Michigan Supreme Court Alters Supply Chain Contract Landscape

Contracts for the sale of goods must include a quantity term. Yesterday, in a significant opinion for automotive and manufacturing industries, the Michigan Supreme Court held that a “blanket” order, by itself, does not express a quantity term that satisfies the Michigan Uniform Commercial Code’s statute of frauds.  The Court also formally recognized that “release-by-release contracts” are in effect agreements to come to a future agreement on a quantity term.  They are marked by an umbrella agreement (or blanket purchase order) that sets forth governing terms, but do not include a defined quantity (like “all requirements”).  Subsequent releases tied to the blanket order may then set the quantity term.  But unlike a requirements contract that obligates the seller to accept all of the buyer’s releases for the duration of a contract, no such obligation exists with release-by-release contracts. So where parties have a release-by-release agreement, the seller may notify the buyer at any time that it will no longer accept future releases.  The key difference between a requirements contract and a release-by-release agreement is thus the level of mutual obligation between the parties and the risk each party bears.

In MSSC, Inc. v. Airboss Flexible Products Co., the Michigan Supreme Court held that the parties’ agreement was a release-by-release contract and not a requirements contract.  The purchase order was a blanket order that specified that MSSC would issue a “Vendor Release and Shipping Schedule” to Airboss for goods under the contract.  Neither the purchase order nor the governing terms and conditions obligated MSSC to send any number of firm orders or purchase a specific quantity of goods from Airboss.  The Court held that the agreement merely stated that MSSC would issue releases.  The Court thus reasoned that there was no quantity term in the agreement and, as a result, no enforceable requirements contract.  In the absence of a valid requirements contract, the Court held that Airboss was only obligated to supply MSSC if Airboss accepted MSSC’s releases.  Otherwise, Airboss could reject MSSC’s releases and refuse to supply goods under the blanket purchase order.

The case presents critical risk management implications for how buyers and sellers structure their supply agreements and balance flexibility against certainty.  It also provides clarity about the nature and enforceability of supply agreements under Michigan law.  And perhaps most importantly, the case calls into question the continuing validity of countless existing supply agreements—agreements that parties may potentially walk away from if they are no longer considered enforceable.

Honigman’s Automotive and Manufacturing practice group includes lawyers with decades of experience representing original equipment manufacturers (OEM), Tier 1 and 2 suppliers, and automotive aftermarket companies.  If you have questions about the impact of MSSC, Inc v. Airboss Flexible Products Co., please contact a member of the Automotive and Manufacturing or Commercial Transactions practice groups.