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Practical Considerations for Auto Suppliers Navigating Supply Chain Disruptions

April 23, 2021
Automotive Advisory

Chips, foam and rubber. What sounds like a strange smorgasbord of automotive inputs all share the common thread of being in short supply due to either unexpected levels of demand in the wake of COVID-19 or exogenous events ranging from unseasonal weather to congestion in global trade channels. 

With the shortage of semiconductor chips becoming an increasingly frequent rationale for suspending or otherwise reducing production at the OEM and supplier level, this advisory outlines some proactive measures auto suppliers can take to protect themselves from liability or to ensure payment consistent with their customer agreements. Specifically, we address contractual force majeure clauses and ways to effectively leverage this language in the broader context of the supplier-OEM relationship. Suppliers should look to their contracts to determine whether they have the right to declare force majeure with their customers in the event of a supply chain disruption caused by the shortage of semiconductor chips. Suppliers should also review their agreements to determine their rights in the event that a customer claims force majeure and refuses to accept delivery due to production delays. 

Force Majeure Provisions

Generally, force majeure clauses are intended to allocate risk for events that are not within the reasonable control of a party and will generally excuse performance when it is delayed or prevented by such events. A shortage of semiconductor chips may or may not entitle a party to invoke a force majeure clause or claim frustration of contract, depending on the facts and the language of the contract. If a contract does not contain a force majeure clause, depending on the jurisdiction, there may be a common law or statute-based right to claim a remedy that is similar to force majeure.

There is no single “standard” force majeure clause. Some contracts will list a number of specific events that qualify as force majeure, while others take a more general approach and include any events outside a party's control. The language will vary widely among contracts, particularly between different industries. Suppliers should consult a qualified attorney to review the language of a particular force majeure provision.

Notice

To invoke force majeure protection, the affected party will generally have to give notice to the non-affected party. Force majeure clauses vary in their notice requirements. Some require notice within a certain timeframe of the occurrence of the underlying event, while others only require "prompt" or “reasonably prompt" notice. The contract may additionally require the notice to state the anticipated consequences and duration of the force majeure event. Some contracts include a “time-bar” clause that requires the affected party to provide notice within a specified period from when it first learned of the force majeure event or lose the right to claim force majeure. 

Given the uncertain and dynamic nature of the COVID outbreak and resulting disruptions to supply chains, some suppliers have issued “protective” or “rolling” force majeure notices that take into account the developing impact that the outbreak has upon the performance of their obligations under the contract.

Mitigation

Even if an event is clearly included in a contract's force majeure provision, the party seeking to excuse non-performance must take reasonable steps to mitigate the foreseeable consequences of its non-performance. A party would be unable to invoke force majeure if its non-performance could reasonably have been mitigated or if it could have found another way to meet its obligations.

Conclusion

The COVID pandemic and the resulting disruptions to various supply chains are unprecedented events in our history and we don't know how courts will evaluate resulting claims of force majeure. If a supplier finds itself in a position where it is difficult to meet contractual obligations due to lack of semiconductor chips, or finds an OEM is unwilling to accept delivery, it may be time to review supply contracts to understand its rights under a force majeure clause or other legal protections. 

Please contact a Varnum attorney if we can be of assistance to your business. 

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