While total vehicle recall campaigns are likely to be less in 2019 compared to prior years, it is likely that the recent trend of elevated numbers of lower volume recall campaigns will continue, including those increasingly involving electrical system components.

The increased pace of the introduction of new technologies and software integrated into new vehicles also will create new areas of risk for automotive suppliers in the coming years. As a focus of liability shifts away from human drivers and toward electrical system components and their software, managing warranty and recall risk will be key for suppliers of these components.

Electrical system components and networks that provide advanced control systems, collision avoidance, adaptive cruse control, lane-keeping assistance, vehicle-to-vehicle communication, and "hands off' steering are increasingly being integrated in more new vehicles. The more complicated these components, systems, and networks are within the vehicle, the possibility of defects—and their associated warranty and recall costs—increase.

Because OEM purchase orders and corresponding general terms and conditions contain highly OEM-favorable terms, exceptions and limitations to supplier warranties are difficult to negotiate. Warranty risk management should start at the contracting phase. Specifications to which the component or system is to be designed and/or manufactured should clearly be set forth in the contract documents, and any inapplicable warranties, including warranties outside the scope of design responsibility, should be the subject of efforts to limit or disclaim. Consider documenting suggested alternative designs for a more robust or superior performing component or system that is declined by the customer.

Automotive suppliers should document their responsibilities for testing electrical system components, systems, and networks, and clarify the limits of their responsibility for testing and validation, at the component, system, and vehicle level. Responsibility for design and validation of components, software, and systems is not always clear, especially when multiple suppliers are involved in supplying various hardware and software components and systems within the vehicle. Allocation of responsibilities and associated warranty and recall costs for failures within these system components may be especially difficult to manage.

If a warranty issue arises, the supplier needs to react quickly to identify the root cause(s), implement containment procedures, and establish clean points. Protocols should be established for analyzing root causes for dealer repair codes that could implicate the product. Protocols for handling warranty claims, including product return, inspection, and determining the root causes for the failure must also be established. The supplier must also understand the warranty period that will apply to the product, when the warranty period commences, and what obligations exist.

If the claim involves multiple parties, the tier 1 supplier should work closely with the OEM to identify and document quality issues early and promptly communicate responsibilities. If the claim involves a lower-tier supplier, notice of the warranty claim, notice of a breach of applicable agreements, documentation of root cause(s) and documentary evidence supporting the damages are critical should litigation arise. These steps are key to ensuring that the supplier has the ability to demonstrate its obligations, including that the tier 1 supplier has the ability to pass through any costs that are the responsibility of the tier 2 supplier, or that it should only be responsible for paying a certain portion of the total recall costs.

Automotive suppliers also should ensure that they have internal safety review procedures in the event the supplier makes a safety defect determination concerning its component or system that requires reporting to the National Highway Traffic Safety Administration (NHTSA). When a potential defect may involve components supplied by a lower-tier supplier, the supplier must review all relevant purchasing contracts for provisions relating to recalls, decision-making, reporting, cooperation, design responsibility, and allocation of cost recoveries. Suppliers also should update their purchase order terms and conditions to ensure that they contain the appropriate contractual protections from their lower-tier suppliers.

If NHTSA commences a defect investigation, it is likely the OEM will be asked to submit confidential information relating to design and engineering documents, as well as test data. The supplier should consider the confidentiality of such documents and request that the OEM seek confidential treatment of the information in accordance with NHTSA's regulations. In many cases, this will require an affidavit in support by the supplier setting forth the basis for the confidentiality of the information under relevant Freedom of Information Act (FOIA) exemptions.

The supplier should develop its own position concerning whether the component or vehicle contains a safety-related defect within the meaning of the Highway Safety Act and NHTSA's regulations, taking into consideration past NHTSA recalls and investigations involving similar components and circumstances. The supplier also should monitor new recalls and investigations, including OEM submissions and regulatory developments that may affect the supplier or its products, such as proposals for new safety standards or amendments to existing standards.

Automotive suppliers also can take other simple steps prior to contracting to reduce the risk of litigation. For example, companies should confirm the specific corporate entity that will be the counterparty in the contract. The counterparty's litigation history, credit history, and reputation in the industry should be reviewed. Companies should also confirm that the written contract accurately defines all relevant prior agreements, negotiated rights, and obligations. If the contract involves parties from different jurisdictions, a forum selection clause or arbitration clause should be considered. Additionally, for long-term agreements, the supplier should confirm that the risks of early termination have been addressed.

During performance of the contract, the company should ensure that a point of contact has been tasked with ensuring compliance with the contract, and that applicable contract documents and relevant communications are readily accessible if, and when, needed. When a dispute arises, important conversations or meetings on the subject should be carefully documented, and confirming emails on the subject sent to the counterparty. If the dispute escalates into a claim, a point of contact should be designated as the lead for the claim and an early assessment of the claim should be performed. The company should also ensure that it has gathered all documents relating to damages, including documenting all costs and time spent addressing the dispute. While the above steps cannot eliminate the risk of litigation, they can reduce the likelihood of litigation and can better position the company for success when litigation is unavoidable.

Managing Supply Chain Disputes Arising From Aluminum and Steel Tariffs

Trade issues and tariffs likely will be an important issue for automotive suppliers and manufacturers to manage in 2019 and beyond. On March 1, 2018, a 25 percent tariff was imposed on imported steel and a 10 percent tariff on imported aluminum under Section 232 of the Trade Expansion Act of 1962 (19 U.S.C. § 1862). Because automotive suppliers typically purchase raw materials and supply components and assemblies to OEMs under long-term agreements with fixed prices, suppliers without appropriate clauses addressing such cost changes for raw materials, components, or assemblies may have limited ability to pass on increased production costs related to the tariffs.

These suppliers will need to ensure that they are examining their contractual relationships to determine their ability to pass on increased costs related to raw materials
and/or tariffs. Force majeure clauses and commercial impracticability under the Uniform Commercial Code (UCC 2-615) should be reviewed but it may be a difficult avenue for relief. Suppliers must also review duration, termination, and quantity terms to determine leverage points for discussions on revised terms. Additionally, suppliers should ensure that they are using risk mitigation strategies such as excluding or adjusting tariffs and duties in the product price, as well as indexing, considering available raw materials, or hedging programs.

Indexing avoids the renegotiation of prices every time the raw material price fluctuates by allowing component part prices to fluctuate with the cost(s) of their raw materials monthly, quarterly, or annually. However, some raw material such as plastics and rubber are not traded on commodity exchanges and, therefore, are not able to be indexed. OEM raw material programs allow the supplier to participate in the OEM's supply arrangement with raw materials suppliers. Hedging strategies also can be used to transfer risk to third-parties.

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.