Electric Vehicle Program Delays And Cancellations: What Happens To Supplier Contracts?

Electric Vehicle (EV) program delays and cancellations have become increasingly prevalent and already have started triggering disputes. Among the issues that come into play are (i) the extent of the customer’s obligation to purchase forecasted volumes, which the customer’s terms typically say are non-binding, but which significantly influence a supplier’s quote and piece price; (ii) the extent of a customer’s liability for reducing releases or discontinuing orders; (iii) supplier recovery for capital and capacity investments; and (iv) pricing or continued supply in the face of lower volumes, inflation, or changed assumptions. For automotive suppliers, these issues turn mainly on the language of their contracts with their customers, but additional arguments may be possible, depending on the circumstances.

If the contract structure affords the customer discretion over orders and volumes (for example, discretion to determine ordering levels within a range, or discretion to decide whether to proceed with a pre-production program milestone that triggers later production volumes), the supplier may argue that the customer must exercise that discretion in good faith and must not make changes that are unreasonably disproportionate to projections and expectations in the agreement. These principles afford some limitation on a buyer’s decisions, but, in practice, showing good faith–or a legitimate business rationale for a decision–is often not difficult for buyers. However, if the contract expressly permits volume reductions, program pauses, or cancellations upon notice (or contains other objective conditions), the dispute likely will turn on whether those express conditions were satisfied rather than on generalized “bad faith” allegations.

Pricing disputes often arise when the supplier’s quoted price assumed a certain volume and that volume was not realized. Volume reductions below the level needed to amortize tooling, capital, or engineering, particularly in view of standard Original Equipment Manufacturers (OEMs) terms and conditions can be a significant issue for suppliers.

Most of the time, a supplier’s first instinct drives them to look at pricing, commercial-recovery, or obsolescence language for relief. Still, the review should not end there. Suppliers often have opportunities to look to quantity obligations, change management requirements, contract duration terms or rejection of new purchase orders for leverage to negotiate price adjustments or obsolescence recovery resulting from bad bets by OEMs on EV production. As many in the industry are aware, the ongoing dispute in FCA v. Kamax and the long line of cases stemming from MSSC v. Airboss that have developed over the last several years serve as strong examples of supplier leverage that can arise from creatively challenging a buyer’s terms. The takeaway from these cases is that sellers may still have an exit strategy or a means of obtaining a price increase or recovery on obsolescence claims based on provisions in the contract or other contracts (to use as leverage) that do not otherwise deal directly with the issue giving rise to the primary dispute (e.g., program cancelations of volume shortfalls).

When working to resolve these disputes, suppliers must analyze their contracts and make arguments rooted in contract-interpretations and contract performance obligations. Importantly, each matter and each dispute is fact-specific, meaning that the outcome of the dispute may differ based on the specific circumstances of the parties. Side letters, courses of performance, and other details not fully described in the four-corners of the supply contract may impact the outcome and be a point of leverage for suppliers to consider. So too may provisions of the Uniform Commercial Code (UCC) to fill in gaps that are not specifically addressed in the contract between suppliers and their customers.

To provide a more tailored assessment of likely outcomes in a specific EV program delay/cancellation, the key first step is review of the governing supply terms (i.e., volume/forecast language, releases, termination rights, and pricing/change provisions). This analysis often is not straightforward, particularly if “battle of the forms” or other contract formation or interpretation issues are in play. The next step is creatively examining additional facts and potential leverage points. Butzel’s Automotive Team continues to work actively with clients throughout the supply chain on these and similar issues. We also continue to monitor cases like FCA v. Kamax, and others, which have the potential to shape the future of automotive supply chain contracts.

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