FCA US LLC and Stellantis N.V. (“FCA”) issued new purchase order terms and conditions, including Global Terms and Conditions – Direct Materials (Common to all regions) and a North America Exhibit A to Global General Terms and Conditions (together, “Terms”). FCA’s revised Terms include numerous changes, many of which may have a significant impact on Suppliers and their business with FCA.
Identifying the changes and differences from prior versions of these Terms is only the first step. Suppliers to FCA need to understand the implications of the various changes to their businesses. The second step will require Suppliers to think strategically about how they will respond to the Terms that FCA now seeks to impose, including: (a) whether these terms are acceptable for existing business or whether certain objections should be raised; (b) implications of these terms to future business awards; and (c) any corresponding changes that may be needed to the Supplier’s contracts with its own supply base.
Foley & Lardner LLP prepared the chart below to help Suppliers navigate the changes by not only identifying the most significant provisions and changes, but explaining the possible implications and strategic considerations for each of these changes.
Applicability; Effectiveness; Entire Agreement; Acceptance
FCA clarified the type of damages it can collect from its Suppliers and the timeframe for payment of those damages.
Suppliers should be mindful of the potential damages for which they may be responsible if they are found to have breached an obligation concerning delivery.
Volume Projections, Capacity, Requirements, and Release Authorization
If FCA’s peak requirements ever exceed a Supplier’s capacity, FCA has the right to decide between making capital improvements with the existing Supplier or sourcing from a third party (without penalty). Any capital improvements made will be FCA’s property.
In the event that a Supplier is required to make capital improvements necessary to increase the Supplier’s capacity, if the Supplier is paying for any improvements or any portion thereof for which the Supplier expects to have ownership, the Supplier must take care to obtain a clear agreement regarding ownership.
Volume Projections, Capacity, Requirements, and Release Authorization
FCA has revised the warranty terms to significantly expand the scope of the warranty. For example, the Supplier warrants that it “has performed and will perform all testing necessary or appropriate to ensure that the goods are not defective in any way.” Suppliers are also required to acknowledge that “FCA will rely on Seller’s expertise in the design of the goods.”
Additionally, Suppliers and their affiliates warrant that they “shall conduct themselves at all times, whether or not in connection with a Purchase Order, in a manner that is not prejudicial or harmful to FCA’s interests, products, services, image, goodwill, or reputation (as interpreted by FCA).”
FCA extends the applicable warranty period to include “the longer of (A) two (2) years from the delivery of the last good under a Purchase Order, (B) the longest warranty extended to FCA’s end user customers by FCA on the date of the Purchase Order for the applicable good, (C) the period set forth in the Source Package (including the quality and durability specifications), (D) any other period agreed upon by FCA and Seller in a Purchase Order or other document, (E) the period set forth in any Warranty Policies (as defined below), or (F) the period of any Recall or similar period.”
FCA’s proposed extension of the warranty period is significant and, as written, appears to afford FCA the ability to extend the period unilaterally. As written, a Supplier arguably must warrant the first products supplied under the Purchase Order for the entire life of the contract, plus two years, a provision that easily could extend to nine or ten years in some cases. On the other hand, provisions tying the warranty to FCA’s “Warranty Policies” and the period of any “Recall” potentially open the door for FCA to extend the applicable warranty by revising other documents.
Depending on how they are applied by FCA, these provisions potentially are among the most significant detriments to Suppliers in the new North American Terms. Suppliers should consider whether they can agree to these provisions as written. At a minimum, Suppliers should consider pushing for a more specifically defined warranty period and limitations on FCA’s ability to unilaterally extend the warranty period. Suppliers selling products based on FCA designs should consider pushing back on warranties concerning testing and fitness for purpose.
By providing additional warranties and assuming additional risks, Suppliers will now be providing Goods and services of greater value. As such, Suppliers should consider leveraging this greater value in contract negotiations.
The North American Terms seek to create a one-way ratchet with pricing in which Suppliers are obligated to pass through any savings to FCA but retain the risk for any cost increases.
The requirement that Suppliers not charge FCA more for goods than Supplier charges to other customers is concerning because it lacks the typical caveats that the goods must be sold in substantially similar quantities and substantially similar terms.
Suppliers should carefully consider whether they can agree to FCA’s proposed pricing model and consider the associated risks when quoting business to FCA.
Property and Tooling
A Supplier provides the same warranties for tooling as it does for goods under N.A. § 7, and FCA may bring a tooling warranty claim two (2) years past the last use of Buyer’s property by a Supplier or the last payment made by FCA.
If a Supplier’s cost to manufacture or acquire FCA’s property is less than the order price, the Supplier will pay FCA the difference.
