers, causing a chain reaction.BRC sued, alleging that CCC had breached the contract.
The Indiana District Court treated the agreement between them as an “Output/Requirements” contract that obligated CCC to sell as much carbon black as BRC wanted while requiring BRC to buy all its carbon black from CCC. On that basis, the District Court concluded, CCC had indeed breached its obligation by failing to sell as much carbon black as BRC wanted.
7th Circuit Opinion
The Seventh Circuit, applying Indiana law, vacated the District Court’s decision and found that the arrangement between the parties was not an Output/Requirements contract. In fact, the Court observed, the contract did not obligate BRC to buy any—much less all— of its carbon black from CCC.
The Court reviewed the case de novo and started with the definition of an Output/Requirements Contract as one calling for a party to buy goods exclusively from another party, who inturn is required to supply all the first party’s needs. The contract clauses relied on by BRC for its Output/Requirements interpretation were the “Meet or Release” and “Quantity of Materials” clauses.
As discussed in the opion however, the Meet or Release clause of the contract simply permitted CCC to meet or beat terms offered to BMC by ANOTHER supplier of carbon black. In short, this was a “Right of First Refusal” term. As for the “Quantity of Materials” clause, it did not obligate CCC to sell any particular amount of carbon black. Instead, it simply estimated the annual volume between the parties at 1.8 Million lbs./yr.
At the conclusion of its analysis the Court determined that in effect nothing in the parties’ contract would have satisfied the 3-prong test applicable to Output-Requirement Contracts, so the lower Court’s decision had to be vacated.