Eastern District of Michigan Expands On Michigan Supreme Court’s Airboss Holding; Requires Defined Percentage Quantity Terms to Make Requirements Contracts

In July 2023, Honigman reported on the landmark Michigan Supreme Court case, MSSC, Inc. v. Airboss Flexible Products Co., which held that a blanket purchase order, by itself, does not express a quantity term that satisfies the Michigan Uniform Commercial Code’s statute of frauds. In so doing, the Supreme Court formally recognized a distinction between “requirements contracts,” which obligate the seller to accept all of the buyer’s releases for the duration of a contract, and “release-by-release contracts,” which allow a seller to notify the buyer at any time that it will no longer accept future releases. On January 25, 2024, the United States District Court for the Eastern District of Michigan applied the Michigan Supreme Court’s holding in Airboss to find that purchase orders providing that “some portion or all of [buyer’s] requirements will be obtained from [seller]” did not create an enforceable requirements contract and, therefore, the seller was free to allow its obligations to expire. 

In Ultra Mfg. Inc. v. ER Wagner Mfg. Co., issued last week, the United States District Court for the Eastern District of Michigan has now expanded on Airboss and set a precedent for how requirements contracts will now be enforced in Michigan federal courts.

The Ultra Court denied the motion for preliminary injunction filed by the buyer of automotive supply parts (Mitchell Plastics), after the seller (ER Wagner) unilaterally instituted a price increase for parts and demanded additional payments to update its tooling, despite language in the parties’ agreement that prices were not subject to increase. Mitchell argued that the purchase orders, which did not specify quantity terms but incorporated the terms and conditions, created a binding requirements contract and, accordingly, ER Wagner must continue supplying at the original contract price. The Court, however, disagreed, finding that the language “some portion or all of [Mitchell’s] requirements will be obtained from [ER Wagner]” in the terms and conditions was not a sufficient quantity term to satisfy the statute of frauds. Quoting Airboss, the Ultra Court ruled that in a requirements contract, the purchase order must dictate that buyer will obtain a set share of its total need from the seller (in other words, a percentage of its total requirements). Here, Mitchell did not agree to purchase a set share of its total need, but rather some indefinite portion or all of its requirements. Because the parties’ agreement was not a requirements contract, the Court found that ER Wagner was not required to supply parts at the original contract price and could stop selling once it satisfied the final accepted release. In reaching its holding, the Court also declined to follow—and called into question—Cadillac Rubber & Plastics, Inc. v. Tubular Metal Sys. LLC, 331 Mich. App. 416 (2020), a case which found that the phrase “no less than one piece or unity of each of the Suppliers and no more than 100% of requirements” was sufficient to create an enforceable requirements contract. 

The Ultra case builds on Airboss, and guides that requirements contracts must contain an actual percentage of requirements—not merely a general reference to some or all of such requirements—in order to be enforceable. Ultra further amplifies critical risk management implications for how buyers and sellers structure their supply agreements and emphases the importance of precise quantity terms. It also should serve as a cautionary tale for buyers faced with demands for more favorable contract terms from sellers who might attempt to walk away from their agreements.

Honigman’s Automotive and Manufacturing practice group includes lawyers with decades of experience representing original equipment manufacturers (OEM), Tier 1 and 2 suppliers, and automotive aftermarket companies. If you have questions about the impact of Ultra Mfg. Inc. v. ER Wagner Mfg. Co., please contact a member of the Automotive and Manufacturing or Commercial Transactions practice groups.