Introduction

Globalization has had such a profound impact on the automotive industry that it has even been suggested that ‘globalization [is] nowhere more apparent than in the auto industry’.¹ One could almost wonder if it is not the automotive industry itself that has contributed to the development of globalization.

As early as 1928, American auto giants Ford and GM were assembling vehicles in 24 countries, including Japan, India, Malaysia and Brazil.² In the late 1980s, the rise in foreign direct investment, the relocation of production sites, and the growth of international trade – especially in the BRIC countries (Brazil, Russia, India, China), the new Eldorados for world vehicle production³ – contributed to the complete globalization of the auto industry.

The industry then relocated to emerging economies to benefit from customs and tax incentives, all the while reducing labor costs;⁴ the automotive industry being a major generator of jobs and economic spin-offs.⁵ As such, within a few decades, transactions primarily on a national level became international. Original equipment manufacturers (OEMs), manufacturers, and suppliers of replacement components and other spare parts also adapted to and followed the inevitable trend towards globalization by striving for customs, labor and tax optimization, as well as for geographic proximity to facilitate logistical and supply chain management.

Nowadays, the industry faces multiple technological challenges, which lead to increasingly demanding, yet necessary, technical specifications and improvements. New technologies such as mobility services like ride-sharing, electrification of the drivetrain and autonomous vehicles, will soon completely transform the industry, and Silicon Valley heavyweights are taking a significant part in the game. Considering the substantial amounts spent every year on research and development (R&D) and other capital expenditures (CapEx), economies of scale and other synergies are essential in order to keep up with such changes,⁶ gain new market share, and penetrate new market segments. Given the importance of technology and the ever-growing need for specific parts, the industry has seen a shift in the balance of power between OEMs and suppliers, with the latter now enjoying much stronger bargaining power.

OEMs and suppliers alike are also increasingly subject to stringent environmental regulations and control, which have driven automakers to develop environmental design tools aimed at managing the environmental impacts of the automotive design and manufacturing process.⁷ Indeed, OEMs and suppliers alike are increasingly subject to the regulators’ control.

In light of these multiple factors and in order to remain competitive, the trend has been towards industry consolidation as from the 1990s.⁸ Indeed, an economy of scale and a pooling of development costs allow auto manufacturers to spread their costs over a larger amount of vehicles in different segments. Such consolidations took place in three primary ways:

• mergers and acquisitions,
• combined capitalization in the form of cross-shareholdings such as the Renault-Nissan ‘Alliance’ model, and
• industrial or co-development agreements.

As mentioned, ‘the arrival of new competitors such as Tesla, and deep-pocketed tech giants intent on disrupting the transport industry such as Google, Apple and Uber, make deal-making an even more pressing need’.⁹

Some consolidations have succeeded. The Renault-Nissan alliance for instance, after taking through Nissan a controlling stake in Mitsubishi in 2016, now sells more than 10.6 million vehicles a year in nearly 200 countries under ten brands (Renault, Nissan, Mitsubishi Motors, Dacia, Renault Samsung Motors, Alpine, Lada, Infiniti, Venucia and Datsun).¹⁰ Others have failed, such as that between Daimler and Chrysler in 1998.

It is indisputable that international arbitration is needed within the sector.¹¹ As we can confirm from personal experience, it is in fact widely considered by operators as the preferred method of dispute resolution. In light of the economic weight of the sector, it can be inferred that the increase in cross-border operations – through combined capital or industrial and commercial agreements (notably with suppliers and distributors) – may result in a substantial number of multi-jurisdictional disputes. Moreover, as the relatively recent ‘Diesel Gate’ scandal aptly demonstrates,¹² any manufacturing defect or fraud is likely to have potentially catastrophic effects on automotive-related actors around the world.

