Judicial Guidance on the Use of Framework Agreements and Blanket Purchase Orders
It is quite common in the automotive manufacturing industry for supply contracts to use framework agreements or blanket purchase orders extending over a certain period of time or for the lifetime of the product line. The customer then just issues individual purchase orders off of the framework agreement or issues releases off of the blanket PO. If your business operates this way, then the recent decision by the Michigan Supreme Court in MSSC, Inc. v. Airboss Flexible Products Co. (July 11, 2023) is of interest to you.
The basic scenario was very typical for the automotive manufacturing industry: Tier 1 supplier negotiated and agreed to a “blanket purchase order” with a Tier 2 supplier for certain agreed prices for the lifetime of the program. Based on the agreement, the Tier 1 supplier would issue POs for specific quantities as it needed the products. Although it might have been implied, what the agreement didn’t expressly say was that the Tier 2 supplier was obligated to fulfill the specific POs (even though it agreed to the blanket PO). When the Tier 2’s costs increased, it tried to increase the prices that it had agreed to in the blanket PO. The Tier 1 said no, and the Tier 2 simply stopped accepting the POs. You can understand how this ended in litigation.
It went all the way up to the Michigan Supreme Court. The lower courts all held that the blanket purchase order created a requirements contract. The Supreme Court disagreed. The Court held that the Tier 2 supplier was not obligated to accept the purchase orders of the Tier 1 even though they had agreed to the blanket purchase order.
Takeaway
If you are using a framework agreement or a blanket purchase order structure (the Court termed these types of agreements “release-by-release” contracts), make sure to address the issue of whether the supplier needs to fill the specific POs that are issued off of that release-by-release contract.
Why is this important?
We bring this to your attention not only because the release-by-release contract structure is commonly used in the automotive manufacturing industry, but also because the cause of the dispute is often intentionally not addressed. The reason that this reached the Supreme Court was because the parties had not stated in the blanket purchase order that the Tier 2 was obligated to fulfill the POs. In our experience, suppliers are very hesitant to commit to a fixed price for a long-term contract. Buyers, on the other hand, consider it implicit in the blanket PO or the framework agreement. After all, why would you bother negotiating a blanket PO or framework agreement if the supplier did not have to supply the products?
For questions or assistance regarding judicial guidance on the use of framework agreements and blanket purchase orders, contact your local Quarles attorney, or:
- Andre Fiebig: 312-715-5126 / andre.fiebig@quarles.com