Legal Question in Business Law in California

Re: Production Contract Obligations

The starting point here is to read the contract. In your situation, there may be no one single document bearing the title "Contract" or "Agreement" but under the Uniform Commercial Code what amounts to a written contract can, in effect, be constructed from the various deal-related papers. These would include the original purchase order, anything your firm put in writing by way of an acceptance or confirmation, bills and statements, and perhaps correspondence leading up to the purchase order.

On reviewing all these documants, look for aything that could be interpreted as a promise to maintain the original pricing, including an agreement to ship a specified quantity over a particular time period, or at a particular price.

The interpretation of contracts for the manufacture and sale of goods is an art, not a science, and the main rules of thumb are that the judge or jury needs to find and enforce the parties' intent or understanding at the time the contract was entered into, or if that is uncertain, the court will assume that the parties preferred a reasonable interpretation rather than one having a harsh or unjust result.

So, I'd say you can probably increase your price to cover your costs, but only if there is nothing in writing clearly specifying a fixed, long-term price. If so, you should gently introduce the subject by notifying the customer in advance. Maybe to keep the business you will have to do some negotiation.

If you lose the customer, you're probably better off than keeping a losing proposition.

It's very rare that a customer can sue for specific performance and require you to keep making and selling the product if you don't want to....that might happen if you had an exclusive patent right to make your particular kind of widget, but as a general rule all the customer could sue for, even if you are contractually bound to supply at the old price, is their short-term loss in finding a new supplier and "covering" your breach of the contract. I think a suit is unlikely, but that of course depends upon the contract, the size of the deal overall, the availability of substitute suppliers and the temperament of the buyer.