Over the past two years, federal and state courts have issued a series of decisions with important implications for supply chain contracts. Most notably, the appellate courts in the AirBoss and Higuchi cases provided guidance regardingwhat type of contract language can, under Michigan law, create a long-term requirements contract — as opposed to a “release-by-release contract,” under which the supplier and customer have no obligations beyond each individual release containing a firm quantity order. This blog previously reported on AirBoss and Higuchi, as well as subsequent trial court decisions interpreting specific contract provisions under the rules established by those appellate decisions. Now two additional trial court judges have weighed in, offering further guidance.
In the first case, L&P Automotive Luxembourg v. Neways Electronics Riesa, a Tier One supplier asked for a preliminary injunction ordering a Tier Two supplier to continue supplying lumbar seating parts at then-current pricing. To secure this injunction, the Tier One supplier needed to show, in addition to other matters, that it was likely to succeed in establishing that its purchase order created a requirements contract.
The terms incorporated in the purchase order stated, among other things, that:
If a quantity term is not stated in an Order and if not otherwise provided, all Orders for Goods used in production by Buyer or its customer ... are presumed to be Blanket Orders for 100% of Buyer’s requirements for the life of the Customer program. ...
Notwithstanding this “presum[ption]” that an order without an express quantity was for “100% of Buyer’s requirements,” the court concluded that the parties had a release-by-release agreement — not an enforceable requirements contract.
In reaching that conclusion, the court began by reciting that a requirements contract can only arise from a “precise and explicit” expression of the parties’ intent to enter into a requirements contract. The court then determined that, reading the purchase order as a whole, it was “ambiguous at best” as to whether the parties intended to enter into a requirements contract.
The court discussed a few different provisions in reaching that conclusion. But the apparent upshot was this: The court found that there was no clear intent to create a requirements contract because the purchase orders stated that the Tier One supplier’s “obligation to purchase” parts was “expressly contingent upon the issuance of a release.” This language, according to the court, reflected an intent to create a release-by-release agreement.
Another decision issued earlier this year provides a useful contrast, as it involved language that a court found could be sufficiently clear to create a requirements contract. In Tower Automotive Operations USA v. Vari-Form Manufacturing, a Tier One supplier similarly sought a preliminary injunction ordering a Tier Two supplier to continue supplying parts. But the court in that case issued the injunction, finding (at least for the purposes of the injunction) that the parties had entered into a requirements contract. The court did so based on language on the face of the purchase orders stating that the orders were for “100% of Reqts.”
These decisions add to the chorus of cases providing more guidance in this rapidly evolving area of the law. They reaffirm the importance of reviewing supply contracts given the dynamic legal landscape — as language that may support the interpretation of a requirements contract today may not be sufficient in the future.
Should suppliers have any questions about ongoing developments in supply contract law or otherwise seek counsel regarding their contracts, please reach out to Adam Ratliff, Tim Smith or a member of Warner’s Automotive Industry Group.