Yet, in proportion to the industry’s economic weight, it may be perceived that arbitration is relatively rarely implemented in the auto industry. This article aims at providing some possible explanations for this limited recourse to arbitration through a presentation of the specific features of the automotive sector such as its oligopolistic nature, the economic interdependency of the market players, and the long-perceived economic imbalance between manufacturers and sub-contractors (I). A study of more than twenty unpublished ICC awards from 2005 to 2013, as well as other publicly available awards, will help identify the types of auto disputes that may arise (II). On that basis, the article will expound on whether the industry would benefit from an industry-specialized arbitral forum, or whether major arbitration institutions such as ICC are already well-equipped to resolve international automotive disputes (III).

I - Specificities of the automotive sector

The automotive sector is known for its oligopolistic nature, a market comprised of only a few sellers, usually of large size, facing a multitude of buyers (a),¹³ but is also characterized by a strong interdependence between all market actors (b).

a) Industry concentration

Concentration among actors in the automotive industry is encountered (i) between actors at the same level of the industry chain, a horizontal concentration, and (ii) between manufacturers, suppliers and the aftermarket, a vertical concentration where automakers may hold substantial shares in their subcontractors.

i) Horizontal concentration

The global automotive industry is today concentrated around a dozen manufacturers that account for about three quarters of the global production of passenger cars. The four major car corporations – the Volkswagen Group, Toyota, General Motors, and Renault-Nissan – now make around 10 million vehicles a year in order to reap economies of scale, particularly in the mass market side of the business where profit margins can be thin.¹⁴ In 2017, the French carmaker PSA Group acquired Opel-Vauxhall from General Motors.

Such consolidation is often essential, considering the costs of designing and manufacturing a vehicle – including high R&D costs and particularly high fixed costs due to the industrial nature of the sector – all within the context of a price war and fast-growing technological changes. General Motors, the largest international auto manufacturer between 1931 and 2005, was also the result of a merger between Buick, Cadillac and Oldsmobile in 1909.

Alliances bring various competitive advantages, the first and foremost being economies of scale, starting with shared parts and platforms, complementary nature of product lines (A, B, C, D, SUV, minivans), and pooling of know-how. Regarding the manufacturing process, consolidation has facilitated the emergence and spread of three major technological breakthroughs in the sector:

• The Ford production system of standardization.
• Toyota’s ‘Just-in-Time’ lean production system.
• And now, Volkswagen’s modular cross-sectional matrix,¹⁵ the Group’s recently developed automobile platform MQB, which stands for the German acronym for ‘Modular Transverse Matrix’ or ‘Modular Transversal Toolkit’. It is a system compiling a standard list of compatible parts from which several forward-drive (FWD) car models can be produced.¹⁶ This matrix and its variants for other car configurations allow for up to a 20% reduction in production costs and 30% reduction in assemblage times per vehicle.¹⁷ This relatively recent introduction of modular matrices marks a technological breakthrough in the auto industry, which combines economies of scale and economies of scope.

Such horizontal concentration is not limited to car manufacturers or OEMs. In a market where excellence is less a competitive advantage than a prerequisite for the company’s survival – especially in mature auto markets such as Europe, Japan and the NAFTA countries – the race for product differentiation requires massive R&D investments in the hopes of making a technological breakthrough at the supplier level as well.

To cope with such high R&D costs, many automotive suppliers have also consolidated to form suppliers’ associations, as with the Kyoryokukai in Japan¹⁸ or the ‘Original Equipment Suppliers Association’ in the US. Other suppliers, such as Delphi, Intel and BMW, have formed partnerships to jointly develop new technologies. Mergers and acquisitions (M&A) among automotive suppliers have also become very common, and in 2015, USD 50 billion worth of M&A deals were made among auto suppliers.¹⁹ In 2017, for instance, Samsung acquired Harman International Industries for USD 8 billion, thus becoming a tier one parts supplier of infotainment components to automakers such as General Motors.²⁰

