Floods, Earthquakes, Other Disasters and the Automotive Supply Chain

November 10, 2011 By Joe Dehner

Flooding in Thailand.  Earthquake and nuclear plant troubles in Japan.  Terrorist incidents.  For those involved in commerce, such disasters evoke the French phrase “force majeure,” or in simple English “excusable delay.”    What are the common standards in the automotive chain for what circumstance allows a supplier to delay or suspend performance, without being subject to damages for failure to deliver on time?

Auto makers use a common approach but differing specifics to describe the circumstances that allow a supplier to delay or fail in delivery without penalty.  One leading US maker broadly defines Excusable Delay as “a cause or event beyond the reasonable control of a party that is not attributable to its fault or negligence.”  It exempts “labor problems” and holds the supplier liable if it failed to “take actions reasonably necessary to schedule performance in anticipation” of customs and other government rules where notice has been given.  The “beyond reasonable control” language may seem broad and favorable to suppliers, but it has double-edged significance.  If safety stock could have been created before an event or if the supplier could source alternatives elsewhere from the area affected by a natural disaster, the maker could argue that Excusable Delay does not exist and could demand timely delivery.

 A Japanese maker defines Excusable Delay to be one “not resulting from the fault or negligence” of the supplier, but not including strikes or other labor troubles, “inability to obtain raw materials, fuel or suppliers” (unless due to government action) or “other industrial disturbances” unless the supplier used “best efforts” to cure the problem. Another Japanese maker uses much broader language to include “acts or events beyond the reasonable control” of the supplier, without express exceptions to this.

A US-based Tier 1 supplier straddles the issue between its own obligations to makers and its rights against its suppliers by defining Force Majeure as a delay or failure “to the extent that it is caused by an event or occurrence beyond the reasonable control of the party and without its fault or negligence.”  By coupling “beyond control” and “without fault,” the Tier-1 supplier aims to hold suppliers liable if they were negligent or at fault in dealing with a situation that was beyond its reasonable control in the first place.

It is important in dealing with a natural disaster, government-caused disruption or other event beyond a supplier’s control, to describe precisely the underlying event of excusable delay so that it fits within the contractual definition.  That’s a starting point for any supplier facing possible delay when confronted by disruptions beyond its control.

Equally important is the need to keep an upper tier supplier or maker informed about possible delay and what can be done to deal with disruption.  Here too contractual approaches differ.  One maker calls for “immediate” notice of a circumstances that could result in delay or non-performance.  Another calls for “prompt” notice, while others set precise time limits (e.g., 7 days, 14 days) for the timing of valid notice that would excuse delay or non-delivery.  Notice concerns the circumstance of excusable delay, not the circumstance of not being able to deliver.  This requires a certain amount of prognostication by a supplier in deciding whether to give notice.  For example, if timely delivery of a critical and unique component part could be jeopardized because of a hurricane, but the supplier’s delivery is not due for several months, the supplier must decide whether to provide notice right after the hurricane shuts down a component part supplier, or whether to wait until it becomes more certain that the parts cannot be obtained from another source to meet the supplier’s delivery date.  The cautious supplier will give notice upstream shortly after the hurricane has struck, and keep its buyer informed as events unfold.  The modern auto supply chain ultimately depends on collaborative efforts of all involved, and generally calls for more rather than less communication throughout the chain.