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Ahead of the Curve Auto Supplier Blog

February 11, 2014

GM Backs Off on Controversial and Troubling Provisions in its July 2013 Terms & Conditions

Seven months of pushback from suppliers later, and it appears that GM has finally gotten the message . . . or, at least part of it.  On February 11, GM issued updated purchasing terms and conditions, which back off of some of the most controversial and troubling provisions of the revamped purchasing terms and conditions that GM rolled out in July of last year.  GM’s Vice President of Global Purchasing and Supply Chain, Grace Leiblein, was quoted by Automotive News as explaining that the reason for the revision of the terms and conditions was that initial changes to the terms and conditions “left a lot of room for interpretation” and were being “interpreted differently than [GM’s] business intent.”  Lieblein acknowledged that it was a “misstep” for GM to revise the terms and conditions without input from its supply base.  She suggested that the updated terms and conditions were being issued as an expression of GM’s commitment to, and trust in, its suppliers.   The updated purchasing terms and conditions issued today implement the following key changes to the July 2013 purchasing terms and conditions: 
  • In Section 8, Protection Against Labor Disruptions (previously entitled “Protection Against Supply Interruptions”), GM  has removed much of the broad language requiring suppliers to take all actions necessary to ensure uninterrupted supply of goods for at least 30 days during any “foreseeable or anticipated” event or circumstance that could lead to delay of either GM’s production or a supplier’s performance, which technically would have required suppliers to predict potential issues both upstream and downstream.
    • GM has narrowed this provision to ensuring uninterrupted supply of goods for at least 30 days only during “foreseeable or anticipated” labor disruptions or the expiration of the supplier’s labor contracts, which is essentially what was required of suppliers under the 2011 terms and conditions.  The deletion of this broad language reduces the supplier’s risk of breaching this provision by failing to predict circumstances that may arguably have been “foreseeable or anticipated” by others in the supply chain, but for which the supplier may have had insufficient information to be able to protect its supply.  
  • In Section 13, Product Warranty; Warranty of Performance, GM has deleted the last sentence, which required the supplier to warrant and guarantee that the goods “will not, at any time (including after expiration or termination of this Contract), pose an unreasonable risk to consumer or vehicle safety.”  This sentence, which appeared to obligate suppliers to a perpetual “safety warranty,” was one of the most, if not the most, distressing provisions of the July 2013 terms and conditions, both from a legal and supplier perspective. 
    • While Section 13 still contains language that is of concern, the removal of this language reduces suppliers’ risk of future liability by putting a finite number of years on a supplier’s warranty obligations, regardless of however difficult that period of time may be to determine given the other vague language that remains in this provision. 
  • Section 15, Duty to Inform and Notify has been deleted in its entirety.  That section required suppliers to notify GM of facts and circumstances “reasonably likely to give rise to” : (i) any failure by the supplier to perform its obligations, (ii) and delay in the delivery of goods and services, (iii) any defects or quality problems relating to the goods or services, (iv) any changes to in the supplier’s corporate structure or organization, (v) any deficiency in GM’s “specifications, samples, prototypes or test results”, (vi) any failure by the supplier, its subcontractors or common carriers to comply with applicable laws and regulations, or (vii) any change in the supplier’s “authorized representatives, insurance coverage or professional certifications”. 
    • As a result of this key change, suppliers are no longer under an obligation to police the entire supply chain (including GM in some circumstances) in order to anticipate situations where the listed circumstances are “reasonably likely” to arise.  This is particularly helpful in reducing suppliers’ risk of liability for breach where suppliers were under this obligation even though they had no, or only partial knowledge of, and may not have access to, all of the information necessary to comply. 
  • In Section 15 (previously Section 16), Audit Rights; Inspection of Seller’s Premises, GM has deleted the reference to “all pertinent information” from the first sentence as well as the following sentence “If requested by Buyer, Seller will promptly provide to Buyer its most current income statements, balance sheets, cash flow statements and supporting data and schedules.”  This sentence gave GM broad access to supplier financial information, regardless of whether such information was relevant to the supplier’s business with GM, causing a number of concerns for suppliers, from potential securities law violation worries to concerns that such information would be used to demand price decreases from the supplier or to give GM the ability to terminate without liability. 
