Recourse in the automotive supply chain

Which cost items are typically the subject of dispute?

Direct costs include spare parts, removal and refitting costs, and, where applicable, other costs such as compensation for loss of use and the costs of technical investigations. In addition, there may be dealer fees, costs for customer communication, replacement transport, software updates, disposal, production downtime and internal project costs. In the case of recalls initiated by regulatory authorities or for safety reasons, these costs can quickly amount to many times the price of the parts.

Not every field action is legally classified in the same way. A mandatory safety recall, a voluntary service campaign, a warranty or goodwill measure, or a precautionary stock clearance all serve different purposes. The following points are important for recourse: Was the measure necessary? Which vehicles were actually affected? Were there cheaper alternatives?

Minimum standard for the cost matrix

The cost matrix has no legally prescribed form; however, it can be established internally and contractually as a binding minimum standard. This is because a lump-sum cost statement without supporting documents complicates the verification process and may trigger contractual objection periods.

In such a matrix, each item is assigned to at least four dimensions: the measure specifies whether it is a recall, a service campaign, a warranty claim, a goodwill gesture, a sorting exercise or an inventory clearance. The population defines the set of vehicle, part, batch or serial numbers and distinguishes between units that have actually been processed and those that are only potentially affected. The time period covers the period in which the costs arose, the service was provided and the invoicing took place, including any subsequent corrections. The cost type breaks down the costs into the categories of parts, labour, logistics, dealers, communication, mobility, analysis, disposal, downtime and internal costs. This also makes it easier to assign the required supporting documents and evidence.

What grounds for a claim may apply?

If the part supplied is defective at the time of the transfer of risk, the buyer is entitled to the rights under the law of sale in accordance with Section 437 of the German Civil Code (BGB). The conditions for subsequent performance, reduction in price or withdrawal vary. Compensation for damages generally requires a breach of duty and the existence of fault – unless the supplier has given a no-fault guarantee or agreed to bear specific costs.

Under Section 445a of the German Civil Code (BGB), the seller may be entitled to reimbursement of certain expenses which they had to bear vis-à-vis their customer due to a defect that already existed at the time of the transfer of risk. This provision may have implications throughout a business supply chain, whilst Section 377 of the German Commercial Code (HGB) remains expressly unaffected. However, not every cost incurred by an OEM automatically constitutes a statutory recourse expense.

The contract is often the deciding factor. Terms and conditions of purchase, specifications and quality assurance agreements may define, extend or specify agreed characteristics, cost items, testing obligations, serial defects, limitation periods and participation rights. Their effective incorporation, order of priority and compliance with the law governing general terms and conditions must be examined.

How is the technical cause established?

The claimant must provide a clear and comprehensible account of the relevant defect, its association with the supplied component, and the link to the costs claimed. A statistical cluster of incidents may give rise to suspicion, but does not in every case replace an analysis of the cause. Possible causes include component faults, system integration, specifications, software, installation, environmental conditions and usage.

The chain of evidence should be included as a mandatory attachment to the recourse file. This includes serial and vehicle numbers, details of the parts’ origin and condition upon removal, photographs and evidence of packaging, production batches, laboratory and measurement reports, details of software and calibration versions, drawing and approval versions, as well as comprehensive documentation of every handover or modification. Joint investigations or the involvement of neutral experts can help minimise future disputes.

In 8D reports and other problem-solving documents, a strict linguistic distinction must be made between confirmed findings, working hypotheses, corrective actions and the legal allocation of responsibility. These documents serve the purpose of technical fault rectification and, without an explicit statement to the contrary, do not constitute an admission of liability. Conversely, this clarification must not be used to withhold established technical findings or to delay a root cause analysis by means of a blanket disclaimer of liability.

What is the significance of specifications, approval and changes?

