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Ahead of the Curve Auto Supplier
BlogsPublications | March 22, 2024
3 minute read
Ahead of the Curve Auto Supplier

Less Than a Year After AirBoss, Federal Appeals Court Faces New Case with Potentially Far-reaching Implications for Suppliers

As this blog previously reported, the Michigan Supreme Court recently issued a landmark decision in MSSC, Inc. v. AirBoss Flexible Prods. Co. Warner represented the prevailing party, AirBoss. In that case, the court held that the term “blanket,” without more, is not a quantity term necessary to create an enforceable requirements contract under the Uniform Commercial Code’s (UCC) statute of frauds. In so holding, the court also formally recognized the existence of “release-by-release” supply relationships, under which suppliers who have not agreed to be bound to their customers’ requirements can stop accepting releases at any time.

Now, less than a year later, in Higuchi v. Autoliv ASP, Inc., Case No. 23-1752, the U.S. Court of Appeals for the Sixth Circuit faces another case with potentially far-reaching implications for suppliers.

Higuchi presents (among other issues) the question of whether the term “requirements” is sufficiently definite to create an enforceable requirements contract under the UCC’s statute of frauds, or whether something more — such as the phrase “all requirements” — is required. An answer from the Sixth Circuit on this question would be significant because it would govern federal trial courts in applying Michigan law. It could also serve as persuasive authority for courts applying the UCC in Michigan state courts, or in other jurisdictions.

Stated briefly, the background in Higuchi is as follows. The plaintiff, Higuchi, is a Tier-2 automotive parts supplier. The defendant, Autoliv, is a Tier-1 automotive supplier and one of Higuchi’s customers. Autoliv issued purchase orders to Higuchi that stated: “This blanket contract is issued to cover Autoliv ASP Inc.’s requirements. ... Deliveries shall be made only in the quantities and at the time specified in such requirements. Autoliv ASP, Inc. shall reserve the right to change, from time-to-time, the quantities specified in any part requirement.”

Following requests from Higuchi for increased pricing, which Autoliv rebuffed, Autoliv and Higuchi became embroiled in a dispute over whether Autoliv’s purchase orders were enforceable requirements contracts. Autoliv maintained that they were. Higuchi, meanwhile, argued that, like the contracts in AirBoss, the purchase orders lacked a sufficiently definite quantity term.

To resolve the dispute, Higuchi filed an action in a federal district court in Michigan, seeking a declaration that the purchase orders did not create enforceable requirements contracts. Autoliv responded by seeking a preliminary injunction, arguing that its purchase orders did indeed create enforceable requirements contracts.

The district court ultimately sided with Autoliv. It held that the reference to Autoliv’s “requirements,” under the circumstances presented, was a definite quantity term.

Higuchi has now appealed that decision to the Sixth Circuit. In short, Higuchi contends that the district court erred because, according to Higuchi, a requirements contract is valid only if it specifies that the buyer will obtain “all” or “a set share” of its needs from the seller; Autoliv’s purchase orders did not specify that Autoliv would purchase a “set share”; and, as used in the purchase orders, “requirements” cannot impliedly mean “all requirements.”

Autoliv has responded that the district court got it right and should be affirmed. The crux of Autoliv’s argument is that the phrase “‘Autoliv’s requirements’ is no less precise than ‘all Autoliv’s requirements’ — they mean the same thing.”

A ruling on that argument could further clarify Michigan contract law and have impacts up and down the supply chain because many supply contracts provide that the buyer will purchase its “requirements,” without using the explicit phrase “all requirements.”

Warner’s supply chain litigators will be monitoring this case — as well as all other cases interpreting and applying AirBoss — closely.

Should suppliers have any questions about ongoing developments in supply contract law, or otherwise desire counsel regarding their contracts in the wake of AirBoss, please reach out to Tim Smith or a member of Warner’s Automotive Industry Group.