Ahead of the Curve Q4: Legal Corner

By Homayune Ghaussi

Partner, Warner Norcross + Judd

As we near the end of this tumultuous year of tariffs that began with initial announcements in March and led us through tariffs being issued, postponed, reduced, raised, and agreements reached, we are beginning to see a flurry of tariff-related “reimbursement” agreements being proposed by OEMs and others. These agreements purport to be for reimbursement of tariff costs or designation of suppliers to receive tariff offsets available to automotive OEMs. In this season of giving, suppliers need to take care when they receive such agreements. Not all presents are a gift.

In reviewing these tariff agreement proposals, suppliers need to ensure that they understand the agreement being proposed, and what relief, if any, they may or may not be getting. And suppliers will need to understand what they are giving in return, and what risks remain after the agreement is signed.

• What Are You Getting?

First and foremost, it is important to understand what it is you are getting from the agreement. While these proposals are being sent to suppliers as “tariff agreements,” the terms may not necessarily guarantee reimbursement for tariff costs. Quite often, such agreements may include amorphous language leaving it at the OEM’s discretion what is reimbursed or not rather than concrete promises. The agreements may also include many “outs” for the OEMs, such as negating payment obligations if the products are found to be noncompliant. In other words, signing may not guarantee recovery. 

• What Are You Giving Up?

Some proposals that open the door for tariff relief try to also close other doors. Proposals that cover tariffs issued under particular laws but foreclose relief for others may be a net-negative for a supplier facing multiple tariff-related costs. And while the agreements are meant to address tariffs, they often include unrelated terms that go beyond suppliers’ current obligations. Such extraneous terms may include audit rights beyond currently applicable audit rights, and express agreement by the supplier allowing the OEM to find an alternate source for the products. While most OEM terms and conditions may allow for such re-sourcing regardless, signing an agreement allowing for it could preclude or make difficult any claim the supplier may have related to such re-sourcing activities otherwise. Suppliers may also give up arguments related to their own terms and conditions applying under a battle-of-the-forms analysis if they agree here that the OEM’s terms and conditions apply.

• What Are you Agreeing to in Return?

These agreements may also impose new obligations on suppliers. Such terms may include agreeing to take further actions to alleviate tariff-related costs and exposure, without definition of what such efforts may mean, any allocation of costs related to such efforts, or reasonable limitations on such efforts or obligations. These agreements may also include provisions obligating the supplier to obtain similar terms with other customers. Further, the agreements likely include detailed mechanisms and document requirements for reimbursement of tariff related expenses. Suppliers must take care in reviewing these agreements to ensure that they can meet all of the obligations included before signing. 

•Reservation of Rights.

While these agreements are proposed as tariff relief agreements and seem to include terms related to such relief, they may also include language reserving the OEM’s rights under the original terms of the parties’ supply relationship leaving the door potentially open to the OEM later clawing back the relief provided. If your agreement includes such language, you should understand that there is the potential for the OEM to reverse course even after the payments are made.

The fact that we have reached a point where tariff reimbursement agreements are being considered is a positive step towards much needed relief for suppliers. But before signing what is sent, suppliers must take care to understand if they may be opening the door to a Trojan Horse.