Thursday, October 10, 2024
Sixth Circuit Decides a Requirements Contract Case
Higuchi International Corporation (Higuchi) sells seatbelt parts to Autoliv ASP, Inc. (Autoliv), a seatbelt safety system manufacturer. Autoliv sends purchase orders specifying its needs when it comes time to order more parts from Higuchi. The purchase orders specify that the purpose of the contract is to cover Autoliv's "requirements" for the parts specified on the purchase order during the time period specified on the purchase order. So the relationship proceeded for some time, but it began to deteriorate in 2021, as Higuchi threatened to stop selling parts unless Autoliv agreed to price increases.
Autoliv claimed that the parties had agreed to fixed prices until “the termination of the vehicle platform” for which Autoliv makes seatbelt safety systems, but it agreed to pay higher prices, while reserving its rights. After attempts at mediation failed, Higuchi sought a declaratory judgment that it was not required to sell more parts to Autoliv. The latter responded with a counterclaim for breach of contract and sought a preliminary injunction requiring Higuchi to continue to supply parts. The district court ruled in Autoliv's favor, entering a preliminary injunction requiring Higuchi to continuing to supply parts at the agreed-upon price.
In Higuchi Int'l Corp. v. Autoliv ASP, Inc. the Sixth Circuit reversed and remanded. The legal analysis is very interesting. Higuchi claims that there is no contract between the parties enforceable under Michigan's statute of frauds because the purchase orders do not specify a quantity. Autoliv responds that UCC § 2-306(1) provides an exception for requirements contracts to the general rule that contracts for the sale of goods to be evidenced in a writing or writings that establish a quantity term.
In this case, the purchase orders were known as releases, and Higuchi claimed that the parties had a release-by-release agreement, which did not obligate Higuchi to send parts in response to each new release. The release-by-release agreement provides general terms that will apply to each sale but they do not amount to a requirements contract under Michigan law because the contract at no point specifies that Autoliv "will obtain a set share of its total need from the seller."
The Sixth Circuit found it unlikely that Autoliv could show that Higuchi had any obligation to provide Autoliv with a set share of its requirements. In fact, the purchase orders, while ambiguous, seem to limit Higuchi's obligations to supplying the parts specified in any particular purchase order. Just for good measure, the court also notes that Autoliv drafted the contract and so ambiguities will be construed in Higuchi's favor.
Having concluded that Autoliv was unlikely to succeed on the merits of its claim, the court spent little time on the remaining factors to be weighed when considering a preliminary injunction. The court reversed the district court's opinion granting a preliminary injunction in favor of Autoliv and remanded for further proceedings.
For my part, it seems like the Sixth Circuit got Michigan law right, but I'm not sure that Michigan law is right. I wonder if Michigan's is an idiosyncratic reading of what terms must be included in order to establish a requirements contract. The court is persuasive that the drafting seems shoddy and ambiguous, because it just says that Higuchi is to provide Autoliv with its "requirements" but does not specify whether Higuchi is obligated to meet all of Autoliv's requirements. However, that ambiguity arises only if the parties are assumed to be familiar with the Michigan Supreme Court's decision in MSSC, Inc. v. Airboss Flexible Prods. Co., which dates from 2023, while the parties' dispute began in 2021. Prior to the Airboss case, I'm not sure why "requirements" would have been ambiguous.
As the District Court put it in granting the preliminary injunction, “Common sense teaches that, when someone refers to their ‘requirements’ or ‘actual requirements’ without any further qualification, that person is referring to all of their requirements.” That would have been my instinct as well. Absent more information about Autoliv meeting its requirements from other suppliers, I would read "requirements" to mean "all the parts of that type required." My common sense and the District Court's common sense have little in common with the sense of the Sixth Circuit. Given the importance of the automobile industry to Michigan's economy and the national economy, people ought to get busy making sure that their requirements contracts are amended to satisfy the expectations of Airboss.
https://lawprofessors.typepad.com/contractsprof_blog/2024/10/sixth-circuit-decides-a-requirements-contract-case.html