A Supplier is now required to carry $5 million per occurrence in commercial general liability insurance. Under the prior Terms, a Supplier only was required to carry a total of $5 million in commercial general liability insurance.
The North American Terms concerning indemnification are more detailed and have an expanded scope. For example, a Supplier is now required to indemnify FCA’s Suppliers, dealers, and distributors, whereas, under the prior terms, a Supplier was only required to indemnify FCA and its subsidiaries.
Potential damages are also clarified to include: “lost business, lost opportunity, loss of use [and] costs associated with business interruption.”
A Supplier waives any claim or defense that FCA provided the specifications or that the claim arose out of the Supplier’s compliance with the specifications or directions from FCA, its dealer, or any subcontractor or supplier to FCA or its dealers.
This gives FCA the flexibility to decide whether it will tender the defense to the Supplier or take over the defense, but both will be at the Supplier’s cost.
Under the new North American Terms, Suppliers have increased disclosure obligations. Now, for purchased parts, upon FCA’s request, a Supplier must disclose its Supplier and the price paid.
Payment; FCA’s Commitments; Claims Adjustment
There are two additional terms regarding the timing of payment. First, the North American Terms specify that payment is due 90 days after FCA has received a proper and timely undisputed invoice. Second, except as set forth in a contract or agreement, all amounts due from Suppliers to FCA are due immediately.
The North American Terms no longer include language that Suppliers are entitled to periodic information about FCA’s financial condition and ability to fulfill payment terms.
When FCA exercises its right to set-off or recoupment, FCA is no longer required to substantiate the offset within fifteen (15) days. Additionally, if FCA’s set-off or recoupment was improper, a Supplier’s only recourse is that the Supplier can require FCA to pay the original amounts due to the Supplier. FCA will not be liable for any damages as a result of deduction, set-off, recoupment, or other action.
Any Supplier currently operating on payment terms less than 90 days should consider objecting and pushing back on the proposed attempt to change payment terms. Suppliers will want to factor in the cost any extended payment terms when negotiating contracts and setting prices.
Customs; Export Controls
The Global Terms now require Suppliers to guarantee the accuracy of “made in __” labeling.
The North American Terms require all goods and services supplied by companies in North America to satisfy the requirements of the US-Mexico-Canada Agreement (USMCA), unless FCA provides a written exception.
While most Suppliers in North America likely are already compliant with the USMCA, any who are not will need to take steps to become compliant.
To the extent not already compliant, Suppliers will want to factor in the cost of compliance with this new obligation when negotiating contracts and setting prices.
Use of FCA’s Name
The North American Terms add a requirement that Suppliers refrain from publishing derogatory or disparaging statements about FCA or its affiliates.
Data; Software; Security; and Privacy
The North American Terms expand “FCA Data” to include: (1) Development Data (all data produced or collected from an FCA branded vehicle); and (2) all improvements and derivatives made by FCA, its Suppliers, and sub-Suppliers.
FCA’s right to disclose the confidential information of its Suppliers has been expanded from “any reason related to or in connection with its risk management functions” to “any business reason.”
Suppliers that are required to disclose significant confidential information may want to consider negotiating a separate confidentiality or nondisclosure agreement to supersede the default provision in the Terms and Conditions.
Cancellation/Termination for Default; Termination at FCA’s Option
The North American Terms expand FCA’s power to terminate contracts for cause. For example, the conditions for default have been expanded to include unauthorized changes in control and situations in which “in FCA’s reasonable judgment, Seller’s financial or other condition is such that it threatens or could reasonably threaten Seller’s ability to fully and timely perform under and installment of or an entire Purchase Order.”
FCA may also compel Suppliers to terminate or use different subcontractors immediately.
While FCA retains for itself the right to terminate for convenience, a termination for default further restricts the payments to which the Supplier can claim. In addition, the Supplier may be liable for damages resulting from any breach.
The North American Terms expand FCA’s remedies for default. Upon default, FCA may terminate all other Purchase Orders with the Supplier and may designate representatives to be present at a Supplier’s facility at the Supplier’s cost.
The North American Terms also expand FCA’s IP rights: if FCA suspends or terminates a Purchase Order for breach or at FCA’s option under Section 19 of the North American Terms, FCA will receive a perpetual license to use and exploit the Supplier’s goods and IP associated with the Purchase Order.
Required Compliance; Cooperation
The Global Terms now require that Suppliers provide advance warning and notice of any part of any goods that could become dangerous or hazardous. They also require Suppliers bear all costs necessary to achieve compliance with existing or new laws.
Dispute Resolution; Governing Law
The North American Terms now include an express waiver of jury trial rights. Additionally, all claims must be brought within one year of the date such claim first arises, regardless of actual knowledge.
