Our Automotive Litigation team sees it all too frequently—upstream auto suppliers trying to extort money out of our Tier 1 supplier clients by threatening to stop shipping a vital part. Given the industry-wide adoption of just-in-time shipping and the prevalence of requirements contracts—in which a supplier agrees to provide a part in whatever quantity its customer requires—these Tier 2 or 3 suppliers find themselves with enormous leverage in demanding higher prices, even when doing so is a clear violation of their contractual price and quantity commitments (as it usually is).
A Tier 1 supplier who receives a stop-shipment threat from its supplier finds itself in an enormous bind. On one hand, they know that a judge would be very likely to side with them in finding the demand for a price increase is a breach of the parties’ contracts. On the other hand, unless the Tier 1 files and prevails on a motion for emergency injunctive relief, the parts will have stopped arriving long before the court has time to rule. And, as anyone in the industry knows, the consequences of an interruption in just-in-time supply to an OEM customer are severe. Idled manufacturing plants, lost profits and diminished goodwill can be incredibly damaging experiences.
Faced with choices like these, some businesspeople might find the demand for a price increase to be an offer they simply can’t refuse. So they reach a commercial resolution rather than a legal one. This gives some degree of certainty that the parts will continue arriving, but at the cost of money that, under the parties previously negotiated contract, should not have to be paid.
However, there is one way (potentially among others) to have it both ways—i.e., to reach a business resolution of the short-term problem while still preserving the option of going to court to recover (after the fact) the extra money that the company should not have had to pay to achieve that goal. It’s called a “reservation of rights.”
Michigan’s codification of the Uniform Commercial Code provides for continued performance while a party reserves its rights under the contract at issue. UCC § 1-308(1) provides:
A party that with explicit reservation of rights performs or promises performance or assents to performance in a manner demanded or offered by the other party does not prejudice the rights reserved by that performance, promise, or assent. Words such as “without prejudice,” “under protest,” or the like are sufficient.
MCL 440.1308(1). The comment further elaborates:
This section provides machinery for the continuation of performance along the lines contemplated by the contract despite a pending dispute, by adopting the mercantile device of going ahead with delivery, acceptance, or payment “without prejudice,” “under protest,” “under reserve,” “with reservation of all our rights,” and the like. All of these phrases completely reserve all rights within the meaning of this section. The section therefore contemplates that limited as well as general reservations and acceptance by a party may be made “subject to satisfaction of our purchaser,” “subject to acceptance by our customers,” or the like.
UCC § 1-308, Comment 1; MCL 440.1308, Comment 1.
The other party need not consent for the reservation to be effective. Courts have applied UCC 1-308 to situations where sellers have attempted to increase prices. A reservation of rights can therefore be sufficient to preserve a claim that the attempted modifications were made in bad faith, or to preserve other UCC claims. Although the section does not require that the objection be made in writing, it is a good practice to document the objection and the reasons for it in writing.
Lately, some suppliers have begun anticipating this response and demanding, along with a price increase, that the Tier 1 also waive its rights to recover the increase in court. This tactic, however, is a bit too clever. Normally, when weighing a motion for emergency injunctive relief (which requires a showing of irreparable harm) a court will not consider the loss of a definable sum of money, standing alone, to be sufficient. But, if the other party insists that the Tier 1 give up its right to seek reparations for the monetary injury, then, by definition, it becomes irreparable. Over-aggressive suppliers may thus be setting themselves up for an even quicker legal defeat than the post-price hike litigation they were trying to avoid.