The 'new' WLTP and the shortage of production call-offs experienced by suppliers

Category: contract law Industry: mobility Author: Year:

Who pays?

As from September 2018, new regulations for measuring exhaust gas emissions will apply in the EU for all newly licensed vehicles. In reference to this, several OEMs have announced that they will only be offering limited numbers of new vehicles until further notice. The situation at Porsche has been the subject of a discussion attracting a considerable amount of attention in the media: currently, no vehicles can be configured on the website. It is said that orders can still be placed for new cars with dealers, but only on a very restricted scale (Porsche newsroom). 

It is quite possible that in the future this will lead to a (temporary) decline in the number of call-offs experienced by the suppliers. Companies, however, which in the context of their capacity and turnover schedules do not as a rule expect such setbacks, will be asking themselves what (legal) options they then have.

WLTP

As from 1 September 2018 the WLTP (Worldwide Harmonized Light Vehicles Test Procedure) and a new exhaust emissions standard will become applicable in the EU. The WLTP is intended to lead to a better depiction of actual consumption and pollutant and CO2 emissions. For this reason automotive manufacturers (OEMs) must convert many of their current models to gasoline particulate filters and apply for a new type approval for each model. According to a recent Porsche press statement, there are therefore limitations as regards the supply of new cars as a result of design measures that are necessary and still ongoing. And that will obviously also affect the suppliers. A shortage of orders from OEMs can for example lead to unexploited capacities, failed amortisation, storage costs and losses incurred in the purchase of bought-in parts and other production material. As to what entitlements to claim the suppliers have in respect of this, it will depend to a great extent on the way the existing contracts with the OEMs are designed.

No going back when the deal is done

As a rule, the provisions that apply to supply contracts with OEMs are those of purchase contracts, service contracts, or contracts to produce a work. On the basis of German law, that means that a person who has issued a (binding) order for a thing via a purchase contract must go ahead and accept it, and pay for it. If he doesn't, he is in default.

If the purchaser is in default, the supplier can call for compensation for all the (extra) costs and damages (in juridical terms: involuntary pecuniary losses) which he incurs as a result of the circumstance (for example those of storage). If the customer still has claims of his own that he can assert against the supplier, it may even be possible for the latter to offset his damages against them. Having said that, there is only an entitlement to compensation if the customer has caused the damage with intent or negligently. So what counts is whether or not the customer was in a position to foresee and avert the damage applying reasonable care. That is for example the case if the customer can prove that he has kept track of changes in the law and advanced his development and production as rapidly as possible deploying appropriate resources and expenditure, but fails to perform adequately on other fronts – e.g. having only low test capacities in the technical services (according to the German Automobile Industry Association [VDA). If that is the case, there is no liability because there is no culpability. However, this 'exculpation' does seem somewhat wobbly inasmuch as it appears that many OEMs have not had any problems with implementation on most of their models (assuming a comparable amount of work and expenditure on adaptation).

If parts that have already been produced are not accepted as agreed, the so-called 'passage of risk' takes place – depending on the supply agreement. That means that after that it is the OEM who bears the risk of accidental deterioration – all the way down to unserviceability of the parts – , not the supplier.

Framework agreements and call-off orders

Having said that, it is customary in the automotive industry to work with framework agreements and individual call-off orders or schedules of the kind which come in the same category. The framework agreements relate mostly only to non-binding volumes required for longer periods within the term of the project. Often enough, these are quoted more precisely in (non-binding) forecasts and are, at the end of the day, not binding until shortly before a given call-off period for certain smaller capacities. From a legal point of view, it is not until such call-offs are issued that obligations to deliver on the part of the supplier and obligations to accept on the part of the OEM actually arise. The latter, if the goods are not accepted, then lead to the entitlements of the suppliers to claim for compensation as described above. 

As to whether or not an OEM, on the other hand, is also under obligation to accept the quantities scheduled in the framework agreement without a clause that expressly states that obligation, this is determined according to the legal principle of 'good faith', which is dealt with in Section 242 of the German Civil Code (BGB) and often referred to among jurists as a clause that can mean anything ... or nothing at all.

According to that principle, acceptance of the scheduled quantity may constitute an obligation on the part of the OEM, if this can be expected taking account of common usage. The content of the range of customer's obligations arising from this must be determined taking into account the circumstances of the individual case. Heed is to be paid to the basic conditions of the contract and the interests of the OEM and those of the suppliers. Above all, the argument against an obligation of the customer to accept is that the very reason why business relationships are configured by means of framework agreements is that production can be organised as flexibly as possible. In particular, if it turns out that the customer's adaptation to the altered legal situation is associated with a great deal of preparation in terms of development and production, this argues against a duty to accept of the kind that would result from Section 242 of the BGB. For the very purpose of these framework agreements, pursued by the OEMs, is to enable them to react to such changes. This certainly plays a part in contracts of the kind that were concluded prior to the change in the law. On the other hand, from the suppliers' point of view, account must be taken of the fact that in long-lasting supply relationships and regular call-offs they have the right to – and indeed must – trust in the continuation of the call-off practice. The agreement of binding capacities to be maintained and potentials for improvement and so-called 'savings', which are fundamentally based on large quantities over certain periods of time, for example, also speak in favour of this. A duty of the customer to accept can be demanded if he has not done everything that could reasonably have been expected of him to ensure timely adjustment, or if he has not notified the supplier early enough of the acceptance problems that were gathering on the horizon. As far as culpability in relation to the shortage of call-offs and any entitlement to claim for compensation that may therefore exist is concerned, the same yardstick applies as applied to culpability as regards the breach of the duty to accept.

Assertion of claims for compensation also renders it necessary to provide concrete evidence of the loss or damage. If losses occasioned by unexploited capacities are the subject of the claim, evidence must above all be provided showing that the capacities have not been used elsewhere, thus bringing about a reduction in the loss or damage.

The way this situation develops is something that may now be awaited with interest.

[August 2018]