Legal Considerations for Managing COVID-19 Driven Commercial Demands From Customers

Foley & Lardner LLP

Foley & Lardner LLPAs the automotive industry grapples with the continued fallout from COVID-19 and its impact on the economy, many companies are facing a significant hit to their financial performance due to reduced volumes and higher costs of doing business.  As so often is the case, OEMs and many other companies are looking for ways in which they can improve their financial performance and push costs down to their supplier base.  Suppliers facing such demands often are caught between a proverbial “rock and a hard place” as they seek to preserve their customer relationships while managing the impact of COVID-19 on their own business.  This article provides a summary of some of the key issues that suppliers should consider in responding to two of the most common types of requests, including warranty claims and requests for commercial accommodations.

One of the favored tools of certain OEM’s, when faced with declining financial performance, is to dust off old warranty claims as a means of extracting cash from their suppliers.  Responding to historical warranty claims involves many of the same considerations involved when facing any other warranty claim.  However, defending against such historical claims can implicate additional challenges and potential defenses.  Such considerations often include:

  • Overall merits – In many cases, historical warranty claims may be of dubious, or at least uncertain, merit.If supplier responsibility was clear, odds are that the claim would have been resolved when it first arose and would not have sat on the shelf.
  • Availability of information – All too often, suppliers are hampered in their ability to defend against old warranty claims due to difficulty in gathering the necessary information.Given the lead-time for new products and programs, it is not unusual to encounter situations in which relevant testing and validation of products may have taken place six or more years prior to the claim.Given the passage of time, memories fade, employees move on, and documents may no longer be available.
  • Statute of limitations – One significant defense that suppliers may be able to raise with respect to historical warranty claims is the statute of limitations.Under the Uniform Commercial Code, the default limitation in most contracts for the sale of goods is four years.However, determining when a claim accrues such that the limitations period begins to run can be critical.
  • Motivation – If a customer’s primary motivation for asserting a warranty claim appears to be based on an effort to improve financial performance, suppliers should take note of this fact. If the customer’s primary motivation is to “get cash in the door,” this can have a significant impact on negotiations.For example, customers may be less willing to consider accepting payment through future price reductions.On the other hand, customers may be more open to taking a deeper discount on the claim if paid quickly.

In addition to asserting historical warranty claims, some OEMs and other companies are requesting various commercial concessions from their suppliers including, for example, requests for price reductions or extended payment terms.  The initial reaction of most suppliers (many of whom have experienced rejection of their own similar requests in the past) upon receiving such a request, likely involves a measure of profanity.  However, it is important to consider all aspects of the request and to make an appropriate response.

The starting point in evaluating any request for a commercial concession should be the contract between the parties.  It is no secret that contracts in the automotive industry tend to be more favorable to buyers rather than to sellers. While most contracts do not permit sellers to unilaterally impose price increases or other commercial concessions, the answer is not always as certain when it comes to requests by the customer.  A supplier receiving a request for a price reduction, or other commercial concession, should carefully review the contract to determine its rights and obligations with respect to the request.  If the customer points to particular provisions of the contract in support of its request for concessions, the supplier must carefully scrutinize these provisions to confirm whether they actually support the request.

Assuming the contract in question does not provide the customer with a right to the requested concession, suppliers still must take note of other considerations.  The most obvious factor that suppliers must consider is the overall customer relationship.  For example, a supplier that is not willing to “play ball” may find itself at disadvantage bidding for new programs with the customer.  Given the prevalence of termination for convenience clauses in the automotive industry, suppliers also must consider whether the customer has the ability to easily resource the business if it is able to obtain more favorable pricing.  While less of a concern for more complex assemblies with greater barriers for resourcing such as IP protections, validation requirements, and tooling costs, suppliers of “commodity” products that compete primarily on price may find themselves at risk of losing the business if they do not acquiesce to customer demands.  Suppliers also should be mindful of other issues and disputes that exist within the relationship.  For example, if the supplier previously had been unable to meet its obligations to the customer, including due to COVID-19 related issues, suppliers may want to consider seeking a release of claims in exchange for any potential claims that the customer may have against the supplier. 

Finally, suppliers must watch out for more stealthy attempts by customers to amend the parties’ contract.  If the parties cannot reach a negotiated agreement on concessions requested by the customer, some customers may attempt to implement the changes by issuing a new, or amended purchase order, or possibly even releases, that incorporate the changes.  If the supplier does not properly reject the amendments, and ships against the revised documents, it may be found to have accepted the changes without having intended to.

While all disputes must be addressed in light of the specific contracts and circumstances involved, the issues addressed above represent some of the most important considerations that parties should consider when facing these types of claims or requests.  Both customers and suppliers should consider these issues as part of their strategy as they work through their strategy for managing the impact of COVID-19. 

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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