The Force Majeure Pandemic

Dietrich: 00:07

We really can't predict the future because nobody can. What we can do though, is help auto manufacturers recognize, prepare for in profit from whatever comes next. Auto Supply Chain Prophets gives you timely and relevant insights and best practices from industry leaders. It's all about what's happening now in the automotive supply chain and how to prepare your organization for the future because the auto supply chain is where the money is.

Jan Griffiths: 00:40

Hello and welcome to another episode of the Auto Supply Chain Prophets podcast in this episode, we are going to enter into the realm of the legal profession. Oh yes, we are we're gonna get knee deep into the subject of force majeure? Are we abusing force majeure? In this post COVID world? We'll talk about price increases, and we'll talk about Terms and Conditions from Your customer contract all the way through your organization, and then we'll talk about the future. What should we prepare for in future contracts? Joining us today is Katie Pullen, from Warner Norcross and Judd. Katie, welcome to the show!

Katie: 01:21

Thank you. It's nice to be here.

Jan Griffiths: 01:23

Katie Pullen, what is your story?

Katie: 01:26

Thanks for asking Jan. I am an attorney at Warner Norcross and Judd. My focus is on automotive supply chain litigation. And for those of you who don't know Warner, we are a Michigan based firm that has nine offices throughout the state of Michigan and we have approximately 230 attorneys. I am a member of the firm's 75 attorney member automotive supply chain group. Our group consists of a cross disciplinary team of attorneys who really work hand in hand with one another to help our clients through various legal issues they're facing, such as supply chain contracting issues, litigation, corporate, m&a, environmental tax, the list goes on and on. In addition, I am also antitrust counsel for two OESA councils and those would be the APRC and MarComm councils. And I am a member of the Automotive Women's Alliance Foundation.

Cathy Fisher: 02:28

Thank you, Katie. It sounds like you folks have a lot going on over there at your law firm and I'm really curious to hear about force majeure. Everybody's been talking about force majeure since COVID. Were kind of curious about has COVID triggered an overuse of force majeure as a legal remedy?

Katie: 02:51

Well, good question, Cathy. And I'm chuckling a little bit here because prior to COVID, you know, two and a half three years ago, force majeure was really a contractual term that most people just sort of glossed over and ignored. And since COVID hit it's really become one of the most invoked and highly analyzed contractual terms out there. As to whether or not it's being overused. I think that's a great question. I'm not sure that I would characterize it as being overused. But I do think that the doctrine is sometimes misunderstood. So to explain that, let me give you a little bit of background about force majeure provision. So virtually every contract is going to have a force majeure clause. And of course, you have to look at that particular provision to really understand what specific occurrence would constitute a force majeure event. But in general, those events are really when performance is rendered impossible by some unforeseeable event. So early on, and COVID, when it hit, we had all the slew of government shutdowns that were closing manufacturing facilities all across the globe. And of course, force majeure was being invoked up and down the supply chain. And for the most part, rightfully so right, performance was rendered impossible. But now here we are two and a half years later, and the COVID and emergency government shutdowns have really, for the most part been lifted. So times have changed. And what we're seeing now though, is that some suppliers are really trying to tie in piece price increases to a force majeure declaration. And I think this is where the misunderstanding is really coming in. What's happening is some suppliers are sort of leaning on force majeure to justify suspending performance due to some unexpected increased costs, but then in the next breath, they then demand a price increase and say, well, we'll keep forming if you pay these higher prices, so unfortunately for those folks, they may not understand that the law is clear that if a supplier simply needs a higher price relief to continue perform, then we don't have a force majeure event. Now, there are very rare exceptions, but the general rule is that you cannot rely on a force majeure provision to try and get price relief. So really, that's where the misunderstanding comes in. And pricing and force majeure issues are two different things that really should be dealt with separately because that's how the courts would deal with them.

Cathy Fisher: 05:37

That's interesting, Katie, because the other topic that I've heard a lot of suppliers, referring to force majeure over is just the transport, the congestion at the ports, the lack of truck drivers, those types of issues. Is that a situation that makes force majeure relevant for the suppliers?

