Minimum purchase commitment clause: buying a set amount or paying anyway

Sample clause

a three year supply agreement between Wandoo Bottling, a fictional contract bottler, and a craft kombucha brand that needs 500 cases a quarter at a discounted rate

8. Minimum Commitment 8.1 In each Quarter of the Term, the Customer must order at least 500 Cases of bottling services (the Minimum Quarterly Volume). 8.2 Within 15 business days after the end of each Quarter, the Supplier must give the Customer a statement of the Cases ordered in that Quarter. 8.3 If the Customer ordered fewer Cases than the Minimum Quarterly Volume, the Customer must pay, within 30 days after the statement, a Shortfall Amount equal to the number of Cases short multiplied by $6.40, being the reserved line cost per Case set out in Schedule 2. 8.4 Cases ordered above the Minimum Quarterly Volume in a Quarter are credited against any shortfall in the next Quarter only. 8.5 The Minimum Quarterly Volume is reduced proportionately for any period in which the Supplier cannot perform because of an event described in clause 15 (Force Majeure) or its own failure to supply. 8.6 The Shortfall Amount is a payment for capacity reserved for the Customer.

Sample wording, not legal advice.

Variants

What to negotiate

• How the shortfall amount is calculated

  A shortfall charged at full sale price hands the supplier profit on goods it never made. A charge based on reserved cost, such as line time or capacity set aside, is easier to justify commercially and less exposed to the penalty doctrine. Buyers ask to see the calculation, and suppliers that resist opening their books will usually agree a fixed per unit figure in a schedule.

• Measurement period and carry forward

  A quarterly minimum hurts a seasonal business that sells most of its volume in summer. Buyers ask for an annual period or a right to carry excess volume forward against later shortfalls. Suppliers accept longer periods where their own costs are annual, and often limit carry forward to the next period so the commitment still means something.

• Relief when the supplier is the problem

  A buyer should not pay for volume the supplier could not have delivered. Common reductions cover the supplier's own supply failures, force majeure events and goods rejected for quality. Buyers also ask for a reduction when a price increase under the agreement takes effect, since the minimum was agreed against the original price.

• An exit if demand collapses

  A three year commitment signed on a forecast becomes a heavy liability if the product is discontinued. Buyers ask for a right to reduce the minimum, or to leave on notice with a capped payment. Suppliers that invested in capacity resist, but a buy out amount that falls each year of the term is a common compromise.

The risk of leaving it out

Without the clause the discounted price is given for volume the buyer is free never to order, so the supplier carries the cost of any capacity it reserved. Silence is not always safe for the buyer either: when volumes were discussed in correspondence but never written into a commitment clause, arguments about what was promised surface as soon as orders fall.

Shortfall payments and the penalty doctrine

Australian courts can refuse to enforce a sum that operates as a penalty, meaning an amount out of all proportion to the legitimate interest the clause protects, and the doctrine can reach a payment triggered without any breach if it really secures a primary obligation. A shortfall amount reflecting the supplier's genuine cost of reserving capacity, or the discount the buyer received on the volume it did take, is far easier to defend than a charge at the full price of goods never supplied. Calling the payment a price for capacity does not settle the question on its own; the arithmetic behind it does. In a standard form contract with a small business, a one sided commitment is also open to review under the unfair contract terms regime.

Minimum commitments next to exclusivity

Minimum commitments often travel with exclusivity: the distributor receives a territory and the supplier receives a volume. The pairing is usually sensible, because each promise justifies the other. Where the supplier is powerful and the commitment is set so high that it absorbs all of the buyer's demand, it can work like exclusive dealing in practice, which the ACCC treats as prohibited only where it substantially lessens competition. A minimum set comfortably below the buyer's total requirements leaves room to buy elsewhere and eases that concern.

Where it sits in a generated document

A generated supply agreement would usually place the minimum commitment after pricing, because the shortfall rate refers back to the price schedule, and before termination, which may rely on it. Volumes, rates and dates are written as figures, and a worked shortfall example can be requested as a small table so both parties see the calculation before signing. The text is written from the description it is given, so the per unit shortfall rate needs to be stated there.

Documents that carry this clause

Distribution agreement template with territory and targetsAn exclusive distribution agreement is a trade: a territory in exchange for volume. This one appoints a New Zealand distributor for a skincare range at 48 per cent of recommended retail, with purchase targets rising from NZD 240,000 to NZD 420,000 across three years, and exclusivity that converts to non exclusive if a target is missed by more than 15 per cent.Wholesale price listA bakehouse sells to cafes, so the price that matters is the pack price, not the unit price. This list shows both for seventeen products, then the four things that decide what a cafe actually pays: volume, zone, cut off and terms.

Questions people ask