Whether a part is defective depends, first and foremost, on the agreed quality requirements. Drawings, specifications, standards, samples, software versions, test plans and approved production processes can collectively define the target condition. The contract should therefore set out how drawings, technical specifications and requirements specifications, the agreed test plan, the approved sample and any supplementary quality and purchasing terms relate to one another. Without such prioritisation, contradictions often only become apparent in the event of a claim for recourse.

Approval by the OEM or Tier 1 supplier does not automatically release the supplier from its responsibility. However, it may be relevant to the allocation of risk if the alleged defect results from a specified design or an expressly authorised deviation. The supplier, on the other hand, is liable for unauthorised changes to processes, materials, software or subcontractors if these contravene the contract and constitute a cause of the defect.

For this reason, change management and approvals must be integrated. For each relevant version, it must be possible to trace when it was in force, who requested, technically assessed and approved the change, and from which batch or software version it was implemented. Verbal approvals or discrepancies between portal, email and drawing statuses should be contractually excluded by means of a clear approval procedure.

What role do notification of defects and participation play?

In the case of a commercial transaction between two parties, Section 377 of the German Commercial Code (HGB) requires an immediate inspection, insofar as this is practicable in the ordinary course of business, as well as the immediate notification of any apparent defects. Hidden defects must be reported immediately upon their discovery. In complex supply chains, contracts specify the scope, sampling procedures, waivers of inspection and notification procedures.

The notification process should be defined in two stages. The initial notification must specify at least the affected part, the observed defect pattern, the batch, the serial number range or the relevant time period. It should also include possible consequences, ongoing precautionary measures and a reservation regarding further findings. The technical cause, the final population and the costs may be submitted at a later date once reliable results are available. The contract should expressly clarify that a timely, properly documented initial report does not become invalid simply because laboratory or field findings are added at a later stage.

The supplier should, insofar as safety and urgency permit, be given the opportunity at an early stage to carry out technical assessments and to participate in field decisions. If a cost-intensive measure is decided upon without the supplier’s participation as contractually required, this may give rise to objections regarding the necessity of the measure and the mitigation of damage. However, this must not hinder immediate hazard mitigation.

How can recall costs be allocated under a contract?

Quality agreements should specify which field costs are reimbursable where a share of responsibility has been proven, and how to deal with mixed causes. Possible approaches include apportionment ratios, flat-rate costs, thresholds or provisional cost coverage with subsequent settlement. Unrestricted general clauses often lead to more disputes than they provide certainty. Whilst it is sensible and necessary to rely on tried-and-tested clauses, this usually means that the provisions must then stand up to scrutiny under the General Terms and Conditions Act.

On the other hand, limitations of liability must be coordinated with guarantees, indemnities, insurance cover and recall clauses. It should be clear whether recall costs are to be regarded as direct damage, consequential damage arising from a defect, or indirect damage that is excluded from liability. The overall assessment must also take into account excesses, serial damage clauses and annual maximum limits. In the best-case scenario, this leads to the customisation of the clauses and can thus exempt them from the review of general terms and conditions.

However, an OEM settlement or a flat-rate charge does not automatically bind the upstream supplier. The Tier 1 supplier should safeguard its own claims, observe participation rights and document in a transparent manner why the payment was economically and legally justified.

How should a recourse claim be managed?

To begin with, a joint core technical and legal team, a document repository and a cost matrix should be established. Immediate technical measures, communication and the safeguarding of claims must take place in parallel. Different versions of the root cause analysis or uncoordinated finger-pointing weaken the company’s position vis-à-vis customers, insurers and suppliers.

Key deadlines relating to notices of defect, limitation periods, debit notices, insurance terms and conditions, and dispute resolution must be recorded. Negotiations may suspend the statutory limitation period, but do not automatically suspend contractual time limits. Standstill agreements may be necessary in certain circumstances.

An economically viable solution is often advisable, even if not all technical issues have yet been conclusively resolved. However, it should clearly define the cause, the extent of the costs, future measures and any potential further cases. A settlement relating to a fleet of vehicles must not inadvertently be construed as an admission of liability for subsequent generations or other components.