Since the pandemic took hold in 2020, the automotive industry has been bombarded with disruption to business as usual for supply chains, requiring both automakers and suppliers to focus on flexibility, adaptability and resilience — including when it comes to contracts, pricing and other legal issues. Industry experts expect that many of the challenges that wreaked havoc on the automotive supply chain in 2021, will continue to plague the industry through mid-2022, or even longer.
Raw materials (such as resin, aluminum, steel, and of course, semiconductor chips) may continue to be limited in 2022. Take resin, for example. The disruption to resin-product production in 2021, caused primarily by hurricanes and winter storm events along the Gulf Coast in Texas and Louisiana, is still resulting in some increased prices and shortages. As extreme weather events are becoming more common, the resin supply could take another hit in the winter months of 2022. Steel prices also are soaring, which is expected to continue into 2022. There are concerns of a possible shortage of aluminum due to constrained magnesium supplies (needed for aluminum production). Further, the often-discussed semiconductor chip shortage is projected to continue impacting supply chains well into 2022, and possibly beyond, while additional manufacturing infrastructure is developed in the United States and abroad.
Shipping challenges go hand-in-hand with supply constraints. Late deliveries caused by raw material and part shortages (the antithesis to the just-in-time process used by the automotive industry) are becoming increasingly more common. When this occurs, orders may need to be expedited. This may be a difficult and expensive task, particularly as the shipping industry is digging itself out of an enormous backlog and the trucking industry reportedly will suffer from a driver shortage well into 2022. Delivery costs may skyrocket even further if shipment by air is needed to protect production. While these supply chain issues likely will not shut down production lines in 2022, to the same extent as 2021, the automotive industry can expect continued challenges.
Who Will Pay?
Due to the above issues, increased raw material and shipping prices are almost a given for 2022, as they were in 2021. The question is whether the customer or the supplier ultimately is responsible for these increased expenses. The answer generally is found in the parties’ purchase order contract and the accompanying set of terms and conditions.
While terms vary, standard automotive industry contracts may provide that the seller will bear costs associated with late deliveries, even if caused by supply chain disruption. That being said, contracts also may contain language allocating these expenses differently, or providing a legal excuse for late deliveries (such as a force majeure clause). Other legal theories may provide a legal excuse for missing delivery dates, such as impracticability, impossibility, frustration of purposes, or allocation. While contracts may on their face require a seller to bear these extra costs, and force majeure and legal excuse clauses and theories may limit a supplier’s responsibility for such expenses, there are no guarantees; each contract and set of circumstances is unique and must be analyzed individually.
Supply Chain Lawsuits in the Automotive Industry
Automotive industry lawsuits related to supply chain disputes in 2021 were few and far between. Typically, these cases included allegations seeking to compel deliveries of raw materials or products at prices specified in purchase orders or in compliance with other contract requirements. These cases slowly will work their way through the court system.
What’s Next for 2022?
In 2021, some customers and suppliers resolved pricing and delivery expense disputes with interim accommodations, while reserving rights to seek recovery later. At times, these resolutions included payments or other terms not required by the applicable purchase order contracts.
Will these interim deals result in lawsuits in 2022? As of January 1st, it seems unlikely that courts will have their dockets clogged with supply chain disputes in 2022, particularly because many of the same challenges continue to plague the industry. But whether it is in 2022 or later, it is expected that the automotive industry will see litigation focused on claims to recover extra price increase payments and delivery expenses.
Separate from interim deals and lawsuits, there are other options that companies are employing to resolve disputes. These include renegotiating contracts or agreeing to amendments specifying a new allocation of delivery costs, revising prices so that they are tied to a publicly reported index, or dual-sourcing raw materials or component parts to minimize risk to production.
The past two years have shown how difficult it is to anticipate what challenges may lie ahead. Whether the automotive industry will change standard practices to accommodate future supply chain disruption remains an unanswered question. But that doesn’t mean you can’t be prepared. If you are in the process of renegotiating contracts with suppliers or customers, make sure to consult experienced legal professionals who can advise you about how you can best protect your interests. If you find yourself in a dispute with a supplier or customer and a business solution does not seem viable, counsel can also provide a frank assessment of what legal remedies are available.
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