Supply Contract Update: Michigan Court of Appeals Affirms that a Requirements Contract Need Not Be Exclusive (Cadillac Rubber & Plastics, Inc. v. Tubular Metal Systems, LLC)
On February 11, 2020, the Michigan Court of Appeals issued a significant decision that impacts manufacturing supply contracts – especially those in the automotive industry – holding that a buyer may enforce a supply contract against a seller where the contract only requires the buyer to purchase between .01% and 100% of its requirements for the particular part. Moreover, the buyer need not commit to buy its requirements from only one supplier. The case is Cadillac Rubber & Plastics, Inc. v. Tubular Metal Systems, LLC, No. 345512, 2020 WL 700144 (Mich. Ct. App. Feb. 11, 2020). Prior to this decision, court decisions in Michigan were mixed regarding whether a requirements contract needs to have some form of exclusivity in order to be enforceable.
Plaintiffs Cadillac Rubber & Plastics, Inc. and Avon Automotive Holdings, Inc. (collectively “Avon”) are suppliers of automotive parts. Defendant Tubular Metal Systems, LLC (“Tubular”) produces parts for General Motors (“GM”). Tubular issued two blanket purchase orders to Avon, which expressly incorporated Tubular’s terms and conditions. Similar to many terms and conditions in the automotive industry, Tubular’s terms and conditions provided that (1) Tubular would determine the quantities of parts it would order and identify the quantities in weekly releases, (2) the contract was “for the life of the program,” and (3) “Buyer [Tubular] shall purchase no less than one piece or unit of each of the Supplies and no more than one hundred percent (100%) of Buyer’s requirements for the Supplies.”
Avon shipped against Tubular’s two blanket purchase orders and its weekly releases, until a dispute arose regarding whether Avon was obligated to continue to accept each release issued by Tubular. Avon argued that the quantity term “per-releases” created a series of spot-buy or fixed quantity contracts, and not a requirements contract. “Therefore, Avon asserted that it had the right to accept or reject each material authorization release issued by Tubular.” The lower court rejected Avon’s argument, and granted summary disposition in favor of Tubular, holding that Tubular’s purchase order and its terms and conditions created an enforceable requirements contract as a matter of law. The Court of Appeals affirmed, in a 2-1 decision, which included a strong dissent.
In Cadillac Rubber, the Court of Appeals definitively proclaimed, “Requirements contracts need not be exclusive.” In doing so, the Court of Appeals relied heavily on Johnson Controls, Inc. v. TRW Vehicle Safety Sys., Inc., 491 F. Supp. 2d 707 (E.D. Mich. 2007) (a case previously litigated by Foley & Lardner LLP). In that case, the United States District Court for the Eastern District of Michigan concluded that similar terms and conditions satisfied the statute of frauds requirement that a contract contain a written quantity term, but that on the facts presented there, “a question of fact remain[ed] as to whether the parties intended a requirements contract.” The TRW court stated, “[A] term which measures the quantity by . . . requirements of the buyer means such actual . . . requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior . . . requirements may be tendered or demanded.” As such, the TRW court stated, “[T]he parties’ past dealings and current course of performance may indicate that a requirements contract was intended.”
In Cadillac Rubber, the majority seemingly extended the holding in TRW and concluded, “[T]he evidence indisputably establishes that the parties have a requirements contract.” The Court of Appeals highlighted the fact that the parties had performed consistently according to the purchase orders and material releases since 2012, noting that, “Tubular regularly issued material authorization releases setting forth the quantity of parts needed as well as a reasonable forecast of future requirements.” Additionally, the Court of Appeals noted that Avon had failed to present evidence that Tubular did not “comply with its obligation . . . to act in good faith in determining its requirements.”
The dissent, on the other hand, concluded that summary disposition was not appropriate, specifically on the issue of whether “a good faith estimate” of requirements existed “on which [Avon] could generally rely.” The dissent stated, “For an agreement to unambiguously create a requirements contract it is not necessary that the agreement be exclusive, but it must define a practicable estimate or range of future requirements.” The dissent further stated that the terms and conditions in Cadillac Rubber included a quantity “range [that] is nothing more than ‘whatever we order.’” The dissent succinctly summarized its position: “In my view, a promise to purchase anywhere from 1 unit to 100% of needs in a non-exclusive contract, does not, in and of itself, create a requirements contract consistent with the UCC.” The majority quite obviously disagreed, and absent action by the Michigan Supreme Court, the ruling of the majority stands.
The Cadillac Rubber decision is the most significant recent decision for automotive suppliers that buy and sell according to purchase orders and releases, because the terms and conditions analyzed by the Court of Appeals are virtually identical to many in the automotive industry. For suppliers that are investing significant capital to supply production parts to a particular buyer, and therefore want to be certain that a buyer must purchase exclusively from a supplier, it is now more important than ever to review existing supply contracts and prepare to expressly confirm exclusivity in a signed writing. The same practice should be applied to confirm either a specific quantity or a defined range that is acceptable to both buyer and seller. Otherwise, lower courts in Michigan are required to follow the precedent set by Cadillac Rubber and hold that similar terms and conditions create a requirements contract as a matter of law, but one which does not impose an obligation on the buyer to purchase anything exclusively from the supplier. This lack of exclusivity coupled with the extremely open quantity range that was enforced in this case is an important point for many automotive suppliers that have invested significant capital in order to sell to a certain buyer, in reliance on exclusivity in order to recover their capital investment.