The State Of The Law Of Requirements Contracts

Amid increasing pressure on supply chains across the globe, multiple recent court opinions have disrupted the law of requirements contracts. These decisions are critical as requirements contracts are common features across many industries, and particularly prominent in the automotive industry, where they are used by many original equipment manufacturers and suppliers. In July 2023, the Michigan Supreme Court in MSSC, Inc. v. Airboss Flexible Products Co. ("Airboss") scrutinized whether certain contracts intending to be requirements contracts comply with the Statute of Frauds. According to the Airboss decision, the designation of a purchase order as "blanket" order is not sufficient to supply a valid quantity term as required under the Uniform Commercial Code ("UCC"). The court further elaborated that, in order to form a blanket contract, the buyer must commit to purchase a "set share" of its needs from the seller. This represented a significant change compared to the approach that many lower courts previously had applied when assessing the existence of a requirements contract, and created legal uncertainties as to whether buyers and sellers of goods could rely on their long-standing supply contracts. Airboss triggered a cascade of new cases addressing requirements contracts. Suppliers subject to unfavorable long-term agreements took advantage of the opportunity to challenge their contract language, using the lack of clarity as leverage in negotiations. The state of the law of requirements contracts remains in flux. This article will analyze the current state of the law regarding requirements contracts in light of the Airboss decision and its progeny, and then analyze what comes next for requirements contracts.

The UCC's Statute of Frauds and Requirements Contracts

Article 2 of the UCC applies to all commercial contracts for the sale of goods in 49 of the 50 states.¹ Under the UCC "a contract for the sale of goods for the price of $500[²] or more is not enforceable...unless there is a record sufficient to indicate that a contract for sale has been made between the parties." UCC ' 2-201. The provision goes on to specify that, "A record is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this subsection beyond the quantity of goods shown in the record." Id. In other words, the only term absolutely required to be in writing in order to satisfy the Statute of Frauds is "the quantity of goods." If the contract is in writing but does not contain a quantity term, then the agreement is unenforceable to require additional purchases or sales as a matter of law, although its terms still will be enforceable with regard to any quantities actually supplied.

This does not mean that the quantity term must be stated as a precise numerical value in the writing, nor that a specific quantity must be proven from the writing alone without reference to oral testimony. The Official Comments to the UCC recognize this, providing that "the quantity term...need not be accurately stated." UCC ' 2-201, cmt 1. As long as the contract includes a written quantity term - even if the quantity term is ambiguous - it will meet the requirements under the statute of frauds and the court can consider parole evidence to interpret the quantity.³

The UCC expressly allows for "[a] term which measures the quantity by the output of the seller or the requirements of the buyer." UCC ' 2-306(1). This provision allows for what are known as "output contracts," where the buyer promises to purchase a portion or all of the goods the seller produces, and "requirements contracts," where the buyer promises to purchase a portion or all of the goods the buyer requires from a seller.

Because of uncertainty in volume requirements and customer demand, requirements contracts are prevalent in manufacturing, particularly in the automotive supply chain. Typically, a buyer in the manufacturing supply chain will issue a blanket purchase order promising to buy a specified percentage of its requirements from a seller. The buyer then will issue regular "releases" that include the exact number of products being ordered. A requirements contract allows the buyer to secure a stable supply of goods even before the precise quantity needed has been determined and even if the quantity needed fluctuates frequently over time. A requirements contract also helps manage inventory risk by allowing the buyer to avoid accumulation of a surplus stock of inventory when forecasted volumes do not match demand. Requirements contracts also benefit sellers by providing for a promise of future sales, contingent upon continued need for the goods.

Notably, some jurisdictions will not recognize a requirements contract unless the contract obligates the buyer to buy goods exclusively from the seller. For example, Georgia courts have said: "A true requirements contract obligates the buyer to purchase exclusively from the seller all the goods needed for a particular use contemplated by the parties...."⁴ Similarly, the Ninth Circuit has recognized that, under Idaho law, a "requirements contract exists if a buyer agrees to purchase up to a certain amount of its requirements exclusively from one seller."⁵ Courts in Illinois,⁶ New Hampshire,⁷ Indiana,⁸ and Arkansas,⁹ among others, have also recognized that requirements contracts obligate a buyer to obtain its requirements by purchasing exclusively from a seller.

However, not all jurisdictions require exclusivity to form a binding requirements contract. For example, Michigan courts have expressly concluded that "[r]equirements contracts need not be exclusive."¹⁰ This pronouncement about lack of exclusivity clashes with older case law in Michigan about what written quantity terms satisfy the Statute of Frauds. Compare Cadillac Rubber & Plastics, Inc. v. Tubular Metal Systems, LLC (finding that a purchase order obligating the buyer to purchase" a quantity between one part and 100% of [its] requirements" was a sufficient written quantity term and satisfied the Statute of Frauds), with Acemco, Inc. v. Olympic Steel Lafayette, Inc.¹¹ (defining a requirements contract as an agreement "in which the seller promises to supply all the specific goods or services which the buyer may need during a certain period at an agreed price in exchange for the promise of the buyer to obtain his required goods or services from the seller.").Suppliers in jurisdictions where there is no exclusivity requirement continue to push for courts to require more certainty of obligation on the part of the buyers, in essence arguing that a promise to purchase either 1 or 1,000,000 parts is insufficient to satisfy the quantity requirement of the Statute of Frauds.

MSSC, Inc. v. Airboss Flexible Prods. Co.

The Airbosscase¹² put the limits of the Statute of Frauds' written quantity term requirement to the test. There, a Tier-1 automotive supplier issued a "BLANKET ORDER" to its Tier-2 supplier of certain parts. The order included a price for the parts but stated that "[a]nnual volume is an estimate based on the forecasts of [buyer's] customers and cannot be guaranteed." The purchase order also stated that it was "valid and binding on seller for the lifetime of the program or until terminated" but contained no quantity term. For many years, the parties operated under the blanket order by having the buyer issue periodic releases that identified the particular quantities for seller to provide. Eventually, the seller sought to renegotiate the price contained in the blanket order and refused to fulfill or accept any releases unless the parties agreed to an increased price. The buyer argued that the seller was contractually obligated to fulfill the quantities identified in the releases because the blanket order was a binding requirements contract.

The trial court agreed and found that the purchase order constituted an enforceable contract because the term "blanket order" expressed a quantity term sufficient to satisfy the Statute of Frauds.¹³ The Michigan Court of Appeals also agreed with the buyer.¹⁴ The Michigan Supreme Court, however, sided with the seller, holding that the phrase "blanket order" did not constitute a written quantity term, and thus the agreement was unenforceable under the Statute of Frauds.¹⁵ "Most importantly, in a requirements contract, the terms...dictate that the buyer will obtain a set share of its total need from the seller...." The Court concluded that "blanket" was not merely an imprecise quantity...