    • In the updated terms and conditions, GM has expressly limited its ability to access a supplier’s books and records for the purpose of auditing the supplier’s compliance with the contract by inserting the words “books and records solely” into the first sentence.  While this change does alleviate the breadth of GM’s audit rights to some degree and precludes GM from arbitrarily demanding access to supplier financial information, GM’s audit rights remain broad and risky for suppliers, especially when viewed in light of other provisions of the updated terms and conditions. 
  • In Section 23 (previously Section 24), Intellectual Property Rights, GM has substantially revised the language of subparagraph (d), which relates to “background intellectual property rights.”  Previously, though subparagraph (d) purported to provide GM with a limited license to a supplier’s background intellectual property, the license was in fact very broad.  It allowed GM to use a supplier’s background intellectual property to do a wide variety of things, including, to make or have the parts made by a third party (i.e. a supplier’s competitor), and the circumstances in which the license could be used were vague enough to allow GM access to a supplier’s background intellectual property if GM wanted or needed it.  The circumstances in which GM could exercise the license to a supplier’s background intellectual property previously included the following: (i) where GM deemed it to be “reasonably necessary for the direct purposes of this Contract”, without cost to GM, (ii) in the case of termination for cause or in case of a force majeure event alleged by Seller for the lifetime of the applicable product or program, without cost to GM, or (iii) if after “good-faith consultation” with the supplier, GM deemed it “reasonably necessary” to prevent interruption or delay to its production operations and for as long as deemed “reasonably necessary” by GM at a reasonable royalty rate to be negotiated. 
    • In the updated terms and conditions, though GM did not modify the scope of the license in terms of what the license allows GM to do with a supplier’s background intellectual property, including its ability to make or have the supplier’s parts made by a competitor, GM did significantly limit the circumstances in which it can use the license by removing much of the vague language and inserting clearer and narrower language.  Under the updated terms and conditions, GM is entitled to use the license to a supplier’s background intellectual property, at no cost to GM, only if: (i) the supplier “breaches or repudiates its obligations by being unable or unwilling to deliver goods or services” or (ii) the supplier is unable to supply goods or services because of a force majeure event, but only for as long as the supplier is unable to supply.  In addition, GM also added a sentence expressly limiting the duration of the license to the expiration date of the contract.  While the remaining subparagraphs of this Section still contain problematic language, again, particularly when viewed in conjunction with the other provisions, the changes to subparagraph (d) are considerable and provide suppliers with more protection than they previously had under the July 2013 terms and conditions. 
Other changes reflected in the updated purchasing terms and conditions include the following: 
  • In Section 9, Seller’s Assurance of Performance, GM has deleted the phrase “as determined by Buyer in its reasonable discretion”, eliminating GM’s ability to unilaterally determine whether assurances of continued performance provided by a supplier are adequate. 
  • In Section 17 (previously Section 18), Payment; Setoff and Recoupment, GM has added language to limit its ability to withhold payment to a supplier pending receipt of evidence that the goods supplied by the supplier are free of liens, claims and encumbrances to only those situations where GM “has reasonable grounds to believe” that goods supplied by the supplier “may be subject to any liens, claims or encumbrances.” 
  • In Section 28 (previously 29), Insurance, GM has removed the burden for suppliers to name GM as an additional insured or beneficiary of all liability policies.  
GM’s decision to issue these important revisions to the purchasing terms and conditions after overhauling its purchasing terms and conditions just seven months ago is a key victory for suppliers to GM.  However, suppliers doing business under these updated terms and conditions without the proper legal protections are still exposed to significant risks and should consider consulting their legal advisors for assistance in navigating the updated terms and conditions in order to best protect their businesses.

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