The OEM and the Swiss engineering services provider

An OEM is auto industry jargon for an Original Equipment Manufacturer. It's a well known term, within the industry, to describe the car company. The OEM is the last step in manufacturing before the car is shipped off to dealers for sale. Some well known OEMs are Ford, Toyota, and Daimler. In the following hypothetical our OEM makes electric vehicles but doesn't develop the technology for the vehicles. Because electric vehicles are state of the art and their manufacture is a complicated process, it is completely feasible that an OEM could have the manufacturing expertise to develop the manufacturing system for making an electric vehicle but lack the engineering and scientific expertise to develop the vehicle. This is not the usual set up. In the industry, OEMs decide all the time to buy parts from external suppliers, this is called a 'make or buy' decision and they are integrated into every development timeline in the entire industry. Usually though, when you buy a part from a supplier, you buy the part already made. In this default setup suppliers have a say, sometimes too much of a say for the OEM's taste, in what parts make it to market. This is not the case in our hypothetical. In our case an OEM only wants a design from the Swiss engineering service provider (SESP). The SESP is uncomfortable with the amount of liability they would have in case of a massive failure of the part and they want to contractually limit their liability to 5% of the contract price. It can be assumed that the contract is small enough that 5% of it would not cover the legal fees if there were litigation on the issue. Nonetheless, our SESP is not budging on the issue and has insisted that the contract be litigated in Swiss courts using Swiss law. The project will not go through without the SESP and the project manager has come to you, Friday afternoon, looking for a fix that will protect the OEM from liability caused by design flaws in the SESP's design. The contract draft goes out Monday and it is too late to insert anything but minor reasonable clauses that haven't already been discussed.

There are three types of liabilities or damages that a potential plaintiff could sue for if the courts find that there was a design flaw that led to some sort of damage on the plaintiff: punitive damages, contractual damages, tort damages, and statutory penalties. Punitive damages are awarded by some courts when they want to make an example of the defendant to convince other people in the public not to act like the plaintiff. A good example of this is the Ford Pinto, where it was shown that Ford knew of a design defect that was killing people and decided not to fix it in order to save money. Contractual damages are damages that arise from breach of contract; The customer reasonably expects a car that doesn't blow up, you sell her a car that blows up, you owe her money for a new car. Tort damages are damages for injuries to the person. The customer reasonably expects a car that doesn't blow up, you sell her a car that blows up, she loses an eyebrow, you owe her for whatever her eyebrow is decided to be worth. Statutory penalties are fines assessed by the laws of the state for whatever law you broke. The state doesn't want their citizens being blown up, so they write a law that fines car companies 10$ every time they sell a car that blows up. You sold 20 cars that blew up and you now owe 200$ to the state. When you do something that incurs these types of damages you are considered liable to pay the damages. These are the types of liabilities that the SESP seeks to avoid and your clien the OEM would like to see to it that any damages caused by the SESP's design are carried by the SESP.

The SESP can bear liability by being sued directly by the customer or by being sued by the OEM after the customer sues the OEM for damages. We won't worry about the customer suing the SESP because that is not what the OEM is concerned with. If the Customer sues the OEM the OEM will want to pass liability off to the SESP which will be complicated by the fact that the SESP limited their liability. So here are a list of things done in industry to make the contract more favorable to the OEM. It is important to note that the industry standard is to not limit liability and a liability limiting clause can be circumvented by showing a breach of contract that would invalidate the contract and make the SESP liable for at least the price of the contract and maybe more. This situation would arise if the OEM could show that the SESP didn't deliver designs of the quality promised in the contract. So our goal is to get the OEM the biggest advantage they can have before court to receive the maximum amount under the liability limiting clause and possibly circumvent the clause by showing a breach of contract.

Discovery is the process by which one party requests and receives relevant information from the other party, with the intent of using some of it to build their case against the other party. In Europe their discovery procedure makes a lot of things non-discoverable that would otherwise be discoverable in America. The goal with discovery in the contract is to get as much information as possible before litigation. OEM can do this by requiring failed parts to come first to the OEM for testing which means that the OEM will have the most complete test results for trial. The OEM should also request that all quality information from the SESP be shared in real time with the OEM. The quality information will be of great help in deciding if their was a design problem and what the SESP was doing to fix it. The OEM should also request internal feasibility studies; design meeting minutes and reports; and design decision charts . If the SESP made cost a priority over safety, or timeline a priority over durability, those sorts of decisions will be borne out in black and white by pugh analysis and other decision making and feasibility devices. All of this is well within the rights of the OEM in the name of quality control, but obviously has an advantage in terms of potential litigation also.

Not all facts have to be decided in a court, Some facts can be settled before you even come to court. Facts such as the address of the party, the description of what is being purchased etc. can be spelled out by the contract. It's important to make sure that all of those facts lean in favor of your client. Intent is something that is difficult to prove in court but if it's spelled out in the contract, being written makes litigation easier. A clause that states “It is the intent of the SESP to create state of the art designs that are unparalleled in their reliability and quality”, might help. That sentence squares it away that both parties thought that they were buying/making the best designs on the planet and that is a high bar to meet. With the intent defined by the contract in such an impossible way, the burden of proving that the SESP didn't fulfill their part of the bargain is easier and could lead to a refund of the contract price.

By opening up relevant information before pre-litigation starts, and per se settling facts in the OEM's favor you have given your client the OEM a leg up. If it ever comes to the daunting task of suing a Swiss company in Swiss courts for liabilities on a contract where they have contractually limited their liabilities, your client will be better situated.