Opinion ID: 2429057
Heading Depth: 1
Heading Rank: 5

Heading: good faith and output/requirements contracts

Text: Finally, Conoco argues that this Court should impose a good-faith obligation on Northern because the Agreement is an output/requirements contract, and a party should not be able to cease business and thereby cancel such a contract unless the cessation is in good faith. Several jurisdictions have applied this principle to service contracts as well as to sales contracts. See William S. Gray & Co. v. Western Borax Co., 99 F.2d 239, 242 (9th Cir.1938); DuBoff v. Matam Corp., 272 A.D. 502, 71 N.Y.S.2d 134, 136 (N.Y.App.Div.1947). Indeed, the seminal case that first enunciated the common-law requirement that changes in the quantity of output/requirements services be in good faith was a contract for services, not sales. See Wood v. Lucy, Lady Duff-Gordon, 222 N.Y. 88, 118 N.E. 214, 215 (1917). Nothing requires the seller in an output contract to have any output, and nothing requires the buyer in a requirements contract to have requirements. On the other hand, parties to output/requirements contracts are required to exercise good faith in determining outputs or requirements, as well as accept the concomitant risk that their counterparts to the contract may make good faith variations, even to the extent of liquidating or discontinuing the business. See HML Corp. v. General Foods Corp., 365 F.2d 77, 81 (3d Cir.1966); Fort Wayne Corrugated Paper Co. v. Anchor Hocking Glass Corp., 130 F.2d 471, 473 (3d Cir.1942). We agree with Conoco that a party who seeks to avoid performance of an output contract by having no outputor of a requirements contract by having no requirementsmay not do so in bad faith. Accordingly, we affirm the court of appeals' judgment remanding this cause for a new trial for Conoco to attempt to prove that Northern canceled its gas purchase contracts without a valid business reason and in bad faith. See HML Corp., 365 F.2d at 83 (It follows that since plaintiff claimed a breach it was its duty to prove it, and the burden, therefore, rested upon it to show that defendant had acted in bad faith.); Fort Wayne Corrugated, 130 F.2d at 473. We affirm the court of appeals' judgment.