Ter­mina­bi­li­ty of US sup­p­ly con­tracts pur­su­ant to the Michi­gan Supre­me Court

Are you still nego­tia­ting or alre­a­dy objecting?

In July, the Supre­me Court of the US sta­te of Michi­gan gave a land­mark ruling for the sup­pli­er indus­try. It was about a dis­pu­te bet­ween two auto­mo­ti­ve sup­pli­ers: MSSC, Inc. (Tier 1) and Air­Boss Fle­xi­ble Pro­ducts Co. (Tier 2) dis­agreed on the ext­ent to which Air­Boss was con­trac­tual­ly obli­ga­ted to sup­p­ly MSSC on a per­ma­nent basis at pre­de­ter­mi­ned pri­ce con­di­ti­ons, or whe­ther it was pos­si­ble for Air­boss to object to deli­very releases.

What was it all about?

Over a long peri­od of time, Air­Boss sup­pli­ed MSSC with com­pon­ents from which MSSC manu­fac­tu­red pro­ducts for its cus­to­mers. This busi­ness rela­ti­onship was based on a con­trac­tu­al rela­ti­onship which gene­ral­ly gover­ned the terms and con­di­ti­ons of the project:

Air­Boss made sup­pli­es accor­ding to regu­lar purcha­se orders pla­ced by MSSC. The­se were each refer­red to as a “blan­ket order” or “purcha­se order”. The Gene­ral Terms and Con­di­ti­ons of MSSC sti­pu­la­ted that once a blan­ket order or purcha­se order had been pla­ced, it was to be con­side­red “valid” for the enti­re dura­ti­on of the pro­ject. Accor­ding to MSSC, this meant, among other things, that the pri­ces set in the order were binding.

It could be seen from the Gene­ral Terms and Con­di­ti­ons of MSSC that MSSC was in prin­ci­ple obli­ged to call off com­pon­ents from Air­Boss by means of deli­very releases. Howe­ver, the­se regu­la­ti­ons did not result in an expli­cit obli­ga­ti­on to purcha­se a spe­ci­fic total quan­ti­ty of goods over the term of the con­tract. Rather, in accordance with the­se regu­la­ti­ons, MSSC only ever pro­vi­ded esti­ma­tes of its total expec­ted future requirements.

When Air­Boss reques­ted a pri­ce adjus­t­ment, MSSC rejec­ted this, invo­king the vali­di­ty of the blan­ket / purcha­se orders. Air­Boss, on the other hand, belie­ved that it was not bound by the­se orders and infor­med MSSC that it would the­r­e­fo­re not accept any fur­ther orders from MSSC. MSSC then appli­ed for a preli­mi­na­ry injunc­tion to force Air­Boss to con­ti­nue supplying.

While the two lower courts orde­red Air­Boss to con­ti­nue sup­p­ly­ing MSSC, the Supre­me Court revi­sed the­se decis­i­ons and took the oppor­tu­ni­ty to look more clo­se­ly at various con­trac­tu­al arran­ge­ments in the indus­try – and for the first time reco­g­nis­ed the vali­di­ty of a “release-by-release” con­trac­tu­al rela­ti­onship in such a con­stel­la­ti­on, which fun­da­men­tal­ly devia­tes from the pre­vious­ly assu­med model of a so-called “requi­re­ments con­tract” under the U.S. Com­mer­cial Code (“UCC”).

As a decisi­ve argu­ment against a (long-term) requi­re­ments con­tract, the court sta­ted that the con­tract bet­ween MSSC and Air­Boss lacked a regu­la­ti­on on the spe­ci­fic quan­ti­ties requi­red by MSSC in total during the enti­re term of the con­tract (“quan­ti­ty term”). The court argued that an agree­ment on this con­sti­tu­tes an essen­ti­al com­po­nent of the con­tract. This is whe­re the “release-by-release” con­tract steps in: With its adapt­a­ti­on to the spe­cial fea­tures of the (auto­mo­ti­ve) sup­pli­er indus­try, it aims to loo­sen the mutu­al com­mit­ment of the con­trac­ting par­ties. The pre­re­qui­si­te for this is that express agree­ments on essen­ti­al con­trac­tu­al com­pon­ents of a bin­ding requi­re­ments con­tract are miss­ing, such as the spe­ci­fic total quan­ti­ty of goods to be supplied.

Our recom­men­da­ti­ons on how to proceed

Check your con­tracts and tho­se with your Ame­ri­can busi­ness part­ners in the sup­pli­er sec­tor for cri­ti­cal for­mu­la­ti­ons. As a result of the ruling, cer­tain stan­dard for­mu­la­ti­ons in gene­ral terms and con­di­ti­ons of OEM and tier sup­pli­ers, even out­side the sta­te of Michi­gan, will at least have to be con­side­red as cri­ti­cal, if not invalid.

But even in con­trac­tu­al rela­ti­onships gover­ned by Ger­man law, pri­ce dis­pu­tes resul­ting from long-term frame­work agree­ments and the obli­ga­ti­on to stoi­cal­ly ful­fil deli­very releases are far from uncom­mon. The dis­pu­tes are often cau­sed by ambi­gui­ties and errors on both sides of the con­trac­tu­al rela­ti­onship regar­ding the ext­ent of the bin­ding force of (frame­work) contracts.

Even though sup­pli­ers often con­sider them­sel­ves see­mingly hope­l­ess­ly bound to part­ly une­co­no­mic con­di­ti­ons of their cus­to­mers, in some cases the­re is actual­ly the pos­si­bi­li­ty to influence the pri­cing or even to with­draw from the busi­ness rela­ti­onship. It is worth taking a look at the con­tracts. They are not unli­kely to con­tain vague for­mu­la­ti­ons simi­lar to tho­se used by MSSC. The basic prin­ci­ple should be: Distin­gu­ish bet­ween frame­work con­tracts that obli­ga­te you to accept and ful­fil indi­vi­du­al deli­very releases and tho­se that do not.