Germany: Obsolescence in the automotive supply chain

Possible claims for compensation for obsolete stock under German law

Obsolescence in the automotive supply chain occurs when purchased raw material or already produced series are no longer needed or become unsuitable for further series production and cannot be used for other purposes. Typically, obsolescence happens when the customer reduces its call-offs compared to the estimated volumes or discontinues vehicle models prematurely. Other causes are delayed market launches and a subsequent later start of production, resulting in raw material that has already been purchased becoming unsuitable for series production after a certain period due to its material properties.

In such situations, the question arises whether the supplier can claim compensation from its customer for obsolete stock.

Shared responsibility to avoid obsolescence

Demand from car manufacturers is volatile. Therefore, in practice and throughout the entire automotive supply chain, medium- and long-term quantities (e.g. annual or project volumes) are almost always only estimates and merely planned quantities, with no obligation to accept or pay for them. Instead, binding delivery quantities are communicated via short-term call-offs in conjunction with production and material release periods. The customer is then obliged to accept and pay for the quantities covered by these release periods.

Overall, demand-driven call-off systems result in a shared responsibility to avoid obsolescence, characterized by an obligation to cooperate with each other. Accordingly, a supplier's entitlement to claim compensation for obsolete stock depends in particular on whether the stockpiling was reasonable in view of the contractual agreements and prevailing circumstances, and whether the changes in demand were communicated in due time.

Possible contractual claims for compensation

Initially, contractual claims for acceptance and payment arise from the generally agreed production and material releases. Comparatively short release periods are common, often no longer than eight weeks. These periods, however, do not always fully coincide with the supplier’s lead times for material procurement. Contractual claims for compensation beyond the release periods may arise from additional circumstances, for example:

• Additional production and material release periods:

  In addition to the general production and material release periods, further release periods may have been agreed (possibly informally) between the parties in individual cases. These release periods may cover additional production and raw material quantities and trigger further payment and acceptance claims.

• Extended release periods by individual agreement:

  Production and material release periods are often found in the supplier manual, the general terms and conditions of purchase or other standard contract documents. These documents usually qualify as general terms and conditions under German law. If the parties have agreed on the purchase of certain raw materials whose necessary procurement lead times objectively exceed the standard material release period by a not insignificant amount, such agreement may constitute an overriding individual agreement for longer (reasonable) material release periods.

• Terms on termination and volume drops:

  In addition, claims for compensation may arise from contract terms dealing with the legal consequences of termination or volume drops, such as an agreed amortization protection for investments made in series supply.

Whether the supplier can claim compensation for obsolete stock in addition to the general production and material release periods must therefore be assessed on a case-by-case basis.

Possible statutory claims for compensation

Claims for compensation may also arise from statutory law.

In particular, claims for damages due to a breach of the duty to be considerate about the other party’s rights and interests are relevant. For instance, subject to the exact circumstances of the case, the supplier may be entitled to damages if the customer, in breach of its contractual duties, failed to communicate volume fluctuations or SOP shifts in due time or did not communicate them at all. This may apply especially to cases where the customer has pressured the supplier into procuring raw materials or producing series parts early and outside of production and material release periods, which are then no longer required due to circumstances within the customer's sphere of responsibility. Nevertheless, even when there is a breach of contract, it will – generally – not be possible to claim reimbursement for unlimited stockpiling, but only for an appropriate level of stock for the specific supply relationship.

Conclusions and summary

Whether compensation can be claimed for obsolete stock depends on the contractual distribution of risk and the circumstances of the individual case. It is of particular importance whether the stockpiling was appropriate considering the contractual agreements and circumstances of the specific supply relationship, and whether the customer communicated changes in demand to its supplier in a timely and sufficient manner.

As potential claims for compensation for obsolete stock heavily depend on the individual case, it is important to assess the facts and legal situation as thoroughly as possible.