United States: Commercial Contract Risk In 2017

Coming off a record year in car sales, it's expected that warranty and recall costs will continue to be on the rise. With that in mind, it's vital that OEMs and suppliers have both their foreign and domestic contracts in line.

Avoiding Common Commercial Contracting Mistakes

With international and domestic supply chain contracts, there is little or no room for error. While some supply chain contracts incorporate negotiated provisions in the form of a letter agreement or long-term agreement, many supply chain contracts rely on standard purchase order terms and conditions. This can result in contracts of considerable value and corresponding high risk receiving  little attention from in-house or outside counsel.

A failure to ensure that key provisions in a supplier's buy-side contracts mirror those of their customer contracts can lead to hold-up situations or unwarranted price demands,  which can ultimately result in increased risk.

Supply chain contract risk can be managed and mitigated with an aggressive legal risk management strategy. Attention to detail and a periodic review and update of basic commercial contracting documents are a must. This is especially true for a supplier's general terms and conditions of purchase, which may not have been updated in many years. Annual training courses offered to sales and quality teams on basic principles of contract law, warranties, and the Uniform Commercial Code can also help minimize common mistakes during the negotiation and performance phases of a contract.

The company should also designate a point person to manage the contractual relationship. That person should:

  • Maintain a complete copy of the written contract, including all exhibits, addendums, amendments, and schedules
  • Understand the contract and contract rights
  • Respond in a timely manner to performance issues to avoid waiver and supply chain disruptions
  • Preserve, organize, and have available important written correspondence concerning the contract

Supply Chain Contracting in Light of Regulatory Changes

Contracting parties should be aware of recent regulatory changes in the areas of self-driving vehicles, highly automated vehicles, vehicle safety regulations, cybersecurity proposed rules, and guidelines regarding confidentiality provisions. In September 2016, the National Highway Traffic Safety Administration (NHTSA) issued the Federal Automated Vehicles Policy (the HAV Policy), which applies to OEMs, as well as equipment designers and suppliers that outfit any vehicle with automation systems. It requires that these entities:

  • Submit detailed safety assessments for each HAV system
  • Develop documented processes for testing, validation, and data collection
  • Submit identifying information and descriptions of HAV systems to NHTSA

In December 2016, NHTSA released proposed rulemaking regarding certain security requirements on vehicle-to-vehicle (V2V) communications, which enable light vehicles to "talk" to each other to avoid crashes. In light of recent regulatory changes, contracting parties will also need to consider how liability and risk will be allocated in their commercial agreements, and in the event of litigation, to ensure that any protective orders comply with NHTSA guidelines.

International Contracting

Parties to international contracts will need to consider similar regulatory developments discussed above in applicable foreign countries. In addition, parties should consider venue, choice to law, and alternative-dispute resolution or arbitration clauses prior to entering into contracts with parties abroad. It is imperative that the parties agree on these issues in the underlying contract prior to the emergence of a dispute. A failure to agree on these clauses could mean that a party is forced to litigate a commercial issue in a counter-party's home country. This prospect could lead to further risk and uncertainty.

"Neutral" law will vary based on the parties to the contract; however, many parties often agree to apply U.S. law. Other "neutral" law can include German or Hong Kong law. If multiple international parties are involved, applicable contracts should have mirrored provisions to ensure all applicable parties have set forth their consent to these issues. The parties also should designate the venue for the arbitration, the language of the proceeding, and add a clause regarding recognition or enforcement of an arbitral award.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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