Changing Requirements: Recent Disruptions to the Law of Requirements Contracts

Amid increasing pressure on supply chains across the globe, multiple recent court opinions have disrupted the law of requirements contracts – contracts regularly relied upon across industries by many original equipment manufacturers and suppliers. In July 2023, the Michigan Supreme Court in MSSC, Inc. v. Airboss Flexible Prods. Co. (“Airboss”) scrutinized whether certain contracts intending to be requirements contracts comply with the Statute of Frauds. According to the Airboss decision, “blanket” order language purchasers incorporated into these agreements did not supply a valid quantity term as required under the Uniform Commercial Code (“UCC”), thus invalidating the subject agreement. Airboss triggered a cascade of new cases addressing requirements contracts, leading to legal uncertainties as to whether manufacturers could rely on their long-standing supply contracts. Suppliers subject to unfavorable long-term agreements took advantage of the opportunity to challenge their contract language, using the lack of clarity as leverage in negotiations. Now, over one year later, the state of the law of requirements contracts remains in flux. This article will analyze the Airboss decision and its progeny and then analyze what comes next for requirements contracts.

The UCC’s Statute of Frauds and Requirements Contracts

Article 2 of the UCC applies to all commercial contracts for the sale of goods in 49 of 50 states.[1] Under the UCC “a contract for the sale of goods for the price of $500[[2]] or more is not enforceable . . . unless there is a record sufficient to indicate that a contract for sale has been made between the parties.” UCC § 2-201. The provision goes on to specify that, “A record is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this subsection beyond the quantity of goods shown in the record.” Id. In short, the only term absolutely required to be in writing in order to satisfy the Statute of Frauds is “the quantity of goods.” If the contract is in writing, but does not contain a quantity term, then the agreement is unenforceable as a matter of law.

However, this does not mean that the quantity term must be stated as a precise numerical value in the writing, nor that a specific quantity must be proven from the writing alone without reference to oral testimony. The Official Comments to the UCC recognize this, providing that “the quantity term . . . need not be accurately stated.” UCC § 2-201, cmt 1.

Elsewhere, the UCC expressly allows for “[a] term which measures the quantity by the output of the seller or the requirements of the buyer.” UCC § 2-306(1). This provision allows for what are known as “output contracts” and “requirements contracts” where the buyer promises to purchase a portion (or all) of the goods the seller produces or a portion (or all) of the goods the buyer requires.

Requirements contracts are prevalent in manufacturing, particularly in the automotive supply chain, in circumstances where the volumes of products being purchased are dictated by the number of parts required to fulfill consumer demand.

A requirements contract allows a buyer to secure a stable supply of goods even before the precise quantity needed has been determined and even if the quantity needed fluctuates frequently over time. A requirements contract also helps manage inventory risk by allowing the buyer to avoid accumulation of a surplus stock of inventory when forecasted volumes do not match demand. Requirements contracts also benefit sellers by providing for a promise of future sales, contingent upon continued need for the goods.

Notably, some jurisdictions will not recognize a Requirements contract unless the contract obligates the buyer to buy goods exclusively from the seller. For example, Georgia courts have said: “A true requirements contract obligates the buyer to purchase exclusively from the seller all the goods needed for a particular use contemplated by the parties. . . .”[3] Similarly, the Ninth Circuit has recognized that, under Idaho law, a “requirements contract exists if a buyer agrees to purchase up to a certain amount of its requirements exclusively from one seller.”[4]

However, not all jurisdictions require exclusivity to form a binding requirements contract. For example, Michigan courts have expressly concluded that “[r]equirements contracts need not be exclusive.”[5] This lack of exclusivity has led to varied and sometimes surprising case law regarding what written quantity terms satisfy the Statute of Frauds in the context of a non-exclusive requirements contract. See, e.g., Cadillac Rubber & Plastics, Inc. v. Tubular Metal Sys., LLC (finding that a purchase order obligating the buyer to purchase “a quantity between one part and 100% of [its] requirements” was a sufficient written quantity term and satisfied the Statute of Frauds).  Suppliers in jurisdictions where there is no exclusivity requirement continue to push for courts to require more certainty of obligation on the part of the buyers, in essence arguing that a promise to purchase either 1 or 1,000,000 parts is insufficient to satisfy the quantity requirement of the Statute of Frauds.

MSSC, Inc. v. Airboss Flexible Prods. Co.