Similarly, to be able to continue offering quality services and keep up with technological innovations, automotive dealers have made efforts to consolidate.²¹ The concept of ‘car dealership’ has been redefined; major dealerships comprise several specialized auto retailers that share the same office space and tools, and are able to offer their ever-demanding clientele a large array of services. Services include redirecting clients to specialized advice centres for competing or partner products within a multi-brand sales and rental space which also provides for repairs. The days of small dealers being tied to major automakers by contracts with single-trademark exclusivity clauses are over. Among the various aftermarket players, the highest pressure for consolidation currently is on spare parts’ distributors that need to reach critical mass and leverage economies of scale.²²

ii) Vertical concentration

In recent years, the aftermarket has been one of the strategic focuses of many OEMs that firmly occupy one or more spaces in the aftermarket value chain through, for example, the establishment of their own networks of non-brand-specific repair shops.²³

PSA for instance has moved into the automotive aftermarket, making it a significant part of its ‘Push to Pass’ five-year growth strategy, through a series of acquisitions along the entire value chain. Another example lies with Tesla that aims at automating and accelerating production in its factories, by acquiring designers and suppliers of automated manufacturing equipment, including the US company Perbix Machine Company in November 2017,²⁴ and the German company Grohmann Engineering in January 2017.²⁵

b) Interdependence of actors

The high level of concentration among actors in the sector, both horizontally and vertically, results in their economic interdependence, which however existed prior to consolidation on the market.

It is to be noted that such interdependence no longer amounts to an economic dependency of one stakeholder over the other, which may have been seen in the past as precluding the weak party from initiating arbitration against the automotive giant. To the contrary, due to their specialization and their own R&D efforts, some suppliers are now in de facto monopoly positions by being the exclusive reference for one or more specific parts on the market. The balance of power between the automaker and certain suppliers is thus at times more balanced, if not reversed.

Manufacturers, at the centre of the automotive industry chain, design vehicles, manufacture the essential parts of the vehicles and then finally assemble the vehicle. To do so, they provide instructions both upstream (OEMs, sub-contractors, suppliers of parts and related services) and downstream (distribution and maintenance-repair companies). Manufacturers’ active collaboration with suppliers at an early stage will allow manufacturers to reap benefits from potential technological breakthroughs. The collaboration between Mercedes and Bosch for the development of the ‘Electronic Stability Program’ (EPS) is one of many examples.²⁶ Vertical collaboration and economic dependence has also been accelerated and reinforced by the rationalization of non-differentiated components. Suppliers and OEMs have refined their products in the form of standardized turnkey installation equipment which are easy to export and compatible with a wide range of vehicles.²⁷

A standardization of the production for various car models and shared production tools, by one automaker, or by different automakers within the same alliance, undoubtedly acknowledges interdependence between actors of the industry. Still in the mindset of achieving economies of scale, mergers, alliances and cooperation agreements between auto manufacturers allow for the development and employment of common platforms (production lines) further affirming their dependence on shared production tools.

Within the framework of strategic alliances, and even among competitors, auto manufacturers can cooperate very early on in the development process, notably for co-designed vehicles.²⁸ The cross-use of patents and know-how sharing compel partners to allocate tasks efficiently during the development process. When co-designing vehicles, assembly may be jointly conducted by two or more automakers, or by one automaker on behalf of another.

Despite such close collaborations, car manufacturers remain competitors by differentiating final products, and producing their own models under their own brand names and badges. Interventions of different actors at various stages of the vehicle production chain, subsequently or simultaneously, raise questions as to types of dispute and the parties thereto. Given the above trends and characteristics of the automotive sector evidencing strong integration and interdependency among market actors, one wonders whether there is room for dispute resolution processes such as arbitration. The following study of awards is enlightening in this regard.

II - Disputes in the automotive sector

Given the generally confidential nature of arbitration, this article does not claim to provide an exhaustive review of all auto-industry related arbitrations. Nevertheless, based on the cases available for study, disputes can be classified in three groups: horizontal disputes between manufacturers (a), vertical disputes with actors in the production chain (b), disputes involving external parties to the automotive industry (c).

a) Horizontal disputes between auto manufacturers

As previously mentioned, the global automotive industry is characterized by an increasing number of mergers and capitalistic or industrial alliances; it is therefore not surprising that many disputes are of a corporate nature.

