Hope for the best but expect the worst

There are two important features in the modern automotive sector: first, there is a long list of suppliers, and second, just-in-time production. In many cases, the situation becomes more precarious where suppliers work with production elements, especially tools, provided by a supplier who is further down the production line. This equipment is very specialised, costly and difficult to replicate quickly.

What happens, therefore, when the supplier using loaned tools becomes insolvent and has problems managing production? The result is disruption of the whole production line, immense liabilities and no quick solution.

Waiting for the verdict of a judge may take too long in many jurisdictions. So, what can be done to prevent this situation or at least minimise its impact?

A. Steps to be taken before entering into a contractual relationship
a. With the help of your Ecovis-advisor, prepare a good contract containing at least the following points:
1. absolute title to the tools which will always be marked as your property (preferably with permanent engravings)
2. comprehensive inspection rights and information obligation
3. unconditional right to retire the tools if so decided by you
4. maintenance and conservation to be provided by the supplier
b. transfer protocol (with photographs showing the condition of the tools and engraved marking)

B. Steps to take during the relationship
a. Establish a structured and well organised monitoring programme in order to ensure that you will be able to react quickly if you encounter problems, reviewing not only the tools but also the general situation of the supplier, thus allowing you to identify symptoms of economic difficulty.
b. Introduce an emergency programme to plan for any eventuality should problems with the supplier arise.

C. Steps to be taken once there a problem has occured

So the monitoring program has worked and you have the information that there might be a problem with one of your suppliers. What should you do?

These are the principles to be followed:
a. Be quick and bold
Do not allow the supplier to convince you not to act, or to wait. In these cases, the last to act will bear the worst consequences of the insolvency.

Do not wait for a formal declaration of bankruptcy!

b. Shock and awe
Once you have decided that you must get back the loaned tools, do not take any half-measures.

Important advice by Ecovis experts: if you are the first to arrive, there will be less time for the supplier to organise resistance. Do not take one loaned tool today and come back next week for more. Be prepared to go to your supplier’s premises with five or ten lorries and twenty of your employees to recover the tools quickly.

Take a new look at your emergency plan: if you have to negotiate with the management of the supplier or its employees, know exactly what you can leave behind and where you can compromise. Do not let a third party decide for you. Sometimes it is better to leave behind a more expensive tool which produces spare parts than a smaller tool which may interrupt the production of your final client in 48 hours.

c. Assume costs
Be prepared to spend some money, and be pragmatic.

Bear in mind the expenses of all types that might arise if you are not able to recover the loaned tools. It may be unfair that you have all the contractual rights on your side and you still have to pay an extra amount. However, think in practical terms.

Author:
Christian Koch, lawyer, ECOVIS Legal Spain, christian.koch@ecovis.es