Ren­ego­tia­ti­ons (of pri­ces) in the sup­ply chain and their risks

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.

The risks

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.

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