4 provisions that could drive your auto-supply agreement to a horrible break-up and prevent it from performing happily ever after

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Photo credit: Food for the supermarkets by Nick Saltmarsh

Thanks for asking. I had a fantastic Valentine´s Day. That is part of why you are reading this post two days after the celebration. Fantastic moments end very soon and that is why we need to be prepared in life and business.

Ask anybody from OEMs to Tier4. The auto-supply agreement is one of the backbone agreements to any automotive business. You may call it other names like OEM supply agreement, supply and distribution agreement, but at the end, is the agreement under which auto companies buy and sell autoparts and components.

Globalization has made that most of these agreements are localized by Mexican Lawyers based on several US-law provisions that are not applicable in full here. The main reason is that Mexico has a civil law system not fully compatible with US common law system.

These are 4 provisions that are taken as standards in auto-supply agreements and might not be enforceable per se, and of course, the Courts may have a different opinion than lawyers:

1. Supply/Distribution Agreement. For starters, Mexican Law does not have provisions for supply or distribution agreements.  Construction of agreements is made by the Courts and might not have the same opinion as your lawyer. REMEDY: It is extremely important to draft a very detailed agreement to avoid legal gaps and misunderstandings.

2. “Material breach”. Common law has vast doctrine and court resolutions as to what to understand for a material breach in any agreement. Unfortunately, Mexican Law does not recognize this grade of breach. REMEDY: Agreement must contain objective guidelines for determining what means “material breach” and what are the consequences for that.

3. Injunctions. By injunction, I refer to those Court orders for immediately doing or not doing something. Mexican Court proceedings are very different from the US Law. REMEDY: Include proceedings that act as injunctions in issues that require instant action, like recall, replacement of components, overdue payments, etc.

4. “Reasonable”. Like happens with “material breach”, there is no doctrine or court resolutions that could guide us on what reasonable means. This is a term that lawyers use for bona-fide (good faith) situations. However, in situations like discussions over collection, bankruptcy, quality of materials, warranties, etc., bona-fide will not necessarily show up. REMEDY: Avoid this term and replace with objective guidelines and benchmarks on what you believe is reasonable.

At the end, ongoing agreements are like any relationship. You have to take care of them if you really care of them. In business however, the logic is to be ready for the best and the worst.

Avoid adopting standard provisions without adjustment and save yourself from being under duress at some point of the performance of an auto-supply agreement. Believe me when I am telling you this … it happens more often than you think.

About the author

Alberto Esenaro

I am a Mexican lawyer with experience in technology, energy, automotive, infrastructure and business. Worked for law firms, international companies and Government bodies on business advice, regulatory compliance and litigation.

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By Alberto Esenaro

About Author

Alberto Esenaro

I am a Mexican lawyer with experience in technology, energy, automotive, infrastructure and business. Worked for law firms, international companies and Government bodies on business advice, regulatory compliance and litigation.

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