Supply Chain Legal Reality: Why The UCC Is Sometimes The Worst, Part I (Or, Who Wrote This Thing Anyway) (Or, Traps For The Unwary)

There would be a lot fewer supply chain lawsuits if Article II of the UCC, the body of law that generally governs supply chain relationships between U.S. entities, did a better job of reflecting the needs and practices of U.S. businesses.  If supply chain partners’ intuition as to where they stood in their supply chain relationships mirrored where they actually stood in their supply chain relationships under the UCC, then maybe we could all just carry on and proceed with making things, for crying out loud.

HAHAHAHAHAHAHAHAHA.  That is not how it works.

In reality, the UCC is a combination of some provisions that do make sense and other provisions that make absolutely no sense – and no rhyme or reason as to when you will encounter each.  So let’s take a moment to examine one of the more, shall we say, “idiosyncratic,” provisions of the UCC, while we weep in despair that so many companies do not know about these rules and are therefore putting money and operations at risk, probably totally inadvertently.  We will continue to examine UCC provisions that make no sense in future posts.
Silly UCC Rule No. 1: The UCC requires order quantity to be in writing for a supply chain contract to be enforceable. 
The UCC includes a “statute of frauds” in UCC 2-201.  Imported from England (although England has since abandoned it), the UCC’s statute of frauds requires all contracts for the sale of goods over $500 to be in writing.  What does this have to do with requiring a written quantity term, you ask?  Absolutely nothing!  But a “Comment” to the UCC’s statute of frauds section “clarifies” that “[t]he only term which must appear [in a UCC contract] is the quantity term which need not be accurately stated but recovery is limited to the amount stated.”  In other words, a supply chain contract must specify order quantity, but need not include any other term.[1]
The problem with this silly rule is that, for many companies, the best supply chain contract structure is a framework agreement that does not specify order quantity, but against which the buyer can issue purchase orders whenever specific quantities are needed.
Under the UCC, however, this may not be allowed, as a battery supplier recently learned in Crown Battery Manufacturing Co. v. Club Car, Inc. [2]  In that case, the parties negotiated and executed a Strategic Supply Agreement that did not contain a written quantity term for the sale of batteries to be used in golf carts and utility vehicles.  The agreement provided that the buyer would place order batteries as needed through purchase orders.  When the buyer backed out of the contract claiming quality issues, a federal court in Ohio held that the agreement was not enforceable because it lacked a written quantity term.
The UCC’s quantity term requirement also wreaks havoc in places like Michigan, which is home to the U.S. auto industry and where supply chain relationships are often structured using “blanket purchase orders” that contain all of the contract terms other than quantity and delivery schedule, against which buyers later place specific orders through “releases.”  Michigan courts have engaged in valiant efforts to find these agreements enforceable – but with mixed results.[3]

One Third Circuit opinion has given up completely on the quantity term requirement.  In a case involving an agreement for the sale of computers, the court refused to invalidate the agreement even though it did not specify quantity, noting that “[t]he detailed nature of the document” left “no doubt that the parties intended to create a contract.”[4]  This opinion, however, is a minority view.
“Requirements” and “output” contracts are allowable exceptions to the written quantity term requirement, but most courts require that the contract expressly state that it is a requirements or output contract, and some courts also require the contract to state that it is an “exclusive” supply/purchase agreement.

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 In short, the UCC is a complex place.  More posts on why at a later date.

[1]     A “Comment” to the UCC is an explanatory note that usually does not appear in any statutory language but that everyone is nevertheless expected to know about and understand.  See Black’s Law Dictionary.

[2]     2014 U.S. Dist. LEXIS 18907, 83 U.C.C. Rep. Serv. 2d (Callaghan) 1 (N.D. Ohio Feb. 14, 2014).

[3]     See, e.g., GRM Miniature Precision Components, Inc., 2008 U.S. Dist. LEXIS 1128, 64 U.C.C. Rep. Serv. 2d (Callaghan) 797 (E.D. Mich. Jan. 8 2008) (blanket purchase order that did not specify quantity was nonetheless enforceable as a requirements contract because ultimate customer’s policy did not allow buyer to change suppliers); Johnson Controls, Inc. v. TRW Vehicle Safety Systems, Inc., 491 F.Supp.2d 707, 62 U.C.C. Rep. Serv. 2d (Callaghan) 863 (E.D. Mich. 2007) (“as released” provision in blanket purchase order was a valid quantity term); MacSteel, Inc. v. Eramet North America, 2006 U.S. Dist. LEXIS 83339, 61 Rep. Serv. 2d (Callaghan) 385 (E.D. Mich. Nov. 16, 2006) (six month purchase order for sale of chemicals that allowed renewal but did not specify quantity was unenforceable).

[4]      Advent Systems Limited v. Unisys Corp., 925 F.2d 670, 13 U.C.C. Rep. Serv. 2d (Callaghan) 669 (3d Cir. 1991).