Sixth Circuit Rules in Automotive Supply Dispute that Purported Requirements Contract is Unenforceable
On May 23, 2024, the U.S. Court of Appeals for the Sixth Circuit sided with Miller Johnson’s client, Higuchi International Corporation, ruling that a purported requirements contract was unenforceable in a decision that clarified the contours of requirements contracts under Michigan law. The Sixth Circuit’s decision was issued in Higuchi Int’l Corp. v. Autoliv ASP, Inc. (No. 23-1752).
The Sixth Circuit’s decision addresses the quantity term that must be included in a requirements contract in order for it to be enforceable under Michigan law. Although the quantity term may be measured by reference to the buyer’s requirements, the Michigan Supreme Court explained in a 2023 opinion, MSSC, Inc. v. Airboss Flexible Products Co., that such a contract is enforceable only if it obligates the buyer to purchase “all” or a “set share” of its actual needs from the seller. If, by contrast, the buyer has no obligation to purchase anything other than what it chooses to order at any given point in time, then the buyer has no enforceable obligation to purchase any particular quantity of goods from the seller, and there is no mutually enforceable contract.
Following in the wake of Airboss, the Sixth Circuit ruled in Higuchi that it is not sufficient to create an enforceable requirements contract simply by stating in a purchase order that the purchase order covers the buyer’s “requirements” of certain goods. Instead, the purchase order must specifically state that the buyer must purchase “all” or a “set share” (i.e., a specific percentage) of its actual needs from the seller. The Sixth Circuit rejected the proposition that courts may infer additional language to save an ambiguous quantity term, specifically declining to infer that the term “requirements” on its own impliedly meant “any and all requirements.” According to the Court’s opinion in Higuchi, the quantity term in a contract for the sale of goods “must be precise and explicit.”
The Sixth Circuit also ruled that, under Airboss, a requirements contract is enforceable only if it “clearly and precisely establish[es] the set share” of the requirements that a buyer must purchase from the seller. If there is any ambiguity in the relevant terms, then they do not establish an enforceable requirements contract. Nor may the parties resort to any evidence external to the documents in order to resolve the ambiguity.
The Sixth Circuit’s decision is the first time in which the Sixth Circuit has addressed the impact of the Airboss decision. The Court’s analysis in Higuchi will likely have significant implications for the manufacturing and automotive supply industries, given the centrality of requirements contracts to those industries.
Miller Johnson represents Higuchi in connection with this litigation. For further information, please contact Todd Holleman, Brandon Corcoran, CJ Schneider, or Steve van Stempvoort, or any member of the firm’s Automotive and Supply Chain practice groups.