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Butzel Legal Corner
Authors: Daniel R.W. Rustmann, Shareholder and Co-Chair of Butzel’s Automotive Practice and Automotive Industry Team, and Andrew S. AbdulNour, Associate and member of Automotive Industry Team
Ever since the Michigan Supreme Court published its opinion in the case of MSSC v Airboss in July of 2023, numerous cases have been litigated in Michigan state and federal courts challenging the long-term enforceability of automotive supply contracts – the bedrock of the automotive, just in time supply chain -- with varying outcomes. If a contract is found to be a requirements contract, the supplier can be forced to deliver at fixed prices for a long period of time. If a contract is found to be a “release by release” contract, the supplier can reject future releases on short notice, with no obligation to continue to supply, and thereby obtain huge leverage to adjust prices and other terms or exit the relationship.
The “Airboss” analysis derives from two related provisions of Article 2 of the Uniform Commercial Code (UCC) which governs contracts for the sale of goods. Under the UCC statute of frauds (UCC 2-201), a contract is enforceable only to the extent of the written quantity. In other words, a contract that has no written quantity is unenforceable and a contract for 10 units is enforceable only for those 10 units. However, under UCC 2-306, a promise to purchase the buyer’s requirements counts as a quantity, thus satisfying the statute of frauds and making requirements contracts enforceable.
But exactly what qualifies as a requirements contract under this framework depends on the facts of each case. One contract that required the buyer to purchase "some portion or all of [buyer’s] requirements” was found to be only a release by release contract, because the quantity term was too imprecise. Another contract that required the buyer to purchase “approximately 65-100% of its requirements” was found by a state trial court and the Michigan Court of Appeals to be enforceable as a requirements contract under current Michigan state court precedent. But the same language was found by a Federal court to be too imprecise and therefore to be a release by release contract. Recently, a Federal court found a buyer’s contract that said the Buyer would purchase its “needs” pursuant to releases but did not specify any percentage of those needs was found to be a release by release contract.
It is possible that the Michigan Supreme Court could clarify the law and provide greater certainty for the analysis in the pending cases of Kamax v FCA or Detroit Diesel v Martinrea. However, the Court is not required to accept either case for further review. Even if the Court does decide to proceed with one or both cases, it is unlikely to issue any final decision in either case for many months, perhaps even into 2026.
At a minimum, questions regarding what contracts qualify as long-term requirements contracts and what can be characterized as “release by release” contracts, terminable by seller on short notice, are likely to persist for some time. This creates enormous risk for buyers and potential leverage or exit opportunities for sellers. Therefore, it is critical for buyers and sellers to seek guidance from competent legal counsel. Buyers should review their purchasing documents and revise them, if necessary, to address this issue as solidly as possible in light of all the recent decisions. Sellers should review their contract portfolios to determine where they could potentially make arguments and develop additional leverage or exit opportunities.
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