In 2014, the automotive industry waded through numerous recalls, including recalls against component manufacturers. These recalls include multi-billion dollar recalls spanning multiple vehicle manufacturers. In 2015, the automotive industry will face continued focus on product recalls, warranty issues, and safety procedures. This year, automotive companies should mitigate their exposure to recall and warranty claims by, among other things, revisiting the limitations and disclaimers in their warranties and other risk allocation provisions, and implementing a Corporate Product Safety Program.
Revisit Warranty Provisions
Contract negotiations and disputes in the automotive supply chain often involve questions concerning warranties, warranty disclaimers, limitations on remedies and limitations on damages. Suppliers should consult the following checklist when drafting a contract:
- Draft clear and concise express warranties concerning the goods being sold.
- As a seller, disclaim the implied warranties and all other express warranties not specifically given in the contract. As a buyer, focus on negotiating the proper express warranties rather than relying on implied warranties.
- Sellers will want to limit the buyer’s remedies, such as to repair or replace. Buyers should resist.
- Buyers should fight against damage limitations.
- Whether a buyer or seller, make sure that the warranties/disclaimers that you give upstream are the same that you get downstream.
The most important focus of any commercial contract should be to capture all aspects of the parties’ commercial relationship in the written agreement. Uncertainty breeds disputes and litigation.
Corporate Product Safety Programs
Corporate Product Safety Programs promote a culture of safety and can identify warranty and recall issues well before they become a multi-million dollar (or greater) exposure for the company. However, a Corporate Product Safety Program is only effective at mitigating risk if the company implements the program in a meaningful way. Key components of an effective corporate product safety program include:
- A written product safety policy. An effective policy contains a mission statement, details a management and accountability structure for the program, establishes goals that are both measurable and ascertainable, empowers employees to raise safety or defect issues, and is widely disseminated within the company.
- A Product Safety Committee, led by a Product Safety Manager. The Product Safety Committee is a working group of legal and operational leaders that establishes criteria, best practices, and procedures to support the written product safety policy.
- Audits and Audit Programs for both manufacturing policies and warranty issues. Audits are designed to identify potential defects before they reach consumers, and to identify problems in the field before they turn into claims
Finally, companies that implement a Corporate Product Safety Program must take steps to protect the attorney-client privilege and work product doctrine when legal counsel is involved. A company that implements a Corporate Product Safety Program is not immune from liability for recalls and warranty claims, but companies that take these steps are taking action toward mitigating their future liabilities.
These issues and trends are explored in more detail in our white paper Top Legal Issues Facing Suppliers in 2015.