Business Alert: Michigan Supreme Court Issues Decision with Implications for Automotive Supply Contracts

In a case that could have significant impact on the leverage between suppliers and customers in the automotive sector, the Michigan Supreme Court recently decided to limit the enforceability of “blanket” purchase orders or supply contracts which purport to bind the supplier to a life of program supply of parts but do not obligate the customer to the purchase of any particular quantities or percentage of requirements.

Traditionally, many of the original equipment manufacturers in the automotive sector—many located in Michigan and using Michigan law in their contract documents—issued blanket purchase orders, often for the life of a program, purporting to bind the suppliers to supply parts at fixed prices but only committing to specific quantities as issues in binding releases against the blanket purchase order or supply contract and specifically disclaiming any impact that would make forecasts or other estimates of need binding. This provided the Original Equipment Manufacturers (OEM’s) or customers with significant leverage over suppliers in negotiating the impact of changes in the marketplace, particularly in an environment of rising labor and raw material costs.

The Uniform Commercial Code’s (UCC) statute of frauds set forth certain requirements for contracts involving the sale of goods for the price of $1,000 or more. To be enforceable, a contract must be signed by the party against whom enforcement is sought and it must contain a quantity term.

Requirements contracts, which define quantity by reference to the buyer’s requirements, satisfy the statute of frauds. For example, a blanket purchase order stating that a buyer will obtain a specific portion of its needs from a seller (e.g., “all requirements of the buyer”) creates a requirements contract. But what if a blanket purchase order states that the buyer will issue releases to the seller in the future specifying the buyer’s needs from the seller? Does the blanket purchase order create a requirements contract and therefore bind the seller to ship goods pursuant to the future releases? 

Recently, in MSSC, Inc. v. Airboss Flexible Products Co., the Michigan Supreme Court answered this question when it held that such a blanket purchase order does not create a requirements contract and does not satisfy Michigan’s version of the UCC statute of frauds. There, MSSC, Inc. (“MSSC”) issued a blanket purchase order to Airboss Flexible Products Co. (“Airboss”). The blanket purchase order incorporated MSSC’s terms and conditions. The blanket purchase order obligated MSSC to issue a “Vendor Release and Shipping Schedule” to Airboss, which would include a “firm order” for goods and MSSC’s estimated long term needs. Importantly, however, the blanket purchase order and the terms and conditions did not require MSSC to send a specific number of firm orders to Airboss.

After Airboss ceased taking further orders from MSSC, MSSC sued Airboss for anticipatory breach of contract. The trial court granted summary judgment in favor of MSSC, holding that the purchase order satisfied the statute of frauds and contained a quantity term because it was identified as a “blanket” purchase order. The appellate court affirmed, holding that the use of the term “blanket order” was enough to create a requirements contract under the UCC and therefore satisfy the statute of frauds.

The Michigan Supreme Court reversed, holding that the term “blanket” is not a quantity term. The Court explained that a requirements contract dictates that a buyer will purchase a specific share of its needs from the seller. In contrast, some agreements are governed by a blanket purchase order and terms and conditions, pursuant to which a buyer will issue releases setting forth the buyer’s specific needs.

This type of an agreement is not a requirements contract but rather a “release-by-release agreement.” Under this type of agreement, the blanket purchase order and terms and conditions create an umbrella agreement, and the releases issued pursuant to the agreement create separate contracts. But a seller is not required to accept future orders from a buyer as it would be under a requirements contract, and the seller is only bound by the blanket purchase order and terms and conditions if the seller accepts a release. In MSSC, neither the purchase order nor the terms and conditions set forth the share of the buyer’s needs to be purchased from the seller. Thus, the parties had only created a release-by-release agreement and not a requirements contract.

Although not every state’s version of the UCC is the same, and courts in different states are not always uniform in how they interpret provisions of the UCC, the decision in MSSC has significant implications for automotive suppliers throughout the United States. If you are experiencing any supply chain issues or concerns, our team at Brouse McDowell can help. Whether you want to discuss a current problem with a customer or vendor or want to work on revising your current contracts to address doing business in light of the MSSC decision, please reach out to one of us today.

Marc is the Chair of the Business Restructuring, Bankruptcy & Commercial Law Practice Group. He focuses on general business counseling, commercial law, and business reorganizations. Marc can be reached via email at mmerklin@brouse.com.