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Neighborcare -TCI, Inc. v. Fritz Reuter Altenheim, Inc.

A-4422-03T5 (N.J. Super. App. Div. 2005) (Unpublished)

CONTRACTS; REQUIREMENTS—A requirements contract is valid even though there is built-in uncertainty as to the quantity of goods to be bought and sold because the party who ultimately sets the quantity is required to act in commercial good faith so that its output or requirements, as the case may be, will approximate a reasonably foreseeable figure.

A medical supplies distributor agreed to provide medications and supplies to a nursing home for one year. The agreement had renewal rights and also could be terminated on ninety days’ prior written notice or upon material breach of the agreement. After almost a year of buying products under the agreement, the nursing home told the distributor that the home would no longer deal with the distributor because of unsatisfactory service which had resulted in compromised medication administration for some of the home’s residents. The distributor then sued, alleging that the nursing home’s action was an express breach of the agreement’s termination provisions. The nursing home argued that the agreement did not obligate it to purchase any medications or pharmaceuticals from the distributor.

The lower court granted the distributor’s motion for summary judgment. On appeal, the nursing home claimed that the provider agreement was not enforceable because it imposed no requirement on the nursing home to purchase any minimum amount from the distributor. The Appellate Division found the agreement to be a requirements contract under which the distributor agreed to provide such prescription and over-the-counter medications and pharmacy supplies to the nursing home as the home required for its residents and its own use. It is usually impossible under a requirements contract to pinpoint the precise amount of goods that a purchaser will require over the course of a contract year. Therefore, the law provides that the party who ultimately sets the quantity is required to conduct its business in good faith and according to commercial standards of fair dealing in the trade so that his output or requirements will approximate a reasonably foreseeable figure. That is why requirements contracts are valid, despite the built-in uncertainty as to the quantity of goods to be purchased and sold.

Furthermore, even though a requirements contract incorporates the implied obligation to act in good faith, it does not require exclusivity in the absence of specific language indicating that intent. Here, the Court found that the nursing home purchased supplies from the distributor for about eleven months, demonstrating that it not only intended to comply with the agreement’s terms, but also that it considered the distributor to be its exclusive supplier. For that reason, the Appellate Division affirmed the lower court’s decision which had held that a valid contract existed and that the nursing home was in breach of it.

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