Rising energy and commodities prices are putting many operators in the supply chain under pressure, and suppliers are seeking (price) adjustments which would allow them to pass on their higher costs to customers. To this end, suppliers are asking their (typically OEM or Tier 1) customers to renegotiate their contracts. Such renegotiations may involve risks if the suppliers simultaneously announce that they are heading for supply chain or procurement difficulties or that their liquidity is at risk.
If suppliers announce that adjustments are required and if this announcement is associated with a possible delivery freeze, the courts will in some cases see this as a (tacit) threat to discontinue supply. If such a situation also involves a rather short time frame, e.g. if the supposed delivery freeze is only a few weeks away, the aforementioned risk is considerably higher. If the customer seeks a temporary injunction, the court may issue an order in summary proceedings requiring the supplier to refrain from failing to supply its customers (in accordance with the terms of the agreement). Even a notice from the supplier stating that, with the current prices, it will be unable to secure liquidity and procure materials on a lasting basis may be taken by the courts as sufficient grounds for a temporary injunction. Although temporary injunctions can be appealed, companies should not take them lightly: after all, such orders are enforceable rulings which can be used to block the contractual negotiations which suppliers are often entitled to and which they ultimately depend on.
These is also a risk that the court deciding on the temporary injunction will not grant a hearing to the affected supplier, and that the supplier will find out about the proceedings only after the order (i.e. the enforceable ruling) is issued. This happens in some cases even though the Federal Constitutional Court has clarified that a hearing can only be dispensed with in exceptional cases. Presumably, such situations would only occur if there is specific evidence that a cessation of supply is directly imminent and if it is demonstrated that the resulting damages would be high. Particularly in cases where a hearing is not held, there is a risk that the court will prematurely assume that the case in question is an exceptional case based on an inaccurate presentation of the relevant facts.
Minimizing risk by filing a protective brief
While a temporary injunction order can be appealed, such an appeal takes time, even though temporary injunction proceedings are conducted in expedited fashion, and this is something which suppliers simply cannot afford (also with respect to renegotiation of the contract, which may be blocked by the order). Moreover, an appeal would not (directly) set aside the existing ruling.
In such cases, suppliers have the option of filing a “protective brief” as a probative measure. A protective brief is a precautionary brief arguing against the issuance of a temporary injunction which can be filed to the protective brief registry at little cost. Courts are required to consider protective briefs prior to issuing a decision even in cases of particular urgency. In this way, suppliers can at least ensure that their arguments, and particularly their presentation of the facts, will be heard.
What to do?
In case of conflicts involving the renegotiation of contracts, suppliers should pay attention to their communications and ensure that they are conducting themselves in accordance with the terms of the contract. If they suspect that the customer may seek an injunction, they would be well-advised to file a protective brief. They may have reason to suspect such a course of action e.g. if the customer announces that it seeking an injunction or even if the supplier receives multiple requests for a statement as to its supply obligation. By filing a protective brief, suppliers can prevent a court from weakening its negotiating position by issuing an enforceable ruling without even hearing the supplier’s arguments.back