Covid-19, The Motor Industry and the ‘New Normal’

With the onset of Covid-19, all of the major car producers around the world were forced to close production facilities. Now, with a glimmer of hope that lockdown may be ending and the world returning to more normal operations, Original Equipment Manufacturers (OEM’s) in the motor industry (along with their financing counterparts) are beginning to consider how best to get their respective businesses back up and running.

There is little doubt that the economic impact of Covid-19 has barely just begun. Governments have opened up their balance sheets in a way not seen during the financial crisis, however it is still unclear if this will be enough to wake the economy from its enforced slumber. We are not past the point yet where companies, in reviewing their contractual obligations with suppliers, may attempt to activate force majeure clauses in contracts and avoid liability for failing to meet the terms of the agreement. Our experience is that we can count on one hand the number of force majeure clauses reviewed that specifically call out a pandemic (no doubt this will now rapidly change).

Possibly the most difficult of all predictions will be attempting to anticipate when previous levels of demand will return, and to attempt to match the supply chain to that demand. Matching this purely commercial concern with the much more important question of how a business can operate safe working practices, such as social distancing, whilst increasing production is a headache for every industry, but particularly one that relies on the use of production lines and close contact amongst some staff.

Below is a summary of the key areas that should be considered over the coming months:

Contracts – Close attention should be paid to either the force majeure (or frustration) provisions of all contracts governing systemic arrangements, to understand whether it is possible that these could be used by you (or against you) to potentially terminate an arrangement. Aligned with this should be a review of notice provisions, in the event termination is required, or material hardship clauses where they exist. All new contracts should be amended to include a provision in the force majeure clause to allow for future ‘epidemic or pandemics’. In addition, it would be wise to perform a business-wide review of all systemic contracts to consider what legal protections might need to be inserted to protect the business into the future.

Insurance – A review of the business’s insurance policies to understand whether they offer adequate protection in a situation such as this would be advisable, in particular focusing on whether these policies are triggered by the outbreak of COVID-19 and, if so, how much cover is afforded. Of particular importance (and this ties in with contractual provisions covering insurance with suppliers also) is how many separate claims can be made under an existing policy, and how do those claims aggregate as multiple claims are made.

Employment – Possibly one of the most difficult areas to navigate is that of the employment rights of staff, aligned with the government schemes introduced to protect employees’ salaries. Understanding contractual entitlements for short term temporary measures to reduce workforce levels, hours, and/or specific payments and re-negotiating those if business needs dictate, can be complex. Aligned with this, undertaking risk assessments and contingency planning for those key staff who need to continue working and understanding how to operate safe working practices, such as social distancing, are critical to protect the business as the economy reopens. In terms of home working (the new normal), there will undoubtedly be a greater expectation of this amongst staff into the future.

Supply Chains – Up until very recently, the main consideration in terms of the supply chain was price, with location coming in well behind. In ‘the new normal’, it is likely that businesses will take a different approach. Into 2021, businesses should begin to reach out to suppliers and discuss and understand their approach to protecting the supply chain. This will need to be approached in a sensible, proportionate way, as it would be unhelpful to begin disputes with suppliers during the next phase of Covid-19 recovery. However, it will be important for businesses to look at how their supply chain is constructed, to avoid key dependencies that can be leveraged by suppliers. In this regard, diversification and contingency planning may be unavoidable. Business should also invest in smart supply chains that are supported by digital technologies, which offer greater visibility and connectivity across the end-to-end value chain.

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The material contained in this post is for general information purposes only and does not constitute legal advice. Specific legal advice should be sought on any particular matter. No liability whatsoever is accepted by PF Solicitors for any action taken in reliance on the information in this post.