Although of scarce occurrence in proportion to the economic significance of the underlying M&A deals in the sector, joint venture agreements (JVA), as a form of joint cooperation that binds operators to a lesser extent have been the subject matter of disputes. In at least two unpublished ICC cases studied, the parties disputed the scope of a JVA’s non-compete clause.

In the first case, a supplier of automotive parts from Latin America argued that respondent, a European manufacturer of automobile-related components, had willfully frustrated the purpose of their JVA by bidding on a project which envisaged the supply of parts covered by the JVA’s exclusivity and non-compete clause. The tribunal considered that the parties’ negotiating history and conduct manifested the long-term spirit of the JVA, along with the implicit agreement that the car parts in question were included within the JVA’s definition of covered products:

The long-term spirit of the joint venture and the purpose of the company … as well as the breadth of the Parties' relations as foreseen by the Implementing Agreements, is telling of the intention to collaborate in enhancing the business with new projects. … The way in which matters were dealt at [the joint venture] supports Claimant's position in that the inclusion of the parts in the definition of Products was implicit, or understood, by the Parties' conduct.

In the second case, also involving a JVA between European and Asian companies with a non-compete clause for products specifically listed as well as for ‘similar products’, the tribunal similarly declined to narrow the scope of the non-compete clause by reasoning that the JVA had been concluded for a long duration and that the non-compete clause would be deprived of its meaning if it was limited to specific designs of the product, since designs have a very limited life span:

The Joint Venture was intended for a considerable period of time … This suggests that the Parties certainly did not contemplate that the activities of the Company would be limited to the manufacture of specific types of [products] that were already considered at the time of the entering into the [Joint Venture Company]. As experience learns, such specific types of [products] have a very limited lifespan … If the non-competition obligation would indeed have been intended to cover only the existing production range of the Company as already defined at the time of the signing of the [Joint Venture Company], any reference to similar products would in fact have been redundant.

By contrast, most published cases did not involve industry-specific issues. For example, in one dispute, the parties incorporated a Joint Venture to enter the Indian automotive market and disputed the implementation of a buy-out clause. The dispute was submitted to LCIA arbitration and the losing party applied to have the issued award set aside in Indian courts on the ground of fraud.²⁹

In another case, the parties’ dispute arose out of a JVA to expand Kia Motors’ sale of vehicles in Brazil and Latin America. The shareholders of the company established under the JVA approved a capital increase, and Kia Motors sought an interim measure from the Brazilian courts to prevent the entry into force of this decision.³⁰ Kia Motors later initiated ICC arbitration, and the tribunal found in favor of claimant, holding that respondents had improperly excluded claimant from the Joint Venture’s management and that their decision to raise capital was fraudulent and thus null and void. Respondents applied to have the award set aside, but the Brazilian Superior Court of Justice dismissed such application, holding that the arbitration clause was not superseded by subsequent agreements and that the pursuit of interim measures before Brazilian courts did not constitute a waiver of arbitration.³¹

Similarly, in a third case, a dispute arose out of the claimant’s termination of a JVA concluded between Malaysian and Chinese auto industry operators for the creation of a Joint Venture to manufacture car molding and parts.³² In the SIAC arbitration, the tribunal rendered an award in favor of claimant, rejecting respondent’s objection that the JVA’s arbitration clause had been replaced by a subsequently concluded dispute resolution clause in favor of Chinese courts. However, the Chinese courts accepted the jurisdictional objection and refused to enforce the award.³³

Thus, as shown above, most of the known disputes concerning auto industry’s horizontal disputes did not necessarily concern industry-specific issues.

b) Vertical disputes with actors in the production chain

Arbitral awards reveal that there were generally three types of disputes arising from such vertical relationships: disputes in the context of supply/sale agreements, generally from parts supply agreements between manufacturers and their suppliers (i); disputes relating to distribution agreements between manufacturers-distributors (wholesale distributors that sell to dealers) and between manufacturers-dealers (retail distributors that sell to consumers) (ii), and, not surprisingly given the importance of technological innovation to remain competitive in the global automotive market, disputes arising out of licensing/sponsorship agreements for intellectual property rights or confidentiality agreements related thereto (iii).

i) Disputes arising out of supply/sale agreements

Disputes commonly arise from contractual obligations (e.g. product liability for defective parts) or post-contractual obligations (e.g. supply of replacements parts after shutdown of the production line) and often involve issues of contractual interpretation or breach of contract, which are not specific to the automotive sector. Relations may become more complex where suppliers contract with sub-suppliers or freight forwarders with regards to transport.

For instance, two unpublished ICC cases studied related to the payment and performance of the contract. In the first case, a vehicle manufacturer terminated the contract and claimed for the reimbursement of its advance when the Asian supplier of vehicle equipment (the respondent) failed to deliver the ordered equipment and spare parts. Although the claimant had issued a letter of credit in accordance with the contract, the letter of credit had not been confirmed by respondent’s bank. The sole arbitrator found that claimant had satisfied its payment obligation, was entitled to the delivery of the goods, and ordered respondent to reimburse claimant for the paid advance on the basis of the following:

The literal interpretation of Article … leads the Sole Arbitrator to the conclusion that the obligation to procure confirmation of the letter of credit is an obligation of means and not obligation of result.

In the second case, the parties’ amended sales agreement required the Middle Eastern seller (the claimant) to deliver one set of vehicles upon the respondent’s payment of an advance, and a second set of vehicles upon respondent’s provision of an irrevocable letter of credit. While the first part of the agreement was performed on both sides, respondent failed to put in place a letter of credit and claimant did not deliver the second set of vehicles. Claimant sought damages for respondent’s breach, and respondent counter-claimed for the increase in unit price between the original and amended agreements. Ultimately, the tribunal dismissed both claims, as claimant had failed to prove it losses, and as respondent had agreed to the amended prices.

Other published cases also demonstrate that more general contractual issues often arise. In an earlier case before the Berlin Arbitration Court attached to the Chamber of Foreign Trade of Berlin, the buyer claimed for missing parts on the basis of a car purchase and delivery contract.³⁴ The tribunal ultimately found the seller (the respondent) to be liable for damages corresponding to the missing spare parts, in an amount also acknowledged by respondent.

Further, in a case before the China International Economic and Trade Arbitration Commission (CIETAC), a German supplier of automobiles and Chinese buyer disputed the validity of their sales contract, given the lack of formal agreement.³⁵ Claimant argued that the contract was valid and that respondent had breached its obligations when it neither delivered the goods nor returned claimant’s down payment. The tribunal agreed with claimant and ordered respondent to return the advance payment.

At least two unpublished ICC cases involved automotive supply agreements featuring disputes with closer connections to the automotive industry although the legal issues at stake (the scope and nature of contractual obligations) are not specific to the automotive industry.

In the first case, a European company (the respondent) had contracted to supply and install mechanical equipment at claimant’s site in Central Asia. Claimant alleged that respondent’s performance of the contract was incomplete, as the latter did not carry out its post-delivery obligations of installation, technical assistance and lifting of the equipment, and contested the validity of respondent’s subsequent termination of the contract. The tribunal found that respondent’s delay in dispatching technicians for the installation of the equipment and failure to carry out certain works amounted to contractual breaches. As the contract only allowed termination of the contract by the non-defaulting party, respondent’s termination was held to be invalid, and the tribunal awarded claimant corresponding damages.

The second case involved an exclusive supplier for a range of replacement parts for the American automobile aftermarket and a supply contract providing for annual purchase targets. It was held that the annual purchase targets were not mandatory, and that the failure to meet such targets did not entitle the supplier (the claimant) to terminate the contract. To reach this conclusion, the tribunal noted that the purchase target clause was subject to other contractual provisions, implying its non-obligatory nature:

First of all, if the … amounts were obligatory, there would by implacable logic be no point in defining "incentives" for doing what was required in any event. Instead of ''incentives", the Parties would rather have stipulated rising lump sum discounts as the defined volumes rose over the years… Secondly, Clause [X] is explicitly "subject to the provisions of Clause [Y]". The only reference in Clause [Y] to the "agreed annual target amounts" relates to the stipulation that if the Respondent were to purchase less than 50% of those amounts, "it shall be deemed in breach"… In the view of the Tribunal, the only sensible reading of the word "obligation" is that it is inherently restricted to 50% of the volumes by Clause [Y], while the incentives quite naturally and logically become payable if the Purchaser reaches the 100% "targets".

ii) Disputes arising out of distribution agreements

Many published cases involved disputes arising out of exclusive distribution contracts. In a case before the Cairo Regional Center for International Commercial Arbitration (CRCICA), respondents acted as commercial agents for a brand of Korean cars, and contracted with claimant for the exclusive distribution of such cars.³⁶ Claimant argued that respondents had sold such cars to others and moreover, at a lower price.³⁷ The tribunal awarded damages to claimant for losses attributable to respondents’ delay in delivery, breach of exclusivity, and moral damage.³⁸

In an ICC unpublished case, claimant, a sales agency, was acting as respondent’s exclusive representative for the sale of certain cold-formed automotive products in claimant’s country. Upon respondent’s termination of the contract, claimant claimed post-termination commissions, which respondent denied on the ground that claimant had violated the non-compete clause. The tribunal held that claimant had breached the non-compete clause, because the clause’s reference to ‘identical products’ could not be construed so narrowly as to encompass only repeat orders of the exact parts, given that such interpretation would not be in line with the continuous development and innovation in the automotive industry. Here too,³⁹ the tribunal rejected a restrictive definition of the ‘products’, in consideration of the parties’ long-lasting relationship:

[Respondent’s] contractual protection would in that interpretation appear to be limited to repeat orders – using exactly the same part numbers, specifications and part descriptions – of products sold before under the Agreement. In view of the continuous development and innovation in the automotive industry, the aforementioned consequence would certainly not be in line with the understanding of a reasonable business person.

Issues regarding the definition of covered products have not arisen only in the context of exclusive distribution contracts.

In an unpublished ICC case, a North African respondent had non-exclusive contracts with an automaker whereby respondent was to provide for the promotion, sale and after-sale services for vehicles, as well as accessories and spare parts for the maintenance of such vehicles. Claimant reserved the right to sell and deliver its products directly in the concerned territory, upon the payment of commissions to be calculated according to a contractual formula. Upon the termination of the contracts, claimant argued that commissions were only due for direct sales of spare parts to be installed in specific models of claimant’s vehicles, but the tribunal disagreed, finding that commissions were due for the direct sales of any spare parts destined for the after-sales maintenance of all vehicles.

Other ICC cases arising out of distribution agreements concerned non-conforming vehicles or parts. For instance, in one unpublished case relating to a distribution contract, an African claimant ordered several products from the respondent for resale to its clients. The delivered products did not conform to contractual specifications. The tribunal held that claimant was partly liable for the non-conformity on the ground that, as a professional distributor, it should have noticed the defect in the designs, and should also have informed respondent of the end clients’ needs.

Another much earlier published ICC case concerned a dispute between an American distributor and a German manufacturer of car accessories with an exclusive distribution agreement.⁴⁰ The parties disagreed as to who should bear the costs for adjusting car accessories, which were originally manufactured for other brands. The sole arbitrator ruled that the manufacturer should reimburse claimant for costs incurred for alterations of the accessories, since there was an implied warranty of merchantability and fitness, meaning that the accessories in question should have been suitable for their end use.

But in the majority of ICC studied cases, parties disputed the validity of the termination of distribution or agency agreements. One example involved an agency contract where a commercial agent (the claimant) would promote and sell respondent’s equipment. Claimant contested the validity of respondent’s purported termination of the contract with immediate effect, and the tribunal agreed that the termination was invalid, as there was no evidence that claimant’s conduct made it impossible to continue in good faith the parties’ contractual cooperation:

Generally, the law requires a particularly important reason to justify the immediate termination of an agency or labor contract. As noted above, the contractual breach must be of such gravity as to irremediably break the bond of confidence … between the parties… The written record of [hundreds of] messages does give the impression of a difficult working relationship between [the Parties] but it does not support the finding that their relationship had become unbearable … To the contrary, the day before [Respondent] terminated the agreement, it had been confirmed by [the Manufacturer].

The long-standing nature of the parties’ commercial relationship was also of importance to other tribunals, for instance in a case relating to an exclusive distribution contract for sale and after-sale services within Europe. Claimant (the distributor) performed its obligations through a network of dealerships established in claimant’s country, but respondent later terminated the contract on the ground that it had to restructure the distribution network pursuant to the entry into force of a new regulation. The tribunal held that the termination was invalid as, notwithstanding the need to restructure the network, respondent had not conducted itself in good faith to find a solution, especially given that the parties’ twenty-year commercial relationship.

Similarly, in a much earlier ICC case, the parties had concluded a contract in which claimant was to not only distribute the respondent’s cars in Lebanon, but also to provide after-sales services, and construct a garage in which to maintain spare parts.⁴¹ Respondent unilaterally terminated the contract upon the distributor’s failure to construct the garage, and claimant contested the validity of this termination. Ultimately, the tribunal ruled that respondent had abused its right of termination because it had not given the claimant any opportunity to remedy the situation.

Another ICC arbitration arose from the termination of a distribution agreement between respondents, suppliers of automobile parts, and claimant, exclusive sales agent of the suppliers’ products in the US and Canada.⁴² The arbitrator held that the termination was valid, but that claimant was entitled to damages for wrongfully withholding commissions and compensation.⁴³

In another unpublished ICC case, a distributor argued that the termination of a distribution contract was unlawful as the respondent had not, inter alia, supplied all the products as provided for in the minimum volume commitment provision. The tribunal ultimately held that such provision imposed a purchase obligation on the distributor, not a delivery obligation on the supplier. It found that respondent’s rejection of claimant’s last placed order was justified, but only to the extent that claimant did not have firm orders with customers:

Arrival of the products [in country X] after expiry of the Agreement was a valid reason … to reject the order, except if Claimant already had firm orders for these [products].

Details of some arbitrations relating to terminations of distribution agreements became public in the context of court proceedings. For instance, in the landmark Mitsubishi v. Soler Chrysler-Plymouth case, a dispute arose between Mitsubishi Motors (a JV created between Mitsubishi and Chrysler) and Soler (an auto dealer) which entered into a distribution and sales agreement for the sale of vehicles in Puerto Rico.⁴⁴ Faced with difficulties meeting its sales targets, Soler asked Mitsubishi the permission to transship excess vehicles to Latin America and to the continental US. Mitsubishi refused and, according to Soler, the alleged reason for such refusal was that Mitsubishi and Chrysler had divided their markets, with Chrysler keeping within the mainland US and Mitsubishi keeping outside. Soler also suspected that Mitsubishi sought to replace it with its wholly owned subsidiary. Mitsubishi initiated arbitration before the Japan Commercial Arbitration Association, in accordance with the arbitration clause in the sales agreement. Whereas Soler argued before US courts that the antitrust issues arising in the dispute were inarbitrable, the US Supreme Court held that antitrust claims under the Sherman Act were arbitrable if they arose from an international agreement.

Recently, in the context of setting aside proceedings before the Paris Court of Appeal, it became known that an ICC tribunal had rendered an award in 2016 in a dispute brought by Qatari distributor Saad Buzwair