The scope of arbitration has been expanded to include injunctive relief, enforcement of Suppliers’ delivery obligations, and the enforcement of FCA’s rights and remedies associated with competitiveness.
Compliance with Requirements; Formula and Information Disclosure; Emissions
The Global Terms require Suppliers to comply with applicable safety and emissions laws.
While FCA retains for itself the right to terminate for convenience, a termination for default further restricts the payments to which the Supplier can claim. In addition, the Supplier may be liable for damages resulting from breach of the warranty regarding pricing.
Although “most favored nation” pricing provisions are not uncommon, the price warranty provided for in Section 29 is unusual in that it does not include limitations for similar volumes or similarly situated customers.
The North American Terms broadened the scope of equitable relief from material breaches regarding delivery and FCA’s property to breaches regarding labor disputes, the use of FCA’s name, data and trade secrets, audits, taxes, and compliance with applicable laws.
Cost Savings Programs
Suppliers must use “best efforts” to reduce costs as much as possible and pass on all savings to FCA. By October 1 of each year, the Supplier must provide a written plan for implementing cost savings and productivity improvements. Such plans are deemed binding on the supplier.
The obligation to pass through any cost savings creates a one-way ratchet effect in which the Supplier is forced to pass any cost reductions through to its Supplier without the corresponding ability to pass through any cost increases.
Seller’s Contracts with its Suppliers and Subcontractors; Seller Acting as a Directed Component Supplier
The North American Terms expand FCA’s regulation of the relationship between Tier 1 Suppliers (referred to as “Assemblers” in the context of a directed supply relationship) and directed component Suppliers. For instance: (1) Assembler agreements must contain terms at least as beneficial to FCA as those in FCA’s contract; (2) any benefits reaped by Assemblers resulting from changes in the Supplier relationship automatically pass on to FCA; (3) FCA may compel assignment and directly enforce the contracts against directed component Suppliers.
While it already is best practice to flow down a Supplier’s customer obligations to its sub-suppliers, these changes impose a contractual obligation to do so. Any failure to do so will leave a Supplier at risk of liability to FCA. It also will further impede a Supplier’s ability to seek relief from FCA due to failures by a FCA-directed sub-supplier.
The obligation to pass through any benefits creates a one-way ratchet effect in which the Supplier is forced to pass any cost reductions through to FCA without the corresponding ability to pass through any cost increases.
Suppliers should review their own contracts with any FCA-directed sub-suppliers to ensure that they adequately flow down the updated FCA Terms and Conditions to those sub-suppliers.
Suppliers may want to consider pushing for revisions to the obligation to pass through cost savings without a corresponding ability to pass through cost increases.
Disposal of Scrap
To avoid rendering cancellation claims null and void, Suppliers must now obtain approval from FCA before disposing of any goods, assemblies, subassemblies, or other “materials related to a Purchase Order.”
FCA Computer Network; Access; Confidentiality
The Global Terms prohibit Suppliers from reverse engineering FCA’s property.
The North American Terms entitle FCA to specific performance and injunctive relief without needing to post bond if a Supplier violates FCA’s confidentiality requirements.
The North American and Global Terms clarified that each party is responsible for paying their respective income, indirect, and withholding taxes.
The North American Terms add an express waiver of any indirect, incidental, special, or consequential damages arising out of a Purchase Order, even if FCA has been advised of the possibility of such damages.
Although several provisions in the current Terms included similar limitations on a Supplier’s right of recovery, the new North American Terms add a global waiver of indirect, incidental, special, or consequential damages. In some cases, this may represent a potentially significant limitation on a Supplier’s ability to recover damages.
The North American Terms outlined the order of precedence for agreements with FCA: (1) Policies; (2) National Terms; (3) Global Terms; (4) Purchase Orders; (5) other documents that constitute the contract.
“Policies” include raw material and steel guidelines, instructions, documents, and procedures applicable to the Supplier’s obligations under a Purchase Order. See N.A. § 1 (g).
In addition, the terms specify that any conflict “will be resolved in a manner that is most favorable to FCA.”
This provision represents a departure from the traditional rule that ambiguity in a contract should be resolved against the drafter (FCA). Further, it reverses the traditional order of precedence in which a specifically negotiated Purchase Order generally controls over more general terms and conditions.
FCA’s decision to elevate its “Policies” to the prime position is particularly concerning as FCA reserves for itself the “right to unilaterally revise any Policy at any time by publishing such new Policy on the Supplier Portal. Seller shall be responsible for periodically checking the Supplier Portal for updates to the Policies.” N.A. § 1 (g). This effectively permits FCA to unilaterally revise the Policies in ways that may contradict the North American Terms and/or a specific Purchase Order.
To read Foley’s full analysis, click here.
