Michigan Supreme Court Reverses 40-Year-Old Precedent and Holds that Commonly Used “Blanket” Purchase Orders Must Have A Quantity Term to be Enforceable
Supply chain agreements, whether in the automotive or other industries, frequently employ “blanket” purchase orders. Historically, these sorts of arrangements have been described as “output” or “requirement” contracts. Sometimes, in these contracts, the purchaser makes no firm commitment about the quantity of goods they will order and simply issues a blanket order. The final order amounts are then specified in periodic “releases” in which the buyer indicates the number of items they need delivered. Since the early 1980s, this was a common feature of such requirement contracts. However, the Michigan Supreme Court has now declared the blanket orders do not satisfy the UCC’s statute of frauds and are, therefore, unenforceable if they do not indicate specific quantities.
The impact of the Court’s decision in MSSC, Inc. v. AirBoss Flexible Products Co. is immediate and far-reaching. In its wake, both purchasers and suppliers alike must review their purchasing agreements and blanket order arrangements to ensure that these agreements indeed create binding and ongoing obligations or if new agreements and purchasing practices are required.
The case involved a blanket order under which defendant AirBoss was required to supply MSSC with products it used to manufacture parts for its customers “for the life of the” product that MSSC produced. While the purchase order identified the supplies that AirBoss provided, it did not include specific quantities of those parts. Instead, the purchase order indicated that quantities would be based on the needs of an MSSC customer. MSSC was obligated to create and send “releases” per the terms and conditions of the order, but neither the overarching blanket order nor the MSSC’s standard terms and conditions obligated MSSC to send any specific number of parts to Airboss—either as a raw number or as a percentage of MSSC’s total need—that number would be included in periodic “releases”.
In 2019, due to a change in price in material inputs, Airboss began to lose money on the parts it sold to MSSC. Consequently, AirBoss threatened to stop fulfilling any new orders unless MSSC agreed to a price increase. MSSC sued AirBoss for anticipatory breach of contract, seeking to enforce the blanket purchase order between the parties. MSSC asserted the blanket purchase order was a requirements contract that satisfied the statute of frauds because the past dealings between the parties provided a history from which a “quantity” term could be inferred. The trial court agreed with MSSC, the Court of Appeals affirmed the trial court’s decision, and the Michigan Supreme Court then granted AirBoss’ application for leave to appeal.
Without a Quantity, a “Blanket” Purchase Order Creates No Future Obligations Beyond Issued Releases
The Court, however, rejected MSSC’s argument and agreed with AirBoss that the term “blanket order”, without more, does not express a quantity term that satisfies MCL 440.2201(1), the UCC statute of frauds. That statute provides that contracts entered into for the sale of goods worth $1,000 or more must be in writing and that a court may only enforce the contract up to the quantity of goods set forth in writing.
The Court began its analysis by noting that quantity is an essential term necessary to satisfy the UCC’s statute of frauds and that two types of agreements – requirement contracts and output contracts – satisfy the statute. As the Court explained, a requirements contract is one in which a buyer promises to buy, and a seller to supply, a set amount or percentage of the goods or services that a buyer needs during a specified period, such as “all requirements of the buyer.” While requirements contracts may be created by a “blanket” purchase order, “a quantity term is what is needed to specifically create a requirements contract,” the Court wrote.
Accordingly, the Court concluded that the blanket purchase order between the parties was not a requirements contract but instead a “release-by-release” contract (a term that the Court coined in this very decision). Such contracts are governed by a blanket purchase order that sets the overall contract terms but does not set forth the share of the buyer’s need to be purchased from the supplier. Instead, the buyer issues subsequent releases that set forth the specific quantity the buyer needs. Importantly, as the Court wrote, “a release-by-release contract 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 Court expressly overruled Great Northern Packaging, Inc v Gen Tire & Rubber Co, 154 Mich App 777 (1986), which had long held that (as MSSC had argued) the prior dealings (and/or other parole evidence) could be used to supply the missing quantity term.
“Release-by-Release” Contracts Do Not Satisfy the Statute of Frauds
Thus, since “release-by-release” contracts do not contain set quantities to be ordered and delivered (either as a sum certain or any other discernable quantity term), they do not satisfy the statute of frauds. In this case, the Court found that “while the releases contained a firm quantity and MSSC’s estimated future need, those releases only constituted an obligation binding Airboss as to each individual release if Airboss accepted—not a promise to fulfill all future releases.” The Court continued:
“The purchase order and incorporated terms and conditions in this case created a blanket agreement, while the releases created individual purchasing contracts governed by the umbrella terms. This saved the parties from renegotiating complex terms for each order while allowing the parties greater flexibility than a requirements contract would allow. Either party was able to walk away from the agreement once a release was fulfilled, and Airboss’s choice to do so was not legally actionable.” (emphasis added)
Because this decision provides a mechanism to permit suppliers to renegotiate blanket orders if the economics of a production program stop working, the Michigan Supreme Court seems to have given suppliers considerable leverage. Even where the agreements between the parties provide that the supplier must accept all “releases,” the supplier is only contractually bound to the extent of the releases that it has actually accepted.
Importantly, the Court left for another day an important question regarding how precise a quantity term must be to satisfy the statute of frauds. For example, in a prior case, the Court had accepted “a quantity between one part and 100%” as a proper quantity term for a nonexclusive contract. The Court noted that, in an apparent contradiction, the court had separately held that “‘[a]ny’ quantity is in fact no quantity at all.” Unfortunately, the Court expressly declined to resolve this issue in the MSSC, Inc. decision. Further decisions will, hopefully, pick up where MSSC, Inc. left off.
The Court’s decision in MSSC, Inc. upended over 40 years of precedent and has sent shockwaves through the supply-chain world, given that “release-by-release” agreements under the umbrella of a “blanket” purchase order are common practice. In the wake of MSSC, Inc., suppliers and customers alike should review any such agreements with counsel to determine whether they still meet their needs and expectations.
If you have any questions about the implications of this case or would like to discuss your existing supply agreements, please contact Jordan Segal at Maddin Hauser.