Texas Business Court Clarifies Output Contract Obligations: Actual Production, Not Capacity

The Texas Business Court continues to shape the landscape of commercial litigation in Texas, and a recent decision may offer guidance for parties negotiating and litigating output contracts. In FSTI, Inc. v. PVS Minibulk, Inc., Judge Melissa Andrews of the Third Division granted summary judgment for the defendants. The court held that a buyer’s obligation to purchase “100% of Seller’s production” was measured by what the seller actually produced, not by what it could have produced.

Background of the Output Contract Dispute

In October 2021, FSTI, Inc. and DPC Industries, Inc. (whose successor in interest is defendant PVS DX, Inc.) entered into a 10-year supply agreement (the Bulk Contract). Under it, DPC agreed to purchase “100% of Seller’s production from its Greenville, TX facility,” excluding production for retail and mini-bulk sales. The parties performed under the Bulk Contract for more than two years.

In February 2024, FSTI sold the Greenville facility to another company but excluded the Bulk Contract from the sale. FSTI then sued, seeking a declaration that the sale did not breach the Bulk Contract. DPC counterclaimed, alleging that FSTI repudiated and breached the Bulk Contract. FSTI’s original petition admitted that it sold DPC “the entire bulk bleach output” of the facility. Its amended petition, however, alleged that DPC breached the Bulk Contract by failing to purchase the total output the facility was capable of producing each month.

How the Texas Business Court Interprets Output Contract Purchase Obligations

The Core Dispute: Production, Not Capacity

FSTI did not dispute that DPC purchased all of the bulk bleach the Greenville facility actually produced. Instead, FSTI argued that DPC was obligated to buy “what FSTI could produce in good faith,” which FSTI identified as the facility’s capacity. According to FSTI, its limited storage and bleach’s short shelf life meant that DPC’s ordering pace effectively controlled production.

The court rejected this reading and FSTI’s reliance on UCC Section 2.306(a). It noted that, in their ordinary meanings, “production” is what the facility actually made, while “capacity” is what it was capable of making. As the court put it, “DPC was obligated to buy what FSTI actually made, not what FSTI hypothetically could have made.”

UCC Section 2.306(a) defines output as “such actual output… as may occur in good faith.” Whether the obligation is described as “actual production” or “actual good-faith production,” it remains limited to actual production. The good-faith language adds a further limitation. It does not turn “production” into “capacity.” The court also noted that no one alleged any of FSTI’s production was made in bad faith.

The court also distinguished key precedents FSTI cited, including the Texas Supreme Court’s Lenape Resources Corp. v. Tennessee Gas Pipeline Co. In that case, the contract expressly based quantity on “capacity” rather than production, which is the opposite of the Bulk Contract here.

Finally, the court rejected FSTI’s “reasonable time for performance” theory. Although contracts without specified performance times imply a reasonable time, the undisputed evidence showed DPC purchased bleach within days of production — before it could degrade. The court found no basis to conclude the parties expected DPC to ensure FSTI could produce at maximum capacity.

Texas Output Contracts: Practical Takeaways from the Business Court’s Production vs. Capacity Ruling

This decision offers several practical takeaways:

1. Contract language matters. Courts interpret “production” and “capacity” according to their ordinary meanings. Parties seeking protection tied to production capability may wish to negotiate explicit terms addressing that concern.
2. Good faith has limits. The UCC’s good-faith requirement does not expand contractual obligations beyond their plain terms or convert one type of agreement into another.
3. Business constraints are the seller’s risk. Limitations like storage space or product shelf life are factors within the seller’s knowledge and control. Buyers might not bear liability for constraints they did not create and may not have known existed.
4. Courts will not assume hypothetical breaches. FSTI’s theory required the court to presume that had FSTI produced more bleach, DPC would have refused additional purchases, which is a breach that never occurred. This speculative approach was insufficient to survive summary judgment.

Conclusion: Texas Business Court Measures Output Contract Obligations by Actual Production

FSTI v. PVS Minibulk demonstrates that the Texas Business Court may enforce output contracts according to their plain terms, measuring the buyer’s obligation by what the seller actually produced. The decision is equally notable for what the court declined to do. It refused to let the UCC’s good-faith requirement rewrite “production” as “capacity,” would not allow a seller’s self-imposed operational constraints to shift risk to the buyer, and would not presume a breach that the evidence did not show.