Katie: 05:57

Perhaps. I think the question then becomes is expedited freight shipping available, and if it is, and it may not be a force majeure event, but if it's truly impossible to get those parts across the ocean, then you might be in the world of force majeure. What listeners should remember is that the force majeure events really only last as long as the force majeure event so as soon as that port congestion gets better, then you are obligated under your contract to resume performance and continue. And also I just want to note is that these declarations are force majeure and what constitutes a force majeure event such as shipping and clogged ports, is going to depend on what the contract says. So you need to look at your terms and conditions and see whether or not that issue would fall within the contractual force majeure provision, and what notice might be required.

Terry Onica: 06:54

What are some of the other key lessons learned from COVID that will impact supplier contracts and or the relationships with the OEMs going forward?

Katie: 07:04

Well, Terry, there are a lot of lessons. Big picture, I would say to expect the unexpected. I know that might be overused, but it's certainly true. But also prepare for the unexpected is, I think, a key lesson. After two and a half years of COVID. Obviously, the supply chain is still feeling the issues of the pandemic. I am running to court on a regular basis filing emergency motions trying to help continue the flow of parts through the automotive industry. So what suppliers are doing is they're turning to legal to find out whether or not they can increase their prices declare force majeure, like we were just talking about whether they have an option to suspend performance. But of course, our opinion and legal is going to be pretty much solely dependent upon what the contract documents say. I would really urge the industry when you're entering into new contracts to really consider whether or not there should be any changes in those contracting documents to adjust to this new world.

Cathy Fisher: 08:11

I'm curious Katie, what homework, internal homework would you recommend the suppliers undertake so that they can better manage the supply chain risks instead of defaulting back to force majeure or other contract terms?

Katie: 08:27

Good question. I think it's important to pull out your contracting documents, look at them. And that's both for existing contracts. And then also look closely at what the terms would be for the new contracts like that is number one homework to do pull your contracting documents together.

Cathy Fisher: 08:44

Katie, I wanted to ask who should take the lead in that effort at the suppliers, especially if you think about like a tier two, tier three smaller organization who really functionally should be taking that lead if they don't have in house legal counsel.

Katie: 08:59

They don't have in house legal counsel, outside counsel can help assess documents, really flag any holes or gaps. My firm and myself we routinely help clients revise their terms and conditions. And oftentimes after we resolve a supply chain dispute litigation, we will go back to our clients with lessons learned, you know, what could we do different next time to help avoid this situation in the future?

Cathy Fisher: 09:28

Do you recommend a cross functional review of those contracts within the suppliers because we oftentimes find that folks who have requirements in those contracts whether from a quality perspective or delivery perspective, are not even aware of what the contract say.

Katie: 09:45

That's interesting, Cathy. Yes. I mean, maybe day one when somebody's hired is, here's a copy of our general terms and conditions. Please read them. And if you have any questions, let's talk about it. And here's what might be important to you, especially those folks in the sales teams should most definitely be aware of the contracting risks and holes and everything out there.

Jan Griffiths: 10:12

You know, Katie, what I found in my experience is that people get confused between what's a business term? And what's a legal term. And sometimes in their mind, they say, oh, that's just legal stuff. That's just boilerplate stuff. I don't need to mess with that. And the answer is, yeah, you do. It's all interwoven together. You cannot separate certain terms and conditions and say, That's illegal people. It's all part of the business relationship. And if you're contracting with another company, you better understand it. Do you see that happening?

Katie: 10:49

Absolutely. Jan, I completely agree with that. They all work together these terms, and you have to understand them all. Not only that, but it's not just your terms. But you need to understand what your customers terms say to. And you need to understand what your suppliers term, say, if they're trying to push their terms on to you. So certainly, it's knowing your not only your own terms, but everyone you're working with as far as your customers and your supplier base goes.

