Corporate & Business/Jul 28, 2020

Elasticity of Quantity Terms in Supply Contracts: Reconciling UCC 2-201 and 2-306

The Michigan Court of Appeals in a recently published court opinion re-opens issues of indefinite quantity terms in supply contracts. The published case at issue is Cadillac Rubber & Plastics v Tubular Metal Systems, Michigan Court of Appeals Docket No. 34551 (February 11, 2020). The blanket purchase orders issued by buyer in this case provided that buyer had the option to purchase “such quantities as determined by Buyer” in releases provided to Seller “provided that Buyer shall purchase no less than one piece or unit of each of the Supplies and no more than one hundred percent (100%) of Buyer’s requirements.” On its face the quantity term is not ambiguous but rather it is indefinite. The Court of Appeals determined that the evidence established that a “requirements contract” existed despite the fact that Buyer was not obligated to purchase 100% of its requirements from Seller nor any definite percentage or ascertainable amount of “requirements” from Seller.

Before getting into a discussion of the import from this case, a review of pertinent UCC provisions is in order. First, UCC 2-201 requires that any contract for the sale of goods for the price of $1,000 or more is not enforceable unless there is a writing signed by the party against whom enforcement is sought and is not enforceable beyond “the quantity of goods shown in the writing.” This is the UCC statute of frauds. The next UCC section is 2-306 which provides as follows:

(1) Output, requirements. A term which measures the quantity by the output of the seller or the requirements of the buyer means such actual output or requirements as may occur in good faith, except that no quantity unreasonably disproportionate to any stated estimate or in the absence of a stated estimate to any normal or otherwise comparable prior output or requirements may be tendered or demanded.

(2) Exclusive dealing. A lawful agreement by either the seller or the buyer for exclusive dealing in the kind of goods concerned imposes unless otherwise agreed an obligation by the seller to use best efforts to supply the goods and by the buyer to use best efforts to promote their sale.

The Court of Appeals stated that a “requirements contract” need not be exclusive and that the UCC permits a buyer to purchase some of its requirements from another supplier. The Court of Appeals cited a non-binding Federal trial court decision from the Eastern District of Michigan in support. The Court of Appeals then relied on another non-binding federal court opinion from the Eastern District as condoning purchase orders with indefinite quantity terms allowing the quantity term to be a minimum of one (1) and no more than 100% of buyer’s requirements.

Justice Shapiro wrote the dissenting opinion in the Cadillac Rubber case. He opined that a non-exclusive purchase order arrangement could be a requirements contract if the contract defined a “practicable estimate or range of future requirements.” Justice Shapiro went on to state that where a supply contract was non-exclusive and provided no estimate or range of future requirements that a party could not be challenged as to its “good faith”.

The concept of “good faith” in a requirements contract environment provides a basis for judicial review of a party’s future orders and releases. A court can look at the buyer’s contractual obligations to determine whether a buyer’s releases to its supplier are consistent with those obligations. It is easy to see that a buyer’s obligation to purchase 100% of its requirements of 50% of its requirements sets for a provable context in which to examine whether buyer has acted in good faith in issuing its releases. However, where there is no concrete percentage of requirements set forth in the contract nor an exclusive relationship created, the contract ends up essentially being “whatever the buyer wants to order, provided that the minimum is 1 and the maximum is 100% of buyer’s needs”.

Thus, the conflict between UCC 2.201 which says that a supply contract is not enforceable beyond the quantity stated in the contract (in this case 1 unit) and some elastic and unknown quantity measured by some ill-defined measure of buyer’s requirements under UCC 2-306 is hard to legally reconcile. Until this issue is revisited by the Court of Appeals or clarified by the Michigan Supreme Court, supply contract sellers should pay careful attention to their contracts.

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