Michigan Supreme Court Upends Enforceability of Blanket Purchase Orders
- Blanket purchase orders that fail to express a specific quantity term are no longer enforceable in Michigan.
- Suppliers doing business with Michigan suppliers need to review their supply contracts to assess enforceability based on the new ruling.
- Managing supply chain arrangements and developing a strategy can unlock significant value for any organization.
By Wegman Hessler Valore business attorney, Kyle S. Baird, Esq.
On July 11, 2023, the Michigan Supreme Court issued an Opinion in the case MSSC, Inc. v. Airboss Flexible Products Co. that drastically impacts supply chain agreements by holding that a blanket purchase order without a specific quantity term is unenforceable. Although this is a Michigan case, the reasoning in this case is likely to spread to other states. Business owners are advised to have their purchase orders and supply chain contracts reviewed regardless of whether they contract with Michigan suppliers.
The court’s analysis in MSSC v. Airboss depended upon what type of contract the parties created. To be a valid, enforceable contract, the UCC Statute of Frauds requires a contract have a quantity term.
Traditionally, there are three (3) methods that parties have used to specify the quantity term in a contract: (1) expressly stating a specific quantity; (2) a requirements or output contract; or (3) a blanket purchase order where future releases would specify the quantity. In this case, the court held that:
- The parties’ contract was a blanket purchase order, but it lacked a written quantity term.
- Since there was not a quantity term in the blanket purchase order, the parties’ agreement was not enforceable under the Statute of Frauds.
- The lower courts’ reliance on documents and evidence other than the contract itself to create a quantity term where one did not previously exist was impermissible because the contract was not ambiguous – the quantity terms simply did not exist.
- Without a quantity term, the parties entered into a “release-by-release” contract that is enforceable only to the extent future releases stating a firm quantity are accepted. Such a contract does not create a promise to fulfill all future releases.
In MSSC v. Airboss, the parties were both automotive suppliers. In 2013, MSSC contracted with an original equipment manufacturer to build suspension systems for various vehicles. In order to build the suspension systems, MSSC issued a blanket purchase order to Airboss. Regarding quantity, the purchase order was non-committal, stating, “[a]nnual volume is an estimate based on the forecasts of MSSC’s customers and cannot be guaranteed.” In the normal course of business, MSSC issued releases to Airboss that included a firm quantity as well as future estimates, but neither the blanket purchase order nor the terms and conditions obligated MSSC to send any number of releases. In effect, MSSC could simply stop sending releases to Airboss and effectively terminate the contract.
For six years the parties’ relationship was profitable, but in 2019, Airboss began experiencing losses on several parts it produced for MSSC. As a result, Airboss issued a letter stating that it would cease supplying parts starting in March 2020. MSSC filed suit alleging breach of contract and seeking specific performance of the blanket purchase order. The trial court and appellate court both found in favor of MSSC and held that the blanket purchase order was a requirements contract. In reversing the Court of Appeals, the Michigan Supreme Court formally recognized a “release-by-release” contract thus upending years of precedent.
For the Michigan Supreme Court, “[t]he key difference between a requirements contract and a release-by-release contract rests in the level of mutual obligation between the parties and the risk each party bears. A requirements contract assures the seller that the buyer will be a customer for the length of the contract, but the seller cannot reject future orders for the length of the contract. In contract, a release-by-release contact ‘gives both parties the freedom to allow their contractual obligations to expire in short order by either not issuing or not accepting a new release.’ The seller cannot be guaranteed future business from the buyer, but the seller can accept or reject any offer for future orders.” The Michigan Supreme Court’s decision this case fundamentally alters the enforceability of long-term supply contracts in Michigan. We strongly recommend that our clients have their legal counsel review any long-term supply contracts to determine whether or not such contracts remain enforceable. Schedule time with us to review and confirm your agreements meet or exceed requirements of the latest ruling.
Schedule time with us by calling (216) 642-3342.
Wegman Hessler Valore specializes in business law for business leaders, applying legal discipline to solve business problems to help leaders run smarter. For over 50 years, this Cleveland law firm has provided full-service strategic legal counsel for closely held businesses, corporations, and individuals. Practice areas include: business law; litigation; corporate governance; estate planning and wealth protection; intellectual property; family law for business owners; HR and employee matters; commercial real estate; business acquisition, and more. Get in touch to learn more.
Visit wegmanlaw.com or call us at (216) 642-3342.
Copyright © Wegman Hessler Valore. This information is for educational purposes. It does not reflect an attorney-client relationship with the author(s) or the firm. This information should not be used as a substitute for professional legal advice in specific situations.