Terry Onica: 11:17

Katie, I often work with supply chain managers, and they're expected for new award of business to meet suppliers certifications, and they are totally unaware of it. So as they start sifting through the supplier certification, they're like, oh, my gosh, we need new software. And then it's like we didn't build this into the piece price. And it's really it's taken them by surprise. What do you recommend when somebody gets a contract to get that wording and all the expectations out to all the involved parties,?

Katie: 11:46

There's a best practice on how to analyze contracts within the organization. I would urge the automotive industry to make sure that they read through all the documents, understand them, identify holes, find out from legal whether there are any risks.

Cathy Fisher: 12:06

And I think it's also important to be able to map those requirements directly to which are the processes inside of my organization that are going to accomplish that. So you know which process owners need to be involved in that contract review, who needs to get the details about the needs of the customer, the requirements, the infrastructure, the business may use, as well, so.

Jan Griffiths: 12:26

I really love what you just said, Cathy, that mapping it to the processes that is critical. And as I think of the poor supply chain leader in tier one, or tier two, you've got these customer contracts with terms and conditions, all different. And you're expected to flow them down through into the supply base. And that's a whole lot trickier than it sounds.

Katie: 12:51

You're right, Jan, I completely agree with that. And that's why we always tell our clients, you don't want to be stuck in the middle. Meaning you don't want to agree to one thing with your supplier, but then promise something more to your customer, where all the sudden, you're stuck and you are stopping shipments to your customer or you're in some sort of emergency situation. So we always encourage our clients to make sure that you analyze all terms and conditions throughout the supply chain to make sure you're not in that position.

Terry Onica: 13:24

What do you think future agreements between OEMs and suppliers are going to look like with the ever changing environment we're in right now. Looking at we've got new entrants, we have new industry competition, new raw materials, what do you see there?

Katie: 13:37

That's a really good question. And if only we had a crystal ball, right, but I do think it's going to be interesting to see. And I do think we're seeing some new things. It does seem as though at least from my experience, and some of my colleagues experience that our supplier clients are really starting to pay much closer attention to the terms and conditions rather than just accepting them. They're really reading through documents. And we're also hearing from more and more of our tier one supplier clients who have obviously been hit the hardest, arguably by some of the disruptions recently, that they're really trying to become more aggressive with the OEMs and really trying to ask for help and support from them. And as far as new entrants go, I think the same is true. Some of these new entrants into the industry may really push back on some of the historical way that the automotive industry has been doing business for decades. They may have different ideas. So for instance, raw material suppliers, you know, most industries are accustomed to having a lot of leverage and contract negotiations, they're likely gonna bring some of their own contracting mentality and strategies to the table. So I really do think that some of these new pressures and negotiating strategies could force or encourage some of the OEMs to start to negotiate maybe flex a little bit to adjust to the changing industry.

Cathy Fisher: 15:05

Katie, is there some resource out there that would inform especially these new entrants into automotive of understanding? What's typical, or the best practices that we have adopted or developed in automotive over the past decades? Is there some tools available for those new entrants to guide them?

Katie: 15:26

Good question. Off the top of my head, I can only tell you that my firm does offer lunch and learns, which includes contracting 101, essentially, for our clients and prospective clients, who might have questions on how they should be going about their business and entering into supply chain agreements. So we do offer those sort of educational options for our client and prospective clients.

Jan Griffiths: 15:53

Katie, what is the one thing the one piece of advice that you would give to supply chain leaders out there something that this actionable to them they could take on board right now, one thing, what would that be?

Katie: 16:06

I would tell them to pay close attention to the new contracts that they are signing. We're in a new world and make sure that the terms that you're agreeing to reflect that certain things that were previously unforeseeable may now be foreseeable. So for instance, some of the force majeure discussions we've discussed today, some of the raw material issues, you know, maybe they want to negotiate new pricing indexes into their contracts. But really, I would encourage people and the listeners to really pay close attention to what they're getting their company into and signing these contracts.

Jan Griffiths: 16:45

Excellent advice. Katie, thank you so much for joining us today.

Katie: 16:49

Thank you, Jan, Terry and Cathy, I really appreciate your time.

Dietrich: 16:57

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