A Wet Blanket for Supply Chain Buyers? New Ruling Calls into Question Language Commonly Used to Create Requirements Contracts
On July 11, 2023, the Michigan Supreme Court overturned decades-old caselaw and ruled that the term “blanket order” does not, by itself, create a requirements contract. A requirements contract is one where the seller must supply some or all of the buyer’s “requirements” of a good for a period of time. The Court held that a requirements contract must state a quantity term on its face, such as “all of buyer’s requirements” or “50% of buyer’s requirements” or similar language. It further held that the word “blanket,” alone, is not a quantity term.
This new ruling calls into question a 2020 Court of Appeals case, Cadillac Rubber & Plastics v. Tubular Metal, which held that a quantity term saying that buyer will purchase between one part and 100% of buyer’s requirements created a requirements contract. Many major automotive suppliers rely on the language blessed by Cadillac Rubber & Plastics to create requirements contracts. The Court’s new ruling could give suppliers new leverage in pricing and other commercial negotiations with buyers who rely on that language.
The Court’s decision stems from a contract dispute between MSSC and Airboss Flexible Products. MSSC made a suspension system. It relied on suppliers, like Airboss, for the necessary components. The contract between MSSC and Airboss was a “blanket order,” but it did not indicate any specific, or even vague, quantity that MSSC would buy.
After realizing a negative return on the parts it supplied to MSSC, Airboss decided to stop supplying the parts and rejected MSSC’s next release. Airboss claimed that it had a “per release” contract with MSSC, which allowed Airboss to reject a release at any time. MSSC, on the other hand, argued that it had a requirements contract, obligating Airboss to supply the all of MSSC’s requirements of the parts for the life of the automotive manufacturer’s program.
Michigan’s highest court agreed with Airboss. It held that the mere presence of the word “blanket” did not create a requirements contract because “blanket” is not a quantity term. A quantity term is one of the terms a contract for the sale of goods must have in order to be enforceable. Because the contract lacked a quantity term, it was not enforceable beyond the parts that Airboss had already sold to MSSC. The Court characterized the contract as a “release-by-release” contract, where either party can accept or reject each release individually.
The Court noted that the common quantity term of between one part and 100% of buyer’s requirements was likely a quantity term, but it declined to decide whether that term created a requirements contract. The Court noted a discrepancy in Michigan law surrounding this term, mentioning to two conflicting cases. A 2005 Michigan court of appeals decision, Acemco v. Olympic Steel Lafayette, ruled that the “one part to 100% of requirements” term in a contract gives unenforceable “complete discretion” to the buyer because “any quantity is no quantity at all.” By contrast, a 2020 court of appeals case, Cadillac Rubber & Plastics v. Tubular Metal, ruled that a quantity of “one part to 100% of requirements” is an acceptable quantity term that creates a requirements contract. The Court left this split in the law unresolved, which suggests that the Court may address it at a later time in another case.
Both buyers and sellers need to be aware of the Court’s ruling and the lingering uncertainty left by the decision. Buyers should evaluate their terms and conditions immediately and consider updating their quantity term in light of this new ruling. Sellers should consider whether the new ruling gives them any additional leverage in ongoing commercial issues, such as pricing requests.
If you would like to further discuss this topic with a Miller Johnson attorney, please do not hesitate to contact CJ Schneider at schneiderc@millerjohnson.com.
***Summer Associate, Ted Orr contributed as an author to this client update.***