Third Circuit Strictly Interprets Requirement Contracts

Third Circuit Strictly Interprets Requirement Contracts

Cedar Grove, New Jersey – July 9, 2020

The Third Circuit Court of Appeals recently issued a precedential opinion interpreting requirements contracts under New Jersey law.  In Mid-American Salt, LLC v. Morris County Cooperative Pricing Council,* the court considered a contract for bulk rock salt at negotiated prices. The contract called for Mid-American Salt (“Mid-American”) to supply rock salt to the members of Morris County Cooperative Pricing Council (“Co-op”) and included a schedule of the members’ estimated needs. Although some members purchased from Mid-American, many members bought no rock salt at all, while others bought from Mid-American’s competitors.

Mid-American sued the Co-op and its members, alleging the contract was a requirements contract that obligated the Co-op’s members to buy from Mid-American. The district court dismissed the action for failure to state a claim because the contract was not a valid requirements contract, and the Third Circuit, over a dissent, affirmed.

Looking at the language of the contract, the majority concluded that the contract did not include “an implicit promise to purchase certain amounts of salt.” In fact, the only promise contained in the contract was for the Co-op members “to pay for any rock salt they might have purchased—a rather obvious proposition.” The court concluded the contract was not a requirements contract but was, in reality, an illusory contract.

The key takeaway from this decision is that, under New Jersey law, if parties wish to create a requirements contract, the language must expressly create the required promise to buy. This is especially so when “sophisticated parties [are] capable of entering into precisely the kind of contract they desire.” The majority suggested using simple language to convey the intent of the buyer to purchase its specified requirements from the seller or even titling the contract a “Requirements Contract.”

This case is also a reminder to practitioners and their clients that a notice of appeal must identify the parties and orders on appeal. In its notice of appeal, Mid-American failed to specify the Co-op and the order dismissing the complaint as to the Co-op. Although the majority found a connection between the specified and unspecified orders in the notice of appeal, and no prejudice to the Co-op, the panel concluded that Mid-American made it clear it did not intend to appeal the unspecified order because it was left out of the notice of appeal. As a result, Mid-American lost its right to appeal the dismissal of the Co-op from the action.

* O’Toole Scrivo represented the Township of Vernon on appeal and before the trial court.

 For additional information on this topic, please contact Joshua A. Zielinski at jzielinski@oslaw.com or Andrew Gimigliano at agimigliano@oslaw.com or at (973) 239-5700.

 

This article is for informational purposes only and not for the purpose of providing legal advice.

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