2014: The year of recalls, supplier liabilities


Despite the fact that vehicles are safer and more reliable than ever, more than 56 million of them were recalled as part of more than 500 separate and distinct recalls in 2014. That’s more than three times the number of vehicles recalled as were sold in 2014.

And what do these recalls cover? Virtually everything — ignition switches, transmission cables, electrical systems, seat belts, air bags, headlights, gaskets, power steering, wiring, faulty systems, even floor mats that can slide out of position. The list goes on.

And what do they sometimes cause? Deaths. Injuries. Fines. Fears. Loss of jobs. Congressional hearings. Ill will. Loss of credibility. Degradation of brands. Seemingly endless bad publicity for the manufacturer and often for the supplier.

How can suppliers protect themselves from the collateral damage of an OEM recall? How should a supplier manage its own recall?

There’s no simple answer and no guarantees, but there are definite steps suppliers can take to protect themselves in the event of recalls. 

Heightened scrutiny and increased vigilance regarding safety issues are behind the growing number of National Highway Traffic Safety Administration and manufacturer-initiated recalls. As vehicles become more complex and new models are introduced in compressed time frames, defects happen.

Smart contracting is critical. Suppliers need to:

Recognize the game has changed. OEM warranty terms are often onerous, unclear and have an increasing tendency to shift liability to suppliers. In signing contracts, suppliers need to keep one key fact in mind: The devil is in the details. Terms and conditions are the focal point of a contract, but they are not the only point. Smart suppliers will make sure their obligations are clearly specified and that their warranty responsibilities cover only things they actually control. 

React quickly when a problem develops. As fast as you can, you need to determine with the manufacturer exactly what the problem is, what your company’s role in it may be, your liability and exposure, and whether there may be similar problems with your product in other customers’ hands

Rely on legal counsel. All of this will likely go much more smoothly and efficiently if you’re joined at the hip with your general counsel or outside counsel and if these attorneys have been involved since the inception of the contract. Counsel may drive you crazy about what seem like niggling details while you’re writing a contract, but these “details” may save your company’s bacon when it comes to potential recall or repair costs, fines, incalculable damage to your company’s reputation, etc.

Assign a team to conduct the investigation once a problem is discovered or a recall initiated. Select someone with stature in the company, someone who is knowledgeable and respected and will establish the most appropriate and efficient plan of action. Include counsel and outside counsel if required and establish immediate attorney-client privilege so that you can get all the detail you need in anticipation of litigation. This allows unvarnished investigation without fear of disclosure.

The investigation should start with a root cause analysis. This may require outside experts as well as internal engineers. Outsiders provide objectivity, a whole new set of eyes and sometimes a whole new level of expertise. To get at the answer, the investigation must include not only the product but also the system within which it operates. Preserve every piece of evidence you uncover during the investigation because you’ll need it. It will be challenged by your customer, the government and attorneys for third parties in potential future litigation.

Finish the investigation as expeditiously as possible. Avoid the temptation of a perpetual investigation mentality. There will always be new facts. Get on with it. Get it done and file your report. And in that report, report it all — the good, the bad, the ugly. It’s better to come from you than from the other side. An alleged cover-up is always worse than an unintended bad act.

Nobody’s suggesting shifting blame on somebody else if the problem is yours to accept in a recall situation. But be sure you know if it’s really your problem or how much of it is your problem before you accept responsibility for fixing it. Suppliers can lose millions of dollars on product recalls — enough to put many companies out of business. Don’t let it happen to you.

Tom Manganello co-chairs the Warner Norcross & Judd LLP Automotive Industry Group, which focuses exclusively on the needs of auto suppliers. He can be reached at tmanganello@wnj.com.

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