Warner Norcross + Judd LLP represented AirBoss Flexible Products Co. in MSSC, Inc. v. AirBoss Flexible Prods. Co., the first case to interpret a key provision of the Uniform Commercial Code in nearly 40 years – and one that will reverberate for suppliers up and down the supply chain. The Michigan Supreme Court handed automotive suppliers a victory yesterday by ruling in favor of AirBoss and clarifying when suppliers have entered into long-term “requirements contracts.”
The case arose out of a fairly typical pricing dispute. When AirBoss, the “Tier 2” supplier, requested adjusted pricing and MSSC, the “Tier 1” buyer, refused, AirBoss signaled that because the parties were operating on a spot-buy basis without any long-term requirements contract, AirBoss would stop accepting material releases. MSSC sued, seeking an emergency injunction to force AirBoss to continue to supply for the life of the program at fixed pricing. The trial court held that although neither the purchase order nor MSSC’s terms and conditions said that MSSC had to purchase any quantity of parts, the purchase order nevertheless was a requirements contract because it had the word “blanket” on the top of the first page and purported to last for the “life of the program.”
AirBoss, represented by Warner’s automotive industry and appellate teams, appealed, arguing that a purchase order that does not commit to purchasing anything, let alone the buyer’s requirements of parts, is not an enforceable requirements contract. But again, the Court of Appeals sided with MSSC, issuing a published decision echoing the conclusion that a purchase order with the word “blanket” on its face — but without any other quantity — was a binding requirements contract as a matter of law. This was the first time a Michigan court had held in a binding opinion that a purchase order and terms and conditions that do not make any reference to the buyer’s requirements nevertheless constituted a requirements contract.
We appealed on behalf of AirBoss, this time to the Michigan Supreme Court. The Michigan Supreme Court accepted AirBoss’ application, heard our arguments in December and issued its opinion yesterday.
In a decision that vindicates suppliers throughout the automotive supply chain, a majority of justices on the Michigan Supreme Court reversed the Court of Appeals’ and trial court’s decisions and re-established the rule in Michigan that parties to a supply contract are only bound by their written commitments to one another. The Supreme Court held that because MSSC’s purchase order and terms and conditions did not commit MSSC to purchasing any portion of its requirements, that it was unenforceable against AirBoss. Instead, the Supreme Court recognized for the first time the validity of a “release-by-release” contractual relationship, under which a supplier that has not agreed to be bound to its customer’s requirements can stop accepting releases at any time.
The Supreme Court’s decision will no doubt reverberate throughout the supply chain for quite some time. And while there is room for additional discussion regarding the immediate and long-term effect of this decision, a few key takeaways are readily apparent:
- The Supreme Court’s decision in MSSC reverses the troubling trend of courts willing to bind automotive suppliers to their customers’ requirements even when there is no express agreement to do so.
- Automotive suppliers and customers should immediately review their existing contracts to determine whether they pass muster under the MSSC decision. Suppliers and customers alike who, as recently as yesterday, might have thought they were parties to a requirements contract may no longer be.
- Customers should review their terms and conditions of purchase. The MSSC decision renders unenforceable language that had become popular among Tier 1 and Tier 2 standard terms and conditions.
- Because there are few state Supreme Court decisions addressing supply chain terms and conditions, this decision is going to have an effect in courts outside of Michigan and thus on contracts not governed by Michigan law.
Warner’s appellate and litigation teams that represented AirBoss were led by Michael Brady, Gaëtan Gerville-Réache and Adam Ratliff.
To read the Supreme Court’s opinion, click here.
Warner is proud to have secured this victory on behalf of AirBoss, and all suppliers, on an issue critical to the industry. We stand ready to assist additional suppliers assessing their current contracts and terms to implement this change in Michigan law.