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A contract is a legally binding agreement. A requirements contract, therefore, is a legally binding agreement that addresses the requirements that one party may have regarding products or services offered by another party. The agreement generally involves the supplier offering an unlimited supply and the buyer agreeing to only purchase from a single source.
Contract terms are often very specific. Quantity, for example, is generally a very important aspect of commercial contracts. With a requirements contract, however, this is not the case. Most requirements contracts do not address any specific quantities. Instead, these agreements focus more heavily on need and availability.
A requirements contract is usually established between a buyer and a supplier. This type of agreement usually requires the supplier to provide an unspecified amount of a product or service. That amount should be sufficient enough to address the buyer’s need. Since the supplier agrees to meet the buyer’s needs, the buyer is generally prohibited from utilizing other suppliers.
The needs of a catalog call center may help to illustrate how a requirements contract works. The XYZ jewelry company may commonly get more telephone orders than its staff can handle. To address this problem, XYZ may sign a contract with Hello Call Center to handle all of the overflow calls. Hello Call Center may agree and restrict XYZ from sending calls to any other call centers.
It is important to note that lack of specified quantities could present a risk for suppliers. This is because a supplier may maintain certain stocks of a product in anticipation of orders from the buyer. The buyer, however, is only obligated to buy what he needs. That could possibly be nothing. There is also a degree of risk for buyers. By obligating oneself to a single supplier, a buyer may lose out on more competitive offers.
Both a buyer and seller can benefit from a requirements contract, however. The supplier benefits because he gains an exclusive client. The buyer can benefit because he does not have to deal with multiple suppliers for a single product or service. The buyer also does not have to worry about whether his demands will be met.
The lack of specifics could cause a person to believe that a requirements contract is unenforceable in a court of law. This is not true. In most cases, either party can violate the contract and be sued.
A supplier, for example, could be sued if the buyer attempts to place an order which is rejected because the supplier does not have the agreed upon products. A buyer could be sued if the supplier discovers that the buyer has been making purchases of the contracted product elsewhere. In both instances, it is possible for a monetary remedy to be ordered.