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“Blanket” purchase order agreements have been used to the buyers’ advantage by using vague and uncertain terms for flexibility in agreements, resulting in losses. The way the law governing supplier agreements was written, buyers, being an OEM or another supplier, had more leverage when it came to negotiations.
Recent Michigan Supreme Court ruling levels playing field for buyers and sellers
A recent court case involving a typical pricing dispute between tier I supplier MSSC and tier II supplier Airboss Flexible Products Co. (Airboss) led to a ruling that would set a new precedent and take the leverage away from buyers and potentially limit the losses for sellers.
In the case, a dispute arose when Airboss Flexible Products Co. began to experience losses on OEM parts it was supplying to MSSC. Airboss attempted to pass those losses onto MSSC, who eventually agreed to a price increase in hopes of resolving the matter. Despite the increase, Airboss continued to lose money and refused to take any more orders from MSSC and was sued as a result.
The case revolved around a purchase order between the two suppliers, with MSSC arguing that the purchase order was a requirement contract binding Airboss to fulfill the orders. Airboss claimed that with no quantity listed, it was a "release-by-release" contract and not binding long-term.
The case began in an Oakland County Circuit Court and moved on to the Court of Appeals, both ruling in favor of MSSC.
The case was then elevated to the Michigan Supreme Court, which ruled in favor of Airboss, stating: “Without a quantity term, the parties could not have entered into a requirements contract under MCL 440.2306(1)," the justices ruled. "We reverse the Court of Appeals opinion and remand this case to the Court of Appeals for further proceedings that are consistent with this opinion."
Wider impact to suppliers
“The ruling may provide additional protection to sellers from continuing to incur losses from vague supply agreements that could be detrimental for the business to continue as a going concern,” said Thomas Alongi, leader of the national manufacturing practice.
The impact of the ruling is even more magnified post-COVID-19, as certain suppliers felt stuck in unprofitable supply contracts, due to inflation and the supply chain turmoil. The ruling could help suppliers that are operating under “release-by-release” contracts, which are especially popular in the automotive industry, to gain leverage in not accepting or renegotiating contracts that are unprofitable.
All suppliers, OEMs or otherwise, will need to do a thorough review of purchase orders, terms and conditions, and contracting documents to determine if they lack specificity in terms of quantity under the legal requirements contract. “For certain suppliers, the ruling could have a major impact," said Alongi.
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