On May 23, 2024, the Sixth Circuit became the latest court to analyze last year's Michigan Supreme Court decision of MSSC, Inc. v. Airboss Flexible Prods. Co. ("Airboss"), finding that an automotive supplier's "blanket contract" was not enforceable due to its failure to satisfy the statute of frauds—upending years of the parties' performance under the alleged requirements contract. In Higuchi Int'l Corp. v. Autoliv ASP, Inc., the Sixth Circuit panel (Cole, Clay, and Thapar, Circuit Judges) heard an appeal from the District Court for the Eastern District of Michigan in which the District Court had issued a preliminary injunction ordering a Tier II supplier to continue to supply parts to its Tier I buyer at an agreed-upon price. For many years, Plaintiff Higuchi had sold seatbelt parts to Defendant Autoliv, which manufactures seatbelt safety systems for OEMs. The parties had agreed to a series of purchase orders that stated, in relevant part:
This blanket contract is issued to cover Autoliv ASP, Inc.'s requirements of the parts listed below, for the period beginning [on the date of the purchase order] and ending upon the termination of the vehicle platform. . . . 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[.]
Following last year's landmark Michigan Supreme Court decision in Airboss, where the Michigan Supreme Court held that the term "blanket order" did not constitute a written quantity term for purposes of satisfying the statute of frauds, Higuchi filed a declaratory action seeking a declaration that its purchase orders with Autoliv similarly did not satisfy the statute of frauds' requirement that a contract for the sale of goods must have a written quantity term. Higuchi argued that the parties had what Airboss called a "release-by-release" contract (whereby Higuchi could reject future releases and demand a price increase). Autoliv filed a counterclaim for breach of contract and sought a preliminary injunction requiring Higuchi to continue shipment of the parts at the prices previously agreed upon. The District Court granted the injunction, finding that the blanket contract's reference to Autoliv's "requirements" was sufficiently precise to establish that the written quantity of goods was for 100% of Autoliv's requirements for the parts.
The Sixth Circuit reversed and remanded. The panel emphasized that Airboss stated that "a requirements contract satisfies the statute of frauds if it 'dictates that the buyer will obtain a set share of its total need from the seller.'" (citing Airboss). While the quantity term may be "nonspecific," it cannot be "ambiguous." Thus, the Sixth Circuit said, "To establish that the parties have a requirements contract, Autoliv must show that its purchase orders explicitly and precisely specify that [Autoliv] will obtain a set share of its total need from [Higuchi]." The panel found that Autoliv was unlikely to make this showing.
The court found that the purchase orders' statement that it was "issued to cover [Autoliv]'s requirements" did not unambiguously establish a requirements contract because it relied on a particular inference (unwritten) that "to cover . . . requirements" meant to purchase "all requirements." However, the court noted that "cover" can simply mean "to deal with" a topic—and that this meaning would be equally consistent with a release-by-release contract. Additionally, the panel found the subsequent sentences problematic. It noted that purchase orders used some "odd phrasing" when referring to "quantities . . . specified in such requirements," and that this phrasing seemed to imply that the purchase order was referring "to releases and requirements interchangeably." This interchangeability was problematic because the purchase order limited Autoliv's obligation and liability to quantities specified in "requirements"—so if "requirements" referred to "releases," then the parties had a release-by-release contract, not a requirements contract. Lastly, the court relied upon the general principle of contract law to construe agreements against the drafter. Since Autoliv had unilaterally drafted the purchase orders, any uncertainty regarding whether they established a requirements contract would be construed against Autoliv.
Therefore, the court held that Autoliv was unlikely to succeed on the merits for purposes of its preliminary injunction. The parties did not have a binding requirements contract, but instead had a release-by-release contract that enabled the supplier to accept or reject future releases as it wished.
This opinion is only the latest in a growing line of cases implementing the Michigan Supreme Court's recent re-evaluation of requirements contracts and the statute of frauds. All parties to purported "requirements" contracts should review their purchase orders and other contract terms to determine if they are bound by a requirement contract or if their contract now lacks the necessary specificity in the quantity term. Foley & Lardner LLP stands ready to assist its clients as they navigate the evolving landscape of Michigan contract law.
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