Michigan Supreme Court Holds “Blanket” Purchase Order Agreement Without Quantity Term is A “Release-by-Release” Contract, Allowing Auto Parts Supplier to Refuse Future Production Orders

On Tuesday, July 11, the Michigan Supreme Court issued a decision that could have profound impacts on the purchase and supply of automotive and other manufactured component parts under contracts governed by Michigan law. In MSSC, Inc. v. Airboss Flexible Products Co., Michigan’s high court found an automotive Tier 1 supplier’s purchase order contract unenforceable to compel future production from its supplier because the purchase order did not specify a quantity of parts to be supplied. In doing so, the Court formally titled a previously unnamed variation on a supply contract—the “release-by-release contract.”

A “release-by-release” contract is one in which parties agree to purchase orders and general terms and conditions under a “blanket” or “umbrella” agreement that does not specify any number of parts for supply. In a release-by-release arrangement, buyers issue production releases to specify their specific near-term supply needs. Under this type of contract, the Court held, a supplier is obligated only to fulfill each release that is issued and that it has accepted. This stands in contrast to “output” and “requirements” contracts, both of which set volumes for supply. An output contract defines the quantity of supply based upon the seller’s production. A requirements contract sets a specific quantity for the buyer’s purchasing needs.

The Court’s ruling concerns a fact pattern that arises routinely in automotive manufacturing, and may have wide-reaching impact for manufacturing supply relationships subject to Michigan law. In MSSC, in 2013, Airboss, a Tier-2 automotive component supplier, and MSSC, a Tier-1 automotive assembly supplier, agreed to a “blanket purchase order” which set forth and incorporated various general terms and conditions (including price). The order provided that it was “valid and binding on [Airboss] for the lifetime of the program or until terminated[,]” and that MSSC would “issue a ‘Vendor Release and Shipping Schedule’ to [Airboss] for specific part revisions, quantities, and delivery dates for Products.” Importantly, the agreement did not require a specific number of firm orders by MSSC or that Airboss fulfill any particular portion of MSSC’s requirements (for example, “all” or a percentage of MSSC’s need). Rather, MSSC was to periodically send “releases” for parts based on its current and estimated needs.

In 2019, Airboss sought to increase prices; MSSC responded by barring further unilateral price increases—to which Airboss declared that it would cease its future supply to MSSC. MSSC sued Airboss in Michigan state court for anticipatory breach of contract and an order enforcing the purchase order through the life of the purchase program.

Both the trial and intermediate appellate courts ruled in MSSC’s favor, finding that the term “blanket order” satisfied the Uniform Commercial Code’s statute of fraud’s ‘quantity term’ requirement, enabling the court to consider the parties’ course of dealing, which demonstrated the agreement to be a requirements contract.

Michigan’s Supreme Court reversed. It decided that “blanket purchase order” is not a quantity term sufficient to satisfy the statute of frauds, and nor could MSSC’s releases specifying firm quantities and estimated future need constitute a “quantity term.” The Court said that the releases instead “only constituted an obligation binding Airboss as to each individual release if Airboss accepted—not a promise to fulfill all future releases.” (Emphasis added).

In reaching its holding, the Court overruled a frequently-cited prior appellate decision, Great Northern Packaging, Inc. v. Gen. Tire & Rubber Co., 154 Mich. App. 777 (1986), which similarly involved automotive-industry suppliers who agreed to a “blanket order” that did not specify a quantity term. There, the Court of Appeals had held that the term “blanket order” was an imprecise quantity term, but was sufficient to deem the agreement an enforceable requirements contract. In overruling Great Northern Packaging, the MSSC Court explained that enforceable quantity terms must clearly define an obligation for future releases to constitute a set share or amount of the buyer’s total needs.

The MSSC Court’s decision draws a very fine yet clear line—that was previously blurred—between a requirements contract, which binds parties to a supply agreement to fulfill future orders through the agreement term, and a release-by-release contract, which give both parties the freedom to walk away at any time after individually-accepted releases have been fulfilled. It also makes clear that, in Michigan, labeling an agreement a “blanket purchase order” will not create a requirements contract binding suppliers to all future releases; rather, to be deemed a requirements contract, the blanket order must also include a quantity term specifying the share of the buyer’s need (e.g., “all requirements”).

In short, the Michigan Supreme Court’s holding limits the enforceability of any contract governed by Michigan law that does not include a quantity term. Parties to such supply agreements would be wise to review their existing agreements to determine whether they are “requirements” or “release-by-release” contracts, as the Michigan Supreme Court defines them—and whether they wish to fall into that category. As the appellate court noted, it is “common in the automotive industry” for these types of agreements to omit “specific quantit[ies] because [the buyer’s] need for parts [is] dependent on its customer’s production schedule[.]” But such agreements may only be enforceable to the extent the individual production releases are accepted by the supplier.