Supplier Contracts

Q. Our customer wants an early termination of his contract with us. Can we (the supplier) refuse to agree to the early termination unless the customer agrees to increased prices or other concessions? –J.O. 

A. If the buyer agrees to the increased prices, the contract is valid, even if the supplier had threatened to terminate the supply contract unless the buyer agreed to the increased prices. 

In Whirlpool Corp. v. Grigoleit Co. (6th Cir. Apr. 12, 2013), the federal Court of Appeals held that so long as the supplier had the contractual right to terminate its supply contract, the buyer was entitled to little sympathy and no relief under Michigan law. (Note that laws in some states differ.) The Court thus confirmed perhaps the most important reality of the manufacturing supply chain: Under the typical supply contract, the only time that the supplier has legal leverage is when it has the right to terminate (or not renew) its contract.

In Whirlpool, Whirlpool informed long-time supplier Grigoleit that it intended to terminate its purchase orders and, in the meantime, significantly reduced its purchases. Grigoleit responded that it intended to exercise its right to terminate its contracts in three months unless Whirlpool agreed to dramatically increased prices and to guarantee minimum volumes. Whirlpool failed to either meaningfully negotiate or prepare for a resourcing. On the eve of Grigoleit’s termination date, Grigoleit escalated its demands to include retroactive price increases and the payment of unspecified costs. The parties reached a revised agreement providing Grigoleit with price increases, a surcharge in lieu of retroactive payments and payment of unspecified costs. Whirlpool sued, arguing that the revised agreement was unenforceable because it was the product of “economic duress” and unconscionable. The Court found that so long as Grigoleit had a right to terminate, its demands were hard-bargaining, not duress.

Whirlpool holds important lessons for buyers seeking protection from supplier leverage and for suppliers seeking to preserve and maximize their leverage. The buyer faced with a termination (or non-renewal) threat must first decide whether the supplier has termination rights. Counsel should be involved in that assessment. If the supplier has that right, the buyer must assess its position and options. 

Importantly, the buyer, working with counsel, should protect itself from a supply cutoff threat by establishing contract terms regarding the duration, termination and wind down of a supply relationship. For example, the buyer should consider whether the contract contains an enforceable duration term; whether its purchase order should be for a calendar time period, a model year or for the life of the program; whether its purchase order should “auto-renew”; and whether the purchase order should give the buyer the right to extend the contract or extend the purchase order for several months following termination to allow for an orderly transition. These are just a few of the possible contractual protections available to the prudent buyer. 

For the supplier, the key is knowing whether, when and how it can terminate (or not renew) the contract. Too often, suppliers involved in an unprofitable or unsatisfactory supply relationship unwittingly let an exit opportunity lapse, for example, by missing a contractual deadline for giving notice of its intent to not renew. To avoid this, suppliers (and buyers as well) should systematically document for each contract: 1) the expiration date; 2) if applicable, the deadline for giving notice of an intent to not renew the contract or other procedural conditions to termination; and 3) any other supplier termination right. This should be tied to a “tickler” system that supports timely and informed decision-making. Again, counsel should be consulted, as the consequences of wrongfully terminating or threatening termination can be severe.