Top 2016 Litigation Issues Facing the Auto Supply Chain

01 February 2016 Dashboard Insights Blog

Nobody likes a fight. Well, almost nobody. Trial lawyers, boxers, and MMA fighters might be the only ones. But, in business, the occasional fight is pretty much inevitable. What fights do we foresee for those in the auto industry in 2016? Well, we see the potential for some in the supply chain in one form or another. Specifically, the automotive industry is expected to see more force majeure events, product recalls, and warranty issues. It’ll be vital for the automotive supply chain to be ready for these and other issues, including continued volume fluctuation and the necessity for international dispute resolution.

Planning for the Next Force Majeure Event

Force majeure refers to unforeseeable circumstances that prevent a party from fulfilling a contract, for example labor disputes or strikes, and “acts of God,” such as flooding. In late 2014 and early 2015, a West Coast labor strike brought trade to a halt at seaports handling $1 trillion worth of container-ship cargo annually. Later in 2015 on the East Coast, Hurricane Joaquin brought historic flooding in South Carolina, and many automotive manufacturer and supplier workers were prevented from reaching their facilities.

If there is a force majeure provision in the parties’ supply contract, the supplier should determine what rights and obligations it has under that provision. It is important to note that even if a listed event occurs, the party seeking to invoke the force majeure provision must be able to show that there are no alternative means, increased costs notwithstanding, for fulfilling the contract. The event has to be one that prevents performance at virtually all costs. In addition to declaring a force majeure event, the supplier should also determine whether the doctrine of commercial impracticability under UCC §2-615 may apply. While application of the doctrine will be fact specific, the supplier may be able to argue that the force majeure event has made performance commercially impracticable. Under the doctrine, increased costs alone will not excuse performance, unless the rise in costs is due to an unforeseen contingency which has altered the essential nature of the seller’s performance. Moreover, some courts have held that nothing less than a 100 percent price increase will make a seller’s performance impracticable.

Identifying Warranty and Recall Exposure

A number of regulatory, financial, and other factors will likely contribute to continued elevated recall and warranty numbers in 2016. The elevated level of collaboration and coordination in design or component integration leads to enhanced supplier warranty risk, and a global recall could threaten the financial viability of even the largest supplier.

Suppliers should consider establishing a product safety program, which includes a written product safety policy, a product safety committee, and an audit program to address manufacturing policies and warranty claims. When a field action or warranty spike arises, the supplier should convene the product safety committee or response team that includes inside or outside counsel. Relevant customer warranty data should be requested, analyzed, and verified, and the team should be trained on preserving the attorney client privilege.

When a warranty issue arises, suppliers will need to determine the scope of all express and implied warranties provided to the original equipment manufacturers (OEM), whether the part is out of warranty, and whether the statute of limitations might apply. However, warranty risk must be managed at the outset of a program award. Procurement, finance, and engineering professionals must coordinate closely with each other, and with inside or outside counsel to ensure:

  • Responsibilities are clearly defined
  • All specifications and changes directed by the customer are documented
  • Relevant documents and communications relating to validation, design, testing, and approval are preserved

During the negotiation stage, suppliers need to consider assigning design responsibilities, determining specifications, and evaluating any warranty disclaimers, modifications, or other limitations that are part of the parties’ contract to determine potential exposure in the event of a warranty claim or dispute.

Managing Volume Fluctuations in 2016

A number of sources are projecting that U.S. auto industry sales could hit their peak as soon as 2016, despite the Federal Reserve reporting strong growth in the third quarter of 2015. In addition, many automotive suppliers face volume fluctuations due to underperforming model sales or variations in product mix, warranty, recall, or other events.

While a supplier should ensure it continues to meet customer requirements, applicable terms in the parties’ contracts may permit the supplier to submit a claim for reimbursement of costs associated with fluctuations.

Suppliers should review the applicable terms of their program contracts, documents, and communications regarding contractually-agreed volumes. In addition, UCC §2-306 provides that a buyer must order requirements in good faith, and may not order unreasonably disproportionate quantities from any stated estimates, or in the absence of stated estimates, from comparable prior output requirements. Many courts have found that increases ranging from 20 to 700 percent may be unreasonably disproportionate. In the case of volume decreases relating to OEM warranty or recall issues, the supplier may also argue under UCC §2-306 that it is entitled to recover costs or damages as a result of acts by the OEM that resulted in diminished supplier volume requirements. However, decreased requirements remain a risk for which the recovery is difficult and planning is essential.

Considering International Dispute Resolution

Litigation in a foreign country can be uncertain, expensive, and may result in a decision that is difficult to enforce for any number of reasons.

To mitigate potential risks, when negotiating commercial contracts between transnational parties, suppliers should consider international arbitration as a potential method of commercial dispute resolution. The New York Convention on Enforcement of Arbitral Awards provides that over 150 contracting countries agreed to give effect to private agreements requiring arbitration, and to enforce and recognize arbitration awards. Such awards are difficult to overturn, and the parties’ express choice of law provision will be respected by most arbitral tribunals.

Singapore remains a popular forum for arbitration of international commercial disputes. Although travel between the United States and Singapore is lengthy, Singapore provides an English-speaking forum that may be desirable for both parties. In November 2014, the Singapore International Arbitration Center (SIAC) launched the Singapore International Mediation Centre (SIMC), which provides parties with an opportunity to participate in contractually agreed-upon mediation with an independent mediator after the arbitration has been filed. The mediator can assist the parties in narrowing issues, settling the dispute, and reducing associated arbitration costs.

When considering an international arbitral tribunal for a commercial matter, there are a number of additional organizations beyond SIAC to consider. These organizations include the:

  • Hong Kong International Arbitration Centre (HKIAC)
  • International Centre for Dispute Resolution (ICDR)
  • International Chamber of Commerce (ICC)
  • London Court of International Arbitration (LCIA)
  • United Nations Commission on International Trade Law (UNCITRAL) (provides rules to govern private arbitration proceedings)

Each of these organizations or rules have their unique set of advantages and disadvantages with respect to a number of issues. Careful consideration should be given to these issues before finalizing an arbitration clause for an agreement.

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