Don't Bet the Business

Those dealing with contracts for the sale of goods, whether they be buyers or sellers, likely are very familiar with the concept of a “requirements contract.” 

A “requirements contract” is a contract that defines the quantity the seller must sell, and that the buyer must buy, by referring to the buyer’s overall needs or requirements for the particular goods involved. Tier I and tier II automotive suppliers commonly use requirements contracts to source parts that eventually wind up in all types of vehicles.

For any contract for the sale of goods, like automotive parts, the inclusion of a quantity term in a purchase order is critical. This is so because for the sale of goods for an amount over $1,000, such agreements must be in writing, and even then they are only enforceable if the writing contains a quantity term. MCL 440.2201(1). 

Traditionally, the requisite quantity term was spelled out one of three ways. The most obvious is to simply include a specific quantity of the part being bought and sold as part of a purchase order. Section 440.2306(1) of the Uniform Commercial Code also allows the quantity to be measured and stated “by the output of the seller or the requirements of the buyer.” An output contract measures the quantity by what the seller supplies. A requirements contract defines the quantity by what the buyer needs. These types of agreements are often made by way of a “blanket purchase order.”

Indeed, blanket order requirements contracts generally obligate a buyer to purchase a stated share of its needs. This might be stated as a percentage, or the writing may simply state that the buyer will purchase “all” of its needs for the goods covered by the blanket order. The buyer then issues releases to the seller to specify the amount it is buying on a periodic basis.

In MSSC, Inc. v Airboss Flexible Products Co, ___NW2d ___ (2023), the Michigan Supreme Court, for the first time, formally recognized a third type of blanket purchase order – the “release-by-release” agreement.

In that case, MSSC was a tier-1 automotive supplier, and it issued a purchase order to Airboss, a tier II parts supplier. The purchase order included specific terms; it also incorporated the general terms and conditions shown on MSSC’s website. The purchase order purported to be for the life of various vehicle programs. It also stated that annual volumes would be based on production estimates from MSSC’s customer. Missing from the purchase order, however,  was any commitment by MSSC to purchase a specific number of parts or a percentage of its total needs. This turned out to be a regrettable oversight for MSSC.

In automotive parts litigation, an all-too-common claim is when a manufacturer or tier I supplier sues a secondary supplier that refuses to provide parts at a previously agreed upon price as set forth in a blanket purchase order. Understandably, buyers want to fix their costs for as long as possible. In the automotive market this is typically for the life of a particular vehicle program or even for as long as the part is needed long after a vehicle is discontinued. Sellers may initially agree to such life-of-the-program agreements, but eventually they reach a point where it is no longer economically feasible to produce the part because of rising production costs.

This is precisely what happened in the MSSC case. Airboss started losing money on its parts, and the supplier told MSSC it needed price increases to continue production. MSSC initially agreed, but only if Airboss promised never to ask for another price increase. Airboss agreed, but predictably it began losing money again, so it asked MSSC to increase the prices it paid for a second time. It was then that MSSC sued Airboss, claiming anticipatory breach while seeking specific performance of the existing purchase order at the existing price.

The trial court ruled in favor of MSSC. The Michigan Court of Appeals later affirmed. In each instance, the courts concluded that merely referring to the parties’ contract as a “blanket” order was enough to state a quantity, albeit an imprecise one, that satisfied §2201(1), Michigan’s version of the statute of frauds. MCL 440.2201(1).

The Michigan Supreme Court reversed, reasoning that the purchase order, together with all the applicable terms, did not create a requirements contract because it did not obligate MSSC to purchase an identifiable quantity of parts from Airboss. This omission violated the statute of frauds. 

Instead, the Supreme Court concluded that the parties had created a release-by-release contract. Under this type of agreement, when MSSC sent a release to Airboss, which did in fact state a specific quantity, the release was deemed an offer which only became binding if accepted by Airboss. This meant that Airboss was not bound to continue supplying parts for the prices MSSC expected to pay. Rather, Airboss was free to walk away from the blanket purchase order at any time.

The reach and impact of the MSSC decision could be significant.  Supplier contracts are notoriously general, one might say even vague.  Automotive manufacturers and suppliers want to ensure a reliable supply chain, but they also seek flexible purchase orders suitable for a “just-in-time” ever changing demand. The MSSC decision may require a new level of specificity in blanket orders that previously was avoided.

At the very least, the MSSC decision will force buyers and sellers to reexamine their form agreements, including the applicable terms and conditions, to ensure that they are actually worded to create binding requirements contracts and not, in fact, release-by-release agreements.