United States: Michigan Supreme Court Overrules Longstanding Interpretation Of "Blanket" Purchase Orders For Supply Contracts

For many years, Michigan has consistently interpreted "blanket" purchase orders as binding requirements contracts that could bind suppliers (and buyers) for many years - frequently, for the life of a particular OEM or buyer program. However, on July 11, 2023, the Michigan Supreme Court issued an opinion in MSSC, Inc. v. Airboss Flexible Prods. Co., which reshapes Michigan's jurisprudence on requirements contracts and gives many parties in the supply chain a powerful argument against enforcement of "blanket" purchase orders that lack a definite quantity term.

The MSSC case raised the question of whether the word "blanket" in a purchase order, without more, satisfies the statute of frauds requirement that a contract for the sale of goods must contain a written quantity term. As a general rule, where a purported contract fails to provide a written quantity term, the statute of frauds renders that contract unenforceable. Prior to the Michigan Supreme Court's ruling yesterday, the Michigan Court of Appeals had relied on prior Michigan case law - such as GreatNorthern¹ and Cadillac Rubber²-in holding that the word "blanket" in a purchase order constituted a quantity term, thus satisfying the statute of frauds. Reading the provisions of the purchase order and written terms and conditions together as one, the lower court found that the contract at issue in MSSC satisfied Michigan's statute of frauds requirement for a written quantity term. The Michigan Court of Appeals affirmed.

In yesterday's opinion, the Michigan Supreme Court reversed the Court of Appeals, finding that the word "blanket," on its own, fails to state a quantity term necessary to satisfy the statute of frauds. Expressly overruling Great Northern, the court found that for a requirements contract to satisfy the statute of frauds, the quantity of goods must be stated in writing with greater specificity. However, the Michigan Supreme Court expressly declined to address Cadillac Rubber, which held that a promise to provide "a quantity between one part and 100%" of the buyer's requirements satisfied the statute of frauds.

Under the MSSC holding, it is no longer sufficient to rely on general terms such as "blanket order" to satisfy the statute of frauds. If a party wants an enforceable requirements contract, the party must say so in its contract by specifying at least some amount of product it is required to purchase or sell. In MSSC, because the "blanket" purchase order lacked an essential quantity term, it did not form a binding contract. Instead, the parties entered into several independent contracts whenever the buyer issued (and the seller accepted) individual releases for the purchase of specific quantities - thus establishing a "release-by-release" contract. A release-by-release contract (sometimes referred to as a "spot-buy" agreement) gives both parties much more flexibility - giving the buyer the option to not issue additional releases and giving the seller the option not to accept such releases when issued.

In practice, the MSSC decision is likely to benefit suppliers that are currently supplying under "blanket" purchase orders by balancing the scales of bargaining power. By requiring specificity as to quantity, the court has eliminated the long-standing arguments (most often advanced by buyers) that the original terms were binding for the life of the program. For example, prior to MSSC, using the term "blanket" in the purchase order resulted in an enforceable requirements contract, even if the buyer retained the power to "cancel, adjust or reschedule the quantities of Products." By contrast, the MSSC decision requires a more specific quantity term, giving suppliers more certainty as to anticipated volumes in a requirements contract. Furthermore, any supplier currently supplying under a "blanket" order that lacks any additional written quantity term now likely has additional arguments and leverage to request price increases. However, suppliers also should note that in certain situations it may be to the buyer's benefit that it is not bound by a "blanket" purchase order.

Buyers and sellers alike should carefully consider how these changes will apply to their long-term contracts going forward. In light of this opinion, all parties to purported "requirements" contracts should review their purchase orders and other contract terms to determine if they are bound by a requirements contract or if their contract now lacks the necessary specificity in the quantity term.

Footnotes

1. Great Northern Packaging, Inc. v. Gen. Tire and Rubber Co., 154 Mich. App. 777, N.W.2d 408 (1986) (holding that the term "blanket order" expresses a quantity term, albeit an imprecise one, so parol evidence could be used to determine what quantity is intended by that term)

2. Cadillac Rubber & Plastics, Inc. v. Tubular Metal Sys., LLC, 331 Mich. App. 416, 952 N.W.2d 576 (2020) (holding that evidence indisputably established the parties had a requirements contract where the terms obligated Tubular to purchase a quantity between one part and 100% of Tubular's requirements).

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