The Airboss case[6] put the limits of the Statute of Frauds’ written quantity term requirement to the test. There, a Tier-1 automotive supplier issued a “BLANKET ORDER” to its Tier-2 supplier of certain parts. The order included a price for the parts but stated that “[a]nnual volume is an estimate based on the forecasts of [buyer’s] customers and cannot be guaranteed.” The purchase order also stated that it was “valid and binding on seller for the lifetime of the program or until terminated” but contained no other quantity term. For many years, the parties operated under the “BLANKET ORDER” by having the buyer issue periodic releases that identified the particular quantities for seller to provide. Eventually, the seller sought to renegotiate the price contained in the “BLANKET ORDER” and refused to fulfill or accept any releases unless the parties agreed to an increased price. The buyer argued that the seller was contractually obligated to fulfill the quantities identified in the releases because the “BLANKET ORDER” was a binding Requirements Contract.

The Michigan Supreme Court sided with the seller, holding that the phrase “BLANKET ORDER” did not constitute a written quantity term, and thus the agreement was unenforceable under the Statute of Frauds. “Most importantly, in a requirements contract, the terms . . . dictate that the buyer will obtain a set share of its total need from the seller. . . .” The Court concluded that “blanket” was not merely an imprecise quantity term, it did not constitute a quantity term, at all.

In the absence of a binding purchase agreement obligating the seller to provide any set portion of the buyer’s requirements, the seller was not required to accept any future releases issued by the buyer. Instead, the Michigan Supreme Court recognized the parties’ dealings as a “release-by-release contract,” whereby each release constituted a separate offer. The seller was free to accept or reject each individual release. The Court reasoned that, under the Statute of Frauds, only the releases could form binding contracts because only the releases provided a written quantity term. The Court also noted in a footnote that there may be some “apparent inconsistency” with the prior Cadillac Rubber holding (referenced above), but expressly reserved ruling on that issue because the relevant facts were not presently before the Court.

Airboss opened the door for suppliers to challenge their agreements with buyers, especially given the common practice in the supply relationships to issue “blanket” purchase orders. Thus, following Airboss, there has been a significant increase in sellers challenging whether their contracts are actually requirements contracts, or if they are free to reject releases if the terms are not favorable. Although Airboss was a Michigan state court case, its holding has reverberated across the country because of the extensive manufacturing taking place in Michigan and because many OEM agreements incorporate Michigan law.

Subsequent Cases

Over the past year, several courts have grappled with the implications of Airboss, including the doubt cast on prior cases such as Cadillac Rubber. Does Airboss stand for only the narrow proposition that “blanket order” is not a quantity term or does it signal a broader shift to apply a more stringent standard for identifying a written quantity term under the Statute of Frauds?

The District Court for the Eastern District of Michigan was the first to weigh in on this issue in an opinion by Judge Paul D. Borman in Higuchi International Corp. v. Autoliv ASP, Inc.[7] In that case, a Tier-1 automotive supplier issued a “blanket contract” to a Tier-2 supplier, but the purchase order also referenced that it was “to cover [buyer]’s requirements.” After Airboss, the Tier-2 supplier filed suit seeking a ruling that the purchase order was not enforceable under the Statute of Frauds, meaning the supplier could accept or reject each individual release. However, in August 2023, the District Court sided with the buyer, finding that the purchase order’s reference to the buyer’s “requirements” constituted a written quantity term sufficient for satisfying the Statute of Frauds. The supplier filed an appeal to the Sixth Circuit.

The Sixth Circuit reversed,[8] finding that the purchase orders did not unambiguously establish a requirements contract because they relied on an inference that “to cover . . . requirements” meant “to purchase all requirements.” However, “cover” can simply mean “to deal with” a topic—and this meaning would be equally consistent with a release-by-release contract. The court also relied upon the general principle of contract law to construe agreements against the drafter. Since Autoliv had unilaterally drafted the purchase orders, any uncertainty regarding whether they established a requirements contract would be construed against Autoliv. Therefore, the parties did not have a binding requirements contract, but instead had a release-by-release contract that enabled the supplier to accept or reject future releases as it wished.

While the Higuchi appeal was pending, the District Court of the Eastern District of Michigan issued an opinion by Judge George Caram Steeh in Ultra Manufacturing (U.S.A.) Inc. v. ER Wagner Manufacturing Co.[9] In that case, the agreement stated that “some portion or all of [buyer]’s requirements will be obtained from [seller].” This phrasing was very similar to the phrasing in the pre-Airboss case of Cadillac Rubber, where the Michigan Court of Appeals found a promise to purchase “a quantity between one part and 100% of [the buyer’s] requirements” was a sufficient quantity term to satisfy the Statute of Frauds. The court in Ultra held that Cadillac Rubber “irreconcilably conflicts with Airboss” because Airboss said a requirements contract must include a promise to purchase “a set share” of the requirements. Thus, the Court found that Airboss implicitly overruled Cadillac Rubber and the parties had a “release-by-release contract.”

Two recent decisions by Michigan trial courts have not applied Airboss as broadly—resulting in a practical “split” between Michigan state trial courts and the federal courts’ application of Michigan law. First, in FCA US LLC v. KAMAX Inc.,[10] FCA brought suit and sought a preliminary injunction against KAMAX after KAMAX threatened to stop shipping fasteners unless FCA paid requested price increases. Under its standard terms and conditions, FCA stated that it would purchase “65%–100%” of its requirements from KAMAX. The court granted the injunction and subsequently found that the language satisfied the Statute of Frauds.[11] This case is currently pending applications to appeal.

The second Michigan trial court case was more definitive. In FCA US LLC v. MacLean-Fogg Component Solutions, LLC,[12] a different judge of the same court dealt with a nearly identical fact pattern and contract language as FCA sought an injunction against a second supplier, MacLean-Fogg. The court again found that FCA was likely to succeed on the merits regarding an enforceable requirements contract.[13]

On the same day as the MacLean-Fogg decision, the District Court for the Western District of Michigan also weighed in on the issue in an opinion by Judge Paul L. Maloney in Feighner Co., Inc. v. Thru-Flow, Inc.[14] There, a manufacturer of marine docks sued its decking supplier, under an agreement that provided a certain price for the first three “loads” of decking and a discounted price for “any subsequent orders” “[i]f [buyer] orders a 4th truckload.” The court found that these terms did not establish any obligation by the buyer to purchase any portion of its requirements from the supplier because the pricing terms used discretionary language through the words “any” and “if.” Thus, the parties had a release-by-release contract.

What Comes Next

The future direction of the law of requirements contracts and the Statute of Frauds in the aftermath of Airboss remains to be seen. The law is in a state of flux and we expect multiple updates to the case law within the next year, especially as the appellate courts continue to weigh in.

In practice, the recent legal developments have benefitted suppliers that were supplying under “blanket” purchase orders by re-opening the opportunity to negotiate pricing. By requiring specificity as to quantity, the Michigan Supreme Court may have eliminated—or at least cast some doubt upon—some long-standing arguments (most often advanced by buyers) that the original terms were binding for the life of the program. Any supplier currently supplying under a “blanket” order that lacks any quantity term likely now has additional arguments and leverage to request price increases. However, suppliers also should note that in certain situations it may be to the buyer’s benefit that it is not bound by a “blanket” order. Just as a supplier can refuse to accept a release in a release-by-release contract, the buyer is under no obligation to issue a release to the supplier in the first instance.

Buyers and sellers alike should carefully consider how these changes will apply to their contracts going forward. All parties to purported “requirements” contracts should review their contract terms to determine if they are bound by a requirements contract or if their contract now lacks the necessary specificity in the quantity term.

[1] While Louisiana has adopted the UCC’s other articles, it has not adopted Article 2.

[2] The price threshold often varies by jurisdiction. For example, the provision as enacted in Michigan applies only to contracts for the sale of goods for the price of $1,000 or more. See Mich. Comp. Laws § 440.2201(1).

[3] Billings Cottonseed, Inc. v. Albany Oil Mills, Inc., 328 S.E.2d 426, 429 (Ga. Ct. App. 1985).

[4] Bright Harvest Sweet Potato Co., Inc. v. H.J. Heinz Co., L.P., 760 F. App’x 537, 538 (9th Cir. 2019).

[5] Cadillac Rubber & Plastics, Inc. v. Tubular Metal Sys., LLC, 952 N.W.2d 576, 582 (Mich. Ct. App. 2020).

[6] 999 N.W.2d 335 (Mich. 2023).

[7] Case No. 23-cv-11869, 2023 WL 5334581 (E.D. Mich. Aug. 18, 2023).

[8] Higuchi Int’l Corp v. Autoliv ASP, Inc.,Case No. 23-1752, 2024 WL 2744687 (6th Cir. May 23, 2024).

[9] Case No. 24-10025, 2024 WL 280515 (E.D. Mich. Jan. 25, 2024).

[10] Case No. 24-205863-CB (Oakland County Circuit Court March 21, 2024).

[11] Case No. 24-205863-CB (Oakland County Circuit Court May 17, 2024).

[12] Case No. 24-206687-CB (Oakland County Circuit Court April 19, 2024).

[13] After injunction proceedings, MacLean-Fogg removed the case to federal court in the Eastern District of Michigan, where the case was initially assigned to the same judge—Judge Paul D. Borman—who issued the Higuchi opinion. However, the case was reassigned to Judge Judith E. Levy, who has yet to weigh in on any of these substantive issues.

[14] Case No. 22-cv-709, 2024 WL 2187838 (W.D. Mich. April 19, 2024).