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Managing Warranty, Recall, And Litigation Risk For Automotive Suppliers – Consumer Protection – Unit…

Managing Warranty, Recall, And Litigation Risk For Automotive Suppliers – Consumer Protection – Unit…

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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.



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Dominic Levent Solicitors
Email: Enquiries@dominiclevent.com
Phone: 020 8347 6640
Url:
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1345 High Rd
London, London N20 9HR

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