Empire Gas Corp. v. American Bakeries Co.
840 F.2d 1333 (1988)
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Rule of Law:
Under UCC § 2-306(1), a buyer in a requirements contract may reduce its requirements to zero if the reduction is made in good faith, but a reduction is not in good faith if it is motivated merely by the buyer having second thoughts about the terms of the contract.
Facts:
- American Bakeries Company, which operated a fleet of over 3,000 motor vehicles, became interested in converting them to run on propane fuel due to rising gasoline prices.
- American Bakeries entered into discussions with Empire Gas Corporation, a propane distributor, regarding the conversion.
- On April 17, 1980, the parties executed a four-year contract for the sale of "approximately three thousand (3,000) [conversion] units, more or less depending upon requirements of Buyer."
- The contract also obligated American Bakeries to purchase all its propane fuel for the converted vehicles from Empire Gas.
- Within days of signing the agreement, American Bakeries decided not to proceed with the conversion project for undisclosed reasons.
- American Bakeries never ordered any conversion units or propane fuel from Empire Gas.
Procedural Posture:
- Empire Gas Corporation sued American Bakeries Company in federal district court (a court of first instance) for breach of contract.
- The case was tried before a jury.
- The jury found in favor of Empire Gas, awarding damages of $3,254,963.
- The trial judge added $581,916 in prejudgment interest to the jury's award.
- American Bakeries Company, as appellant, appealed the judgment to the U.S. Court of Appeals for the Seventh Circuit, with Empire Gas as appellee.
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Issue:
Does a buyer in a requirements contract, which includes a specific quantity estimate, breach the contract under UCC § 2-306(1) by reducing its requirements to zero if the buyer offers no legitimate business reason for the reduction?
Opinions:
Majority - Posner, Circuit Judge.
Yes. A buyer in a requirements contract breaches the contract by reducing its requirements to zero without a good faith business reason. The court held that while the 'unreasonably disproportionate' clause in UCC § 2-306(1) does not apply to a buyer demanding less than the stated estimate, the overriding duty of good faith does. Good faith requires more than simply having second thoughts about the contract; a buyer must have a legitimate business reason for reducing its requirements, such as a drop in demand for its own products. A decision to reduce requirements to zero that is not based on such a reason is a breach of contract. Because American Bakeries never provided any valid reason for its decision, other than a vague reference to 'budget problems' which the court viewed as a mere change of heart, it acted in bad faith and breached the contract.
Dissenting - Kanne, Circuit Judge,
The record is insufficient to determine if a breach occurred. The majority is correct that the central issue is good faith, not the 'unreasonably disproportionate' clause. However, the trial focused on the incorrect legal standard, and as a result, neither party presented evidence on the issue of good or bad faith. Empire Gas, as the plaintiff, had the burden to prove American Bakeries acted in bad faith and failed to do so. The majority improperly creates a post-trial presumption that a reduction to zero is bad faith unless the buyer proves otherwise. Since the issue of good faith was never properly litigated, the case should be remanded for a new trial on liability.
Analysis:
This decision significantly clarifies the obligations of a buyer under a requirements contract governed by UCC § 2-306(1). The court distinguishes the application of the 'unreasonably disproportionate' clause, limiting it to cases of over-demand, from the ever-present 'good faith' requirement, which governs reductions. By holding that a buyer cannot reduce its requirements to zero simply because it changes its mind, the ruling prevents a requirements contract from being treated as a mere option for the buyer. This precedent strengthens the position of sellers by ensuring that buyers assume the risk of their own reassessments of a contract's advantages, absent a legitimate, external business reason for their change in needs.
