Risks and Strategies With Contracts of Indefinite Duration

20 February 2013 Dashboard Insights Blog

In the manufacturing supply chain, parties often enter into contracts that lack a term of duration. Blanket purchase orders without a set quantity or a set duration are, as one judge observed, “commonplace in the automotive industry in Michigan.” Sundram Fasteners Ltd. v. Flexitech, Inc., No 08-cv-13103, 2009 U.S. Dist. LEXIS 104037, at *24 (E.D. Mich. Nov. 9, 2009) (Cleland, J.). The majority of contracts arising by virtue of such blanket purchase orders are contracts of indefinite duration within the meaning of section 2-309 of the Uniform Commercial Code (“UCC”). Under that section, “[w]here the contract provides for successive performances but is indefinite in duration it is valid for a reasonable time but unless otherwise agreed may be terminated at any time by either party.” Mich. Comp. Laws § 440.2309(2). The same UCC section dictates that “[t]ermination of a contract by one party except on the happening of an agreed event requires that reasonable notification be received by the other party.” Mich. Comp. Laws § 440.2309(3). 

Contracts of indefinite duration give rise to a number of issues under UCC 2-309. The overriding issue is quite basic — when does your contract end? More specifically, the issues are: (1) what constitutes a contract of indefinite duration; (2) what qualifies as “reasonable time” during which the contract of indefinite duration remains "valid;" and (3) what length of notice period is required to terminate such a contract. The last question is litigated most frequently.  In resolving it, courts have looked to a number of factors, including duration of contractual relationship between the parties; centrality of the product at issue to the aggrieved party’s business; product’s uniqueness and tightness of the relevant market; good faith of the terminating party; inventory on the aggrieved party’s hand; aggrieved party’s investment into, and profit from, the contract; and industry practice in terminating the contract.

For further guidance for navigating through these and other associated issues, please see the Michigan Business Law Journal article authored by John R. Trentacosta and Irina Kashcheyeva from our Detroit office.

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