Suppliers, seeking price concessions, get rare leverage in contract talks

A Michigan Supreme Court opinion could help suppliers get what they've been longing for over the past few years: more leverage to extract price concessions from their customers.

Michigan's high court ruled this month that buyers must be explicit in contracts in saying what they intend to buy from a seller. Contracts between auto suppliers and their customers sometimes use "wishy-washy language," said Dan Rustmann, co-chair of Detroit law firm Butzel's global automotive group.

But because of the court ruling, customers in Michigan must now either state a specific number of parts that they intend to purchase or specifically say what percentage of parts they will buy over the course of the contract.

"You have to use very specific language that says you're buying your [contractual] requirements," Rustmann said. "You have to use clear language now."

The ruling in MSSC Inc. v. AirBoss Flexible Products Co. — a dispute between Tier 1 and Tier 2 suppliers — comes down as many auto suppliers feel the financial pinch of heightened costs, uneven vehicle assembly schedules and labor issues.

During the past few years of pandemic shutdowns and microchip shortages, many parts companies have asked customers for price concessions in hopes of protecting margins. Suppliers have seen mixed results at best.

The Michigan Supreme Court decision could give suppliers more leverage when negotiating with customers. Because of the AirBoss ruling, a supplier that finds that a contract is now unenforceable can go to the customer and say they will stop shipping components, Rustmann said.

"That gives them enormous leverage to ask for a price increase or to change the terms," he said.

The decision only applies to contracts that fall under Michigan law, but it could also prove "persuasive and influential" outside the state, attorneys believe.

"It wouldn't be binding," Rustmann said of the Michigan ruling. "But you can still cite it and make a good argument based on it because it's from an important state, the hub of the automotive industry.

"And it's from a Supreme Court, making it persuasive to other courts."

The decision could help to rebalance the power dynamics between suppliers and customers, said Adam Ratliff, a partner in the Detroit office of Warner Norcross + Judd, which represented AirBoss in the case.

"It's fair to say there's been a trend toward customer-friendly decisions — an assumption that the customer's view of the contract is the prevailing one, primarily driven by the biggest players in the industry — the OEMs and the large Tier 1s," Ratliff said.

The Michigan Supreme Court signaled that it is not holding assumptions like that anymore, he said.

"It doesn't matter how big [the companies] are or how small they are," he said. "All that matters is just what actually makes it into the contract."
To be sure, not all suppliers will find themselves with new leverage over their customers. And while some of the issues that have plagued suppliers in recent years, including production interruptions and cost inflation, have eased in recent months, costs remain much higher, and margins remain deflated for suppliers when compared with the pre-COVID period.

Upcoming labor talks between the Detroit 3, the UAW and the Canadian union Unifor are likely to lead to more economic uncertainty for suppliers, said Michael Robinet, executive director of automotive advisory services at S&P Global Mobility.

"We know there are labor economics upcoming," he said. "We just don't know what the extent of it is going to be. But we do know it's going to be more than what we were expecting three or four years ago — that's for sure."

As contracts expire in coming years and suppliers vie for new programs, both sides are going to be more cognizant of potential economic risks when drafting new agreements, Robinet said.

"It sets up a potentially new dynamic that both parties are going to have to work through moving forward," he said.

Kurt Nagl of Crain's Detroit Business contributed to this report.