MSSC v. Airboss Continues to Roil Automotive Supply Markets —  Sixth Circuit Reverses Preliminary Injunction Ordering Auto Supplier to Supply Parts Under Purchase Order Contract

Relying on a recent Michigan Supreme Court opinion, the Sixth Circuit Court of Appeals recently reversed a preliminary injunction requiring an auto supplier to supply products, holding that the parties’ purchase order contracts do not obligate the supplier to continue supplying parts beyond the most recent release. In Higuchi Int’l Corp. v Autoliv ASP, Inc. the Sixth Circuit analyzed a long-term supply agreement between Higuchi, a seatbelt manufacturer, and Autoliv, a tier one automotive safety system supplier.¹ The Purchase Order’s relevant portion read:

This blanket contract is issued to cover Autoliv ASP, Inc.’s requirements of the parts listed below, for the period beginning [on the date on which the operative purchase order was issued] and ending upon the termination of the vehicle platform, including service part requirements, for which the parts listed herein are used. Deliveries shall be made only in the quantities and at the time specified in such requirements. Autoliv ASP, Inc. shall reserve the right to change, from time-to-time, the quantities specified in any part requirement. In such event, Autoliv ASP, Inc. shall be under no obligation to [Higuchi] unless the delivery or fabrication of such parts or the acquisition of such raw materials was specifically authorized in a Release delivered to [Higuchi] from Autoliv ASP, Inc[.]²

Citing the recent Michigan Supreme Court opinion in MSSC Inc. v. Airboss Flexible Prods. Co.³, the Sixth Circuit explained that under Michigan law a “precise and explicit” quantity term is required to establish a binding contract under the Uniform Commercial Code’s Statute of Frauds.⁴ Other terms—such as price or delivery dates—may be ambiguous without impacting the enforceability of the contract, as proof of the parties’ agreement on those terms may be provided by evidence outside the contract.⁵ However, because of the quantity term’s “special importance” under the statute of frauds, the quantity term “on its face and as written” must be clear and precise in the contract itself.⁶

The quantity term need not be a precise number. As reiterated by the Sixth Circuit in Higuchi, quantity can be measured by: (1) the number of goods to be sold, (2) the output of the seller, or (3) the requirements of the buyer.⁷ Describing the law prior to Airboss as “muddled,” the Sixth Circuit explained that Airboss clarified what is meant by the third category, explaining that a requirements contract will satisfy the statute of frauds if it “dictates that the buyer will obtain a set share of its total need from the seller.”⁸ Whether the contract requires the buyer to purchase all of its requirements, a set proportion, or a set amount, the critical part of a requirements contract is that it binds the buyer to obtain a set share of those requirements from the seller.⁹ If a purchase order refers to the buyer’s “requirements” without binding the buyer to obtain any set share of its requirements from the supplier, the writing does not create a requirements contract, but rather a “release-by-release” agreement, binding only to the extent of the quantity contained in the last accepted release.¹⁰

Analyzing the purchase order between Higuchi and Autoliv, the Sixth Circuit found that while the language referenced Autoliv’s requirements, it did not “unambiguously obligate Autoliv to purchase its requirements from Higuchi, let alone precisely state the specific share of requirements at issue.”¹¹ The Court went on to reject Autoliv’s argument that the clause should be interpreted to mean “any and all requirements,” holding that an inferred quantity term does not satisfy the statute of frauds.¹² The Court held that additional language limiting Autoliv’s obligations to quantities “specially authorized in a Release,” circumvented the central purpose of a requirements contract, which is intended to obligate a buyer to source a set amount of its requirements from the seller.¹³ Summarizing its analysis, the Sixth Circuit stated that “[b]ecause the parties appear not to have formed a requirements contract, Higuchi may turn down Autoliv’s requests to purchase automotive parts on a release-by-release basis.”¹⁴

The Takeaway

The Higuchi decision continues a trend of Michigan courts and courts applying Michigan law finding blanket supply agreements unenforceable for lack of a quantity term. Manufacturers and suppliers in the automotive supply industry should be examining their purchase orders and contracts to ensure that they include a “precise and explicit” description of the quantity to be provided under the contract, whether measured by a set number of goods, all of the buyer’s requirements, or a set portion of the buyer’s requirements. Gone are the days when buyers may bind suppliers to sell goods at a set price, but only purchase the amount of goods as and when desired by the buyer.  

For suppliers, now is the time to examine your contracts for a clear and explicit quantity term and, if one is lacking, determine what negotiations with buyers may be appropriate. Many suppliers who have found themselves on the wrong side of the recent uptick in inflation may find an opportunity to revisit pricing in light of these developments. 

While this line of cases has largely been limited to the automotive supply market so far, there is nothing in the logic of either Airboss or Higuchi that would limit these holdings to automotive supply agreements. Any contract for the sale of goods worth more than $1,000—and thus subject to the statute of frauds—must contain a clear and explicit quantity term to be enforceable under the Uniform Commercial Code. Finally, while these decisions have been confined to analysis under Michigan law to date, the logic underlying the Airboss and Higuschi decisions would be applicable to any agreement involving a requirements contract under the Uniform Commercial Code. Given the broad enactment of the uniform commercial code among the fifty states, it is only a matter of time before additional state supreme courts take up this issue and decide whether such blanket contracts are enforceable outside of Michigan.   

For questions or assistance regarding the enforceability of blanket purchase orders, contact your local Quarles attorney, or:

• Brandon Krajewski: 414-277-5783 / brandon.krajewski@quarles.com

For additional information on Supply Chain issues, see Quarles’ Supply Chain Survival Series, available at: https://www.quarles.com/supply-chain-series

END NOTES

¹ Higuchi Int’l Corp. v. Autoliv ASP, Inc. No. 23-1752, 2024 WL 2381879 (6^th Cir. May 23, 2024)

² Id. at *1. 

³ MSSC, Inc. v. Airboss Flexible Prod. Co., 511 Mich. 176, 999 N.W.2d 335, 2023 WL 4476721 (2023), as amended (Sept. 22, 2023)

⁴ Higuchi, 2024 WL 2381879, at *3.

⁵ Id.

⁶ Id.

⁷ Id. (citing Mich. Comp. Laws § 440.2306(1)

⁸ Id. (cleaned up). 

⁹ Id. at *4.

¹⁰ Id. 

¹¹ Id. 

¹² Id. 

¹³ Id. at *5.

¹⁴ Id. at *6.