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March 7, 2021
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Business Review Western MI
Business Review Western MI
READY TO RUMBLE
(2007-04-05)
(wgvu) - Lawsuits are very bad customer relations. If you really throw down the
gauntlet and stop shipping, you're done, baby, you're done.

Butzel Long lawyer Daniel Sharkey of Detroit used these words at the Van
Andel Global Trade Center auto symposium March 8 to underscore the vast
repercussions of an increase of auto supplier suits against their
tier-one customers. Despite his warnings, rampant material price
increases the past few years have prompted many suppliers to fight for
price increases, changing the landscape of supplier relations.

Everything changed because of steel, Sharkey said. It was a 100
percent (increase) in 55 days. It just went nuts, and the whole world
turned upside down.

January 2004 marked the first wave of steel-price-inspired litigation,
said Frederic Smith, partner at Warner, Norcross & Judd's Southfield
office. That's when China's hunqger and the end of U.S.-enforced steel
tariffs forced prices to new heights and OEMs bucked pass-alongs
filtering up the supply chain.

General Motors was the first to say, We're not paying any more
money,' Smith said. They were losing money on every car.

That trickled down to the tier-one suppliers, who also refused to pay
more for parts than originally agreed. Thus began a wave of suits as
tier-two and -three suppliers across the state fought for compensation
of rising steel costs. Whereas once legal action was taboo, desperate
times emboldened many suppliers.

When the choice is recouping money or going out of business , Smith
said. I have a west Michigan supplier.

But the first suits over material costs often ended poorly for
suppliers. Judges issued affirmative injunctions, forcing them to
continue shipping parts during the trial. That sent many companies out
of business before the suits ended, Smith noted.

The tide turned in 2005, when judges complained such suits were clogging
the dockets. Many stopped issuing injunctions, forcing tier ones to pay
higher prices to keep suppliers shipping parts. Those additional costs
could be recouped if the tier ones prevailed in the suit, Smith said.

But the unusual loopholes of auto contracts tied a noose around some
upper tiers. The same terms and conditions that had benefited them
historically hung some of them in court.

Auto contracts are odd. They allow upper-tier suppliers to cancel at
their convenience, Smith said, adding that many purchase orders didn't
specify a certain number of parts for the order.

That caused many judges to rule they weren't mutually obligating
contracts, relieving lower-tier suppliers of a requirement to ship at
originally stated prices.

From a buyer's perspective, it's extortion, Sharkey said. From a
seller's perspective, they're getting bled to death. Terms and
conditions matter now. It used to be seven or eight pages you never read.

The suits continue in 2007 and now include cases involving resin prices,
which have risen alongside oil, copper and brass costs, Sharkey said.

A lot of times, the battlegrounds have changed, Smith said. I see a
lot more in bankruptcy settings. Bankruptcies have continued unabated. A
lot of those horrendous contracts have either expired or been
renegotiated. I don't see as many over steel prices.

The litigation of the past two years changed the language of contracts,
with many suppliers now basing prices on commodity indices and tier-ones
committing to more specifics.

The period also encouraged smaller suppliers to consider litigation as a
possible avenue.
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