Automotive - Supplier’s Revenge: Court of Appeals Confirms that When a Supplier has the Right to Terminate, the Law does not Protect the Buyer from Supplier’s Rightful Cutoff Threats

April 26, 2013

In this issue:

Supplier's Revenge: Court of Appeals Confirms that When a Supplier has the Right to Terminate, the Law does not Protect the Buyer from Supplier's Rightful Cutoff Threats

A supplier threatens to terminate a supply contract unless the buyer increases prices. Faced with an imminent supply cutoff, the buyer agrees, and then later argues that its agreement is not enforceable because of the circumstances under which it was made. In Whirlpool Corp. v. Grigoleit Co., No. 11-2348/2421 (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.¹ The Court thus confirmed perhaps the most important reality of the automotive 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, but when it does have that right, its leverage can be enormous.

¹ The Court recognized that the law of some other states differed from Michigan law on important issues. Thus, the issues addressed in Whirlpool must be assessed under whichever state's law applies.

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