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.


Stay up-to-date

We use your email address exclusively for sending our newsletter. You have the right to revoke your consent at any time with effect for the future. For further information, please refer to our privacy policy.