New contract clauses further shift risks to suppliers
The automotive industry continues to be shaped by fluctuating sales volumes, technological shifts, and volatile markets. Projections and forecasts regarding purchase volumes sometimes change at short notice and to a significant extent. Against this background, we are currently observing a new trend: OEM and other customers in the automotive sector are increasingly requiring suppliers to waive claims in advance in the event that planned volumes are not called off or are called off only to a significantly smaller extent.
Forecasts have always been non-binding
For many years, contracts in the automotive supply industry and other sectors have been structured in such a way that quantities planned and forecasted are generally non-binding for the customer.
While the supplier is often obligated to build up and maintain the necessary capacity to meet forecasted demand, the customer is generally under no obligation to purchase specific quantities, except in the case of short-term material and production releases and specific purchase orders. Suppliers are therefore generally not entitled to have the forecasted quantities actually ordered.
For a long time, this was often not a problem in practice because the quantities actually called off were at least sufficient to amortize the supplier’s project-related investments.
In recent years, however, this has changed significantly. Political, economic, and technological developments are increasingly leading to substantial discrepancies between forecasted and actually ordered quantities. In some cases, projects are even discontinued before reaching the series production or ramp-up phase.
Even if there was no entitlement to an order for specific quantities, other claims could previously be considered in such situations, depending on the individual case. These included, in particular, claims for compensation for investments that had become useless or obligations on the part of the customer to negotiate price adjustments or other compensation solutions.
Possible claims for damages shall now also be excluded
The requirements currently demanded by OEM – particularly for new projects – now go a step further. They are not limited to the non-binding nature of forecasts. Rather, suppliers are in some cases expected to expressly waive any claims that might arise from subsequent volume reductions, project delays, or project cancellations.
These may include, among other things:
- investments in facilities and infrastructure,
- machinery, equipment, and tools,
- staffing and training,
- procurement of materials, and
- other project-related standby costs.
This is intended not only to shift the volume risk but also, in effect, to shift the investment risk even further onto the suppliers.
Risks for suppliers
For suppliers, such clauses can have significant economic consequences. Automotive projects often require substantial upfront investments years before actual series production begins. If the expected and called-off volumes are later significantly reduced, there is a risk that substantial investments cannot be amortized.
Special attention should be paid to blanket waivers intended to cover “all claims” related to volume deviations. Their economic implications often only become apparent once investments have already been made or projects fail to meet expectations.
Once a waiver has been issued, it becomes difficult to even get to the negotiating table with the customer. If the waiver is valid, the legal enforcement of claims can even be completely prevented.
Recommendation for action
Suppliers should not consider such provisions to be merely a clarification of non-binding forecasts. Rather, they should carefully assess which claims are to be excluded and whether the assumed risk is proportionate to the expected business volume.
If a comprehensive waiver of claims is required, suppliers should assess at an early stage whether project-specific investments, holding costs, or other expenses can be contractually safeguarded in some other way.
Conclusion
While non-binding forecasts have long been part of everyday business in the automotive industry, new contract clauses are increasingly aimed at excluding potential claims for compensation related to investments and holding costs. The economic consequences for suppliers can be significant and should be assessed early on during contract negotiations.
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