LEGAL STRATEGIES TO MANAGE THE SUPPLY CHAIN RISK OF ...

LEGAL STRATEGIES TO MANAGE THE SUPPLY CHAIN RISK OF UNANTICIPATED MATERIALS

PRICE INCREASES

William R. Jansen Fredric A. Smith Thomas J. Manganello Automotive Industry Group Metro Detroit Office Warner Norcross & Judd LLP

Background

• The dramatic price increases for resins have had a dramatic negative effect upon the bottom line of many suppliers.

• OEMs have not been responsive to well mannered requests for price increases.

• Is there a legal strategy?

Know Your Legal Options

• Suppliers Perspective:

– Is there an enforceable contract between the suppliers (of both resin and parts made with the resins) and the buyers?

– Legal positions can be effectively used in negotiations to facilitate resolution without filing suit

– Are there defenses to the Buyer’s threats to obtain an injunction forcing continued production at the stated price?

• Buyer’s Perspective – If the Buyer’s bargaining power is insufficient:

– What can you do to assure supply before the “Cut-Off” Letter is received?

– Does the course of performance with your supplier assist contract enforceability?

– What is the likelihood of obtaining an injunction preventing the shut down of your line and the OEM’s line?

Know Your Legal Options

The Relevant Contracts

• The Resin Supply Contract

– Large resin suppliers may have “Active Price Agreements” which they claim gives them the ability to raise prices due to raw materials increases

– Also applies to direct steel suppliers who have great experience with price fluctuations and most have surcharges built into their contract

• The Resin Supply Contract

– If you have signed or otherwise assented to these contracts, you may be caught “between a rock and a hard place” as the supplier who bought from the resin producer or mill

– If you have not signed these contracts and the purchase order issued to the resin supplier incorporates your Terms and Conditions there is a battle of the forms issue to be analyzed

The Relevant Contractscont.

• The “Standard” OEM Automotive Contract

– Buyer oriented contract whose purpose appears to be maintaining the flexibility to obtain maximum discounts from suppliers

– Most tier suppliers use this as a template for their buyer terms and conditions even though OESA has its model terms

– Award Letters and Master Terms and Conditions are not contracts by their own terms



– Most companies issue “blanket” Purchase Orders which do not commit to purchase any particular quantity but only contain a product description and price term

– Many Purchase Orders have no expiration date



– The OEM Terms and Conditions contain a “Cancellation for Convenience” clause. OESA’sModel Terms allows for mutual termination on 60 days notice.

– Releases govern the quantity ordered, raw materials to be purchased and ship dates but generally only cover a 4-8 week time frame


• Does the Supplier have any obligation to sell or the Buyer have any obligation to purchase beyond the term of the Releases?

Critical Issue with the OEM Contract Language

Whose Contract Terms Govern?

• Becomes an issue when neither party signs or otherwise assents to the other party’s contract. No matter how much we lawyers beg, form contracts often get exchanged and shoved in the drawer

• Verbal assurances are of little value when it comes to enforceability

• Most suppliers have separate terms and conditions when they are buyers and sellers

• Whose terms govern is analyzed under the “Battle of the Forms” – Uniform Commercial Code §2-207

Practice Tip

• In most instances, Buyers have the bargaining power until the deal is closed. Require your customer to sign your Purchase Order. The OEMs do!

• Automate the process – The electronic quotation process that appears to leave no options

• As a supplier or as the direct buyer from the steel mill or resin supplier it may be best not to sign and let the battle determine the terms

The UCC Battle of the Forms

• The written “acceptance” of an “offer” constitutes a contract even if the “acceptance” contains different terms

• The different terms in the “acceptance” are proposals that do not become part of the contract if the different terms materially alter the terms of the offer

• The “offer” will control unless the “acceptance” is expressly made conditional on assent to the different terms.

• If the “acceptance” or both the “acceptance” and the “offer” are expressly made conditional on assent to their respective terms, the KNOCK OUT RULE applies and the conflicting terms are thrown out.

• The UCC will supply the missing terms

• The “offer” is crucial since it may define the terms of the sale


• Myth #1: The Purchase Order is always the “offer”:– The Quote can be the “offer” and the RFQ is a

request for offers.

– Make sure all quotes incorporate the Seller’s Terms and Conditions either as an attachment or appropriate website reference

– Make sure that all quotes are expressly conditional on assent to the Seller’s Terms and Conditions – this can be done on the Ts&Csthemselves.


• Myth #2: The “perform and you assent to our terms” language in the Purchase Order ends the Battle of the Forms:

– There is no magic language in an “acceptance” that will automatically eliminate contrary terms in the “offer”

– If you are the Buyer, insist on your terms


• Myth #3: All Purchase Orders contain the “expressly conditional” language:– Most all try to but some fail – Challenge

Machinery case

– The language must be exact and is strictly construed

– Key Issue: The expressly conditional language does not necessarily give your Ts&Cs priority –may just knock out the offending Seller’s terms


Is The OEM Contract Illusory?Steel Dynamics v. General Motors

A Real World Example• SDI was a steel supplier to General Motors and

was issued an “Award Letter”, a Purchase Order and Releases

• Steel prices dramatically increased and SDI refused to supply under the agreed upon price matrix

• Though it involved steel prices, the analysis is equally applicable to all raw materials

• GM sued claiming breach of contract

• “Mutuality of Obligation” – a general rule of contracts is that a contract is not enforceable if one party is not required to perform.

