Tariffs and Your Contracts: Why does the contract quantity matter?
If review of a contract indicates an undesirable allocation of tariff costs, consider whether there is even an obligation to purchase or supply under the agreement.
UCC § 2-201(1): Threshold for Enforceability
Section 2-201(1) of the Uniform Commercial Code (the “UCC”), which has been adopted in all 50 states except Louisiana, provides that a contract for the sale of goods for the price of $500 is only enforceable up to the quantity specified.
Formulation of Quantity Clauses
Common approaches that companies use to specify binding quantities in their contracts pursuant to the UCC include the following:
- Minimum Volume Commitment – The parties agree that the buyer will buy and the supplier will sell at least a certain volume of product.
- Requirements Contract – The parties agree that the buyer will buy its requirements, and the supplier will sell to the buyer the buyer’s requirements.
- Output Contract – The parties agree that the buyer will buy the supplier’s output, and the supplier will sell that output.
- Defined Volume – The parties set forth in writing a defined volume that the buyer will buy and the supplier will sell. This is commonly accomplished via purchase orders or statements of work.
Impact of Lack of Quantity on Supply
Therefore, if a party to a contract is underwater on product pricing due to tariffs and the contract does not contain a quantity, the buyer may have the flexibility to simply not buy product under the contract, and on the flipside, the supplier may choose to not sell product to the buyer under the contract.
Want to learn more about other contract strategies that may mitigate tariff-related risks? Visit our “Tariffs and Your Contracts” series home page here.
For insights on other trending supply chain topics and to get to know our supply chain team, visit Foley’s Supply Chain Team page.
