"It's OK, I've Got It In Writing" - Michigan's Uncertain Treatment Of Dual Source Supply Contracts

December 5, 2014

Parties to a contract usually feel a sense of security knowing that their agreement is embodied in a written, properly executed document containing all of the agreed upon terms. However, if such an agreement is a “dual source” supply contract executed under Michigan law, the parties may not be as secure as they believe.

In a “dual source” supply contract, a seller agrees to sell to a buyer and the buyer agrees to purchase from the seller a percentage of the goods needed for a defined period rather than a definite amount. For example, Fred’s Fabrications might enter into separate agreements to purchase 80% of the widgets it needs for one year from Waldo’s Widgets, and 20% of the necessary widgets from Wisco Widget Company. The two agreements would be classified as “dual source” supply contracts. Such dual source contracts are different from “requirements” supply contracts in which the buyer agrees to purchase 100% of his requirements for the specified component during the term of the agreement.     

The Michigan Uniform Commercial Code mandates that all contracts for the sale of goods of $1,000.00 or more must meet the following 3 requirements: (i) the contract must be in writing, (ii) the contract must be signed by the parties, and (iii) the contract must state the quantity of goods to be purchased (the “Quantity Term”).[1]  If a contract falls short in any of these three aspects, the contract will be unenforceable.   

Even though a typical requirements contract does not state a specific amount of widgets to be purchased, Michigan courts uniformly find that requirements contracts meet the Quantity Term requirement. Michigan courts, however, are split on whether dual source supply contracts meet the Quantity Term requirement. Some court decisions have held that since dual source supply contracts fail to state a specific and definite Quantity Term, they are unenforceable. Other courts have held to the contrary and enforced such contracts. This inconsistent treatment creates a significant amount of uncertainty regarding the enforceability of dual source supply contracts. 

Because of this uncertainty, it is possible that an unhappy party to a dual source supply contract may choose to cease performance and claim that the contract is unenforceable. The potential costs of mitigating damages or litigating in such event would likely be substantial. Until the Michigan Supreme Court issues a bright line rule clarifying the enforceability of such contracts, businesses electing to use dual source supply contracts do so at their own risk.

[1] MCL 440.2201(1). 

 

Hosted on the FirmWisesm Platform