• Factors the Court Examined:

– The Award Letter did not obligate GM to buy any steel from SDI even though there were projected quantities


• Factors the Court Examined (cont.):

– The Purchase Order did not contain a quantity term and did not require the purchase of any amount

– The “cancellation for convenience” clause allowed GM to stop purchasing at any time


• GM had argued in the past -- in a reported case –that its contracts and awards do not obligate GM to buy anything (Sound familiar?)

• The Oakland County Circuit Court ruled that the contract was unenforceable because there was no mutuality of obligation

• Judge clearly not friendly and mused during argument if prices were falling would GM still claim it had to buy at the higher price?


• Course of Dealing: How parties deal with each other is extremely relevant to whether there is a binding contract

• Court rejected this argument without much consideration

• Issues to consider:

– Did the parties discuss or establish a course of dealing as to quantity, when pricing issues were discussed, purchase order expiration


• Case is under appeal to the Michigan Court of Appeals

• Only case to have ruled on this precise issue – stay tuned

• Most suppliers have this same argument to use and may be bound only to accepted releases and no further


How Can Buyers Protect Themselves?

• Not just for the suppliers who buy directly from the mill or producer but for all buyers “up the chain”

• In a rising raw materials market – RELEASE, RELEASE, RELEASE:

– An accepted (the seller performs) release is certainly a contract and the farther out it goes in time and quantity, the more protection you have

– Weigh price concerns against excess inventory on hand if the OEM stops buying

How Can Buyers Protect Themselves?

• The case for a real Requirements Contract:– Perform an analysis in raw material intensive parts

whether the ability to force price decreases justifies the risks of a contract which may be illusory and unenforceable

– In many cases the cost to PPAP a new materials supplier creates a de facto requirements contract

– Partial requirements contracts are permitted and you may still be able to keep the cancellation for convenience clause (with a good faith requirement for its use)

What Can Buyers Do When The Cut-Off Letter

Comes?• Have an immediate understanding as to the

course of dealing between you and your supplier as to purchase requirements

What Can Buyers Do When The Cut-Off Letter

Comes?• If re-sourcing is not possible, Temporary

Restraining Orders are a last resort :

– Irreparable Injury and balance of hardships are evidenced by the shutdown of your line and the OEM’s line will entail huge costs and unemployment consequences no State Court will want to see

– Use contract terms to your advantage to maintain supply

– Must still prove that there is likelihood of success on the merits

What Can Buyers Do When The Cut-Off Letter Comes?

• Injunction Process:

– Seek Temporary Restraining Order and try to shift burden on Supplier to sue for more money if they are correct

– Court must hold a hearing within a set period of time (14 days in Michigan State Court)

– As a practical matter, the more serious the harm the more likely that a court will grant temporary relief

The Supplier’s Right To Pass On Price Increases

• The Steel Dynamics Analysis – if the Purchase Order or Award Letter does not obligate the customer to purchase any quantity, there may not be an enforceable contract

• Suppliers are obligated to produce through accepted releases but can reject newly issues releases

• Understand your course of dealing – is there evidence that you were able to extract a promise of future purchases that you now must honor?

The Supplier’s Response To An Injunction

• Put the Buyer on notice that you want to be present for any TRO consideration. The statements in the TRO can be prejudicial and you need representation

• The harm is not irreparable. You are willing to supply at the increased price. This is all about the money

• The impact on your business can be equally excruciating. You would only sue a customer as a last resort

Arbitration Provisions• Most OEM Contracts do not have a

requirement for binding arbitration.

• Some supplier contracts and the OESA Model Contract does provide for binding arbitration

• If there is a belief that Arbitration is best, incorporate the AAA Optional Rules for Emergency Measures of Protection. Arbitrator is appointed off a list in 1 day and a hearing can be held in 2 business days. MUST be specifically incorporated

Arbitration Provisions• Most of these issues are legal ones and may be

best left to the Courts

• No effective appellate remedy if the Arbitrator makes an unfounded legal ruling.

Conclusions

• Flexing legal muscle with a customer can be disastrous and must be done judiciously

• In negotiations, knowing the extent of your legal rights and obligations is critical

• Plan for rising raw material markets and lock in prices if the risks outweigh the costs of continually seeking price reductions from the supplier

LEGAL STRATEGIES TO MANAGE THE SUPPLY CHAIN RISK OF ...

Documents

Transcript of LEGAL STRATEGIES TO MANAGE THE SUPPLY CHAIN RISK OF ...