Supply chain disputes in the automotive industry

In the automotive industry, supply relationships are generally regulated by framework agreements. These rather general long-term agreements are often further specified by project  contracts. The applicable prices are often fixed for one or more years based on forecasted volumes and expected efficiency gains. On this basis, the customer is entitled to call off the volumes that it actually requires. The forecasted volumes are mostly not binding on the customer. Instead, where call-offs (significantly) deviate from the forecasted volumes, the supplier may be entitled to a renegotiation of prices. In this regard, some contracts expressly provide for regular price reviews or contain other adjustment mechanisms.

These contractual setups increasingly lead to disputes between the parties. Time and again, suppliers take the position that they are no longer obliged to deliver after a pricing period ends and make continued supply dependent on (unilateral) price increases, occasionally threatening or suspending supply. In most cases, such behavior is equal to a violation of the supplier's contractual obligations: expired price agreements normally do not release suppliers from their delivery obligations, neither is a supplier usually entitled to unilaterally increase prices during the lifetime of a project. Rather, contracts typically stipulate that the last agreed price or a fallback price applies until a new agreement is reached, or prices are determined by a court or an arbitral tribunal. Even without an explicit provision, the obligation of the supplier to continue delivery may follow from the nature of the project-related contract or, in some instance, from competition law requirements.

Even where a valid price agreement is still in place, suppliers sometimes attempt to unilaterally impose price adjustments or demand one-off payments citing a change of circumstances (e.g., reduced orders or increased energy or raw material costs). Often, such demands are accompanied by threats to discontinue deliveries. Mostly, this approach amounts to a contractual breach.

Under German law, as in many other jurisdictions, unilateral contract adjustments follow strict requirements: they are typically only permissible if circumstances that formed the basis of the contract have significantly changed after its conclusion, and the parties would not have agreed – or would have agreed differently – had they foreseen these changes. Internal miscalculations or unilateral expectations about profitability do not justify adjustments. The supplier requesting an adjustment to the contract bears the burden of proof for the change in circumstances.

Even where the strict requirements for contract adjustment are met, this mostly does not lead to an automatic change of the contract. Under German law, the supplier only has a right to renegotiate. If negotiations fail or the customer refuses, prices may be determined by a competent court or arbitral tribunal, which can appoint an expert to assess whether an adjustment is justified. Regardless of any adjustment claim, suppliers are generally not entitled to suspend deliveries. Often contracts expressly exclude rights of retention, and even without such clauses, retention is subject to strict limits. In just-in-time or single-source setups, the suspension of deliveries causes tensions with the nature of the underlying agreements and the exercise of any right to withhold delivery is constrained by the principle of proportionality.

When a customer is faced with a threat of a delivery stop or the actual suspension of deliveries, the key question is how to respond. In just-in-time supply chains, even short disruptions can cause severe financial damage, notably due to production line stoppages at the OEM, as well as reputational damage. If the customer decides not to give in to the supplier’s unilateral demands, it must take action to ensure continued supply.

The customer may consider applying for interim relief by the competent court or arbitral tribunal. Where the contract includes an arbitration clause, interim relief can nevertheless be sought in state courts unless the parties have excluded their jurisdiction for such relief. Under several arbitration rules, including the ICC Rules, [1] interim measures can be requested from an emergency arbitrator before the arbitral tribunal is constituted.

To obtain interim relief, an applicant normally must show a prima facie right to delivery and urgency. While the standard to be met is generally strict, recent case law has become more permissive: other than in early decisions, the applicant’s economic survival is not a requirement anymore. Instead, it is often considered sufficient that the applicant would suffer a significant loss without the injunction. When deciding, courts have also taken into account the specific characteristics of just-in-time production in the automotive sector. There are several precedents, in which German state courts have granted injunctions prohibiting the suspension of delivery s to prevent major financial losses.

In view of the strict standard and limited available time, interim relief may not be sufficient to secure continued supply. Given the potential impact of an injunction, courts are generally reluctant to decide without holding a hearing before. To ensure continued supply in the short term, the customer may consider making payment under protest and subject to reclaim in court or arbitration. However, this approach carries significant risks: with the upfront payment the customer assumes the risk of the supplier’s insolvency as well as the risk associated with litigation or arbitration.

If the supplier insists on unconditional payments, the customer may choose to pay and later declare the avoidance of the agreement once dependency on the supplier has ended. German courts have qualified the announcement of a suspension of deliveries as a threat in the legal sense. Such threat is illicit if the supplier lacks the right to withhold deliveries. Under German law, a contract can be rescinded based on an illicit threat within one year after the threat ceases. If successful, the contract – or the price adjustment – is deemed void from the outset, requiring reversal of all exchanged services: the supplier must refund payments, and the customer must return delivered parts or provide compensation.

Finally, a supplier who is being sued by its customer may be interested in having the effects of the legal dispute extended to the next level (e.g. to its own customer). Supply chains, especially global ones, are complex systems. To fulfill their obligations, players at different levels depend on the performance of their contractual partners. Disputes in the supply chain are therefore not usually limited to the relationship between the claimant and the respondent. Rather, the outcome of one dispute often triggers follow-on disputes. To avoid losing the case twice, the supplier has an interest in extending the decision in the first case to the follow-on case, not only with regard to the dispositive part but also with regard to all relevant findings. In state court proceedings, this can be achieved by issuing a third-party notice. In arbitration, however, such an instrument is usually unavailable. The German Arbitration Institute (DIS) has recently introduced “Supplementary Rules for Third-Party Notices” which address this issue allowing, under certain conditions, that the recipient of a third-party notice is bound by the arbitral award in a follow-on dispute. [2]

Looking at the global landscape, one can expect that, in view of the prevailing instability, disputes in the supply will remain at a high level in the automotive sector. The situation may change, once the shift from the combustion engine to e-mobility has progressed and current challenges are mitigated, for example through resolution of trade conflicts and stabilization of energy markets.