In an important decision that impacts customers and suppliers in the manufacturing industry, the Michigan Supreme Court, in MSSC, Inc. v. AirBoss Flexible Prods. Co., clarified the contractual circumstances under which a supplier can become bound to a long-term “requirements contract” under the Uniform Commercial Code. As discussed below, unless a contract identifies a quantity, it will be treated as a release-by-release contract.
The Underlying Dispute
In this case, MSSC, Inc., a “Tier 1” automotive buyer, sought to enforce a purchase order for goods manufactured by “Tier 2” automotive supplier Airboss. Many years before the suit, the parties agreed to a specific set of terms and conditions that would govern the transactions between the parties and the individual purchase orders, or releases, pursuant to that agreement. The parties identified their purchase order as a “blanket” order that listed the parts to be supplied but did not include specific quantities of the parts to be supplied by Airboss. Instead, the quantity to be supplied by Airboss would be based upon the needs of MSSC for their customers’ orders. However, no one purchase order nor the any of the terms and conditions required MSSC to send any specific number of firm orders to Airboss. As time passed, the fixed price agreed to by the parties began to result in substantial losses to Airboss and Airboss eventually threatened to cease production under the agreement unless MSSC agreed to a price increase.
At the trial court, Airboss moved for summary disposition, arguing that the purchase order failed to satisfy MCL 440.2201(1), the statute of frauds of the Uniform Commercial Code, because it did not include a quantity term. In response, MSSC, Inc. moved for summary disposition, arguing that the blanket purchase order was a requirements contract that satisfied the statute of frauds.
The trial court ruled in favor of MSSC, Inc., reasoning that because the purchase order contained the word “blanket” on the first page, it therefore included a “quantity term” that satisfied the statute of frauds. Airboss appealed to the Michigan Court of Appeals, which affirmed the trial court’s ruling.
The Michigan Supreme Court’s Analysis
At the core of this case is the treatment of “requirements contracts,” under the UCC, which are those whose quantities are determined “by the output of the seller or the requirements of the buyer ….” MCL 440.2306(1). Prior to this case, those were the choices you either had a contract for the “requirements of the buyer” (oversimplified as one for “all of the wood the buyer needs”) or a contract for the “output of the seller” (oversimplified as “all of the wood I can cut”). As the Michigan Supreme Court went on to explain, however, some of these oversimplifications led to unspecific or unidentifiable quantity, which violates the statute of frauds (i.e., a legal principal that dictates the essential items that must be included in order to create a binding contract). The Court went on to conclude that where a contract fails to specify a quantity or a quantity-determining term, it would be found to have created a newly recognized type of contract called a “release by release contract.” Under such an agreement, “the purchase order and incorporated terms and conditions created a blanket—or umbrella—agreement, while the releases created individual purchasing contracts governed by the umbrella terms.” MSSC, Inc. v. Airboss Flexible Prod. Co., No. 163523, 2023 WL 4476721, at *10 (Mich. July 11, 2023). As such, the umbrella agreement included the pricing, shipping, and other terms and conditions of the agreement between the parties, but it was each individual order (or each “release”) that created a binding contract. There is no long-term commitment required by either party in a release-by-release contract.
The Supreme Court ruled that the lower courts erred by relying on parole evidence – that is information not contained within a written contract – to determine whether the parties intended the term “blanket” to identify a contractual quantity and to clarify what quantity was intended. Instead, the contract must contain language that identifies a quantity in order for it to be enforceable as a requirements contract. Accordingly, Airboss was within its rights to reject releases from MSSC because no quantity term was specified in the underlying contract.
In light of the Supreme Court’s decision, buyers and sellers of goods should review their contracts with legal counsel to evaluate whether they meet the standards for a requirements contract. If you have questions, or require assistance, please contact Bob Burgee.
Robert D. Burgee is an attorney at Fraser Trebilcock with over a decade of experience counseling clients with a focus on corporate structures and compliance, licensing, contracts, regulatory compliance, mergers and acquisitions, and a host of other matters related to the operation of small and medium-sized businesses and non-profits. You can reach him at 517.377.0848 or at firstname.lastname@example.org.