In 2016, we see the potential for issues in the supply chain involving force majeure events, product recalls, volume fluctuations, and warranty exposure. It will be vital for suppliers to be proactive and prepared to address these issues and for global suppliers to plan 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. Common examples include labor disputes or strikes, and “acts of God.”
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. 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. In addition to declaring a force majeure event, the supplier also should 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 of commercial impracticability, increased costs alone will not excuse performance, unless the rise in costs is due to an unforeseen contingency that has altered the essential nature of the seller’s performance. Some courts have held that nothing less than a 100% price increase will make a seller’s performance impracticable.
Identifying Warranty and Recall Exposure
A number of regulatory, financial, and other factors likely will 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.
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.
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.
When a warranty issue arises, suppliers will need to determine: (a) the scope of all express and implied warranties provided to the original equipment manufacturers (OEM); (b) whether the part is out of warranty; and (c) whether the statute of limitations might apply. The expiration of either the warranty period or the statute of limitations is an absolute bar to a breach of warranty claim.
Managing Volume Fluctuations in 2016
Many automotive suppliers face volume fluctuations due to underperforming model sales or variations in product mix, warranty, recall, or other events.
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. Courts have found a wide range of percentage increases may be unreasonably disproportionate depending on individual facts and circumstances. 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. 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 the arbitration of international commercial disputes. Singapore provides an English-speaking forum that may be desirable for both parties, and provides for contractually-agreed upon mediation with an independent mediator to assist the parties in narrowing issues, settling the dispute, and potentially reducing associated arbitration costs. Careful consideration should be given to a number of issues and arbitration forums before finalizing an arbitration clause for an agreement.
By John R. Trentacosta, Mark A. Aiello, Vanessa L. Miller, and Andrew B. Fromm