The Michigan Supreme Court issued a key opinion this week in a case about supply chain contracts that clarifies uncertainty over terms and conditions and likely gives sellers more leverage at the negotiation table.
In MSSC Inc. v. AirBoss Flexible Products Co. — a local case stemming from a typical pricing dispute between a tier 1 and tier 2 supplier — the high court indicated that supply agreements are not requirements contracts by default, according to the opinion led by Justice Elizabeth Welch.
What it means is that buyers must be explicit in their contracts about what they intend to buy from sellers, rather than keeping the terms vague and therefore more flexible, often to the benefit of buyers. It levels the playing field for buyers and sellers, said Michael Brady, executive partner at Warner Norcross + Judd in Detroit and lead counsel to AirBoss in the case against its buyer.
"This case will have wide implications in the supply chain world," Brady said.
"As the court found, it was muddled in this area of law. The way the law had been, it gave buyers, whether it's an OEM or a supplier doing business with another supplier, a bit more bargaining power," Brady said. The court's new opinion does the opposite. "It puts everyone on the same level playing field during negotiations of a contract so everyone knows what they're signing up to."
The dispute between MSSC and AirBoss arose in mid-2019 when AirBoss began to experience losses on parts it was supplying to MSSC for suspension systems being built for Stellantis. The tier 2 supplier AirBoss attempted to pass on the roughly $1 million in annual losses to its tier 1 customer. While MSSC eventually agreed to a price increase, AirBoss continued to lose money on the business and ceased taking orders in 2020. MSSC sued as a result.
At the center of the lawsuit was the "blanket" purchase order between the two companies. MSSC argued that the blanket order was a requirements contract binding AirBoss to fulfill its orders. AirBoss argued that because there was no quantity listed, it was a "release-by-release" contract and not binding long-term.
The Oakland County Circuit Court in Michigan sided with MSSC, as did the Michigan Court of Appeals. But in December, the case was sent to the state Supreme Court, whose opinion set a new precedent.
"Without a quantity term, the parties could not have entered into a requirements contract under MCL 440.2306(1)," the justices said in their opinion. "We reverse the Court of Appeals opinion and remand this case to the Court of Appeals for further proceedings that are consistent with this opinion."
While the case began before the COVID-19 pandemic in 2020, the supply chain crisis and ensuing flurry of contract disputes since have significantly elevated the importance of Tuesday's ruling. By far the biggest issue of the supply base for the past three years has been increased prices and attempting to pass them up to customers.
"Every supplier and every OEM will want to take a hard look at their terms and conditions, their purchase order, their contracting documents," Brady said. They'll need to assess based on this opinion — do they have a legally appropriate requirements contract."
Jason Killips, attorney at the law firm Brooks Wilkins Sharkey & Turco PLLC in Southeast Michigan, said he has been flooded with calls from clients wondering what the ruling means for their business. Killips, who wrote an amicus brief for the AirBoss case on behalf of 14 automotive clients, said he is pleased with the opinion and believes it will benefit both sides to a contract, as well as judges hearing future supply chain disputes.
"For our clients it means increased clarity and increased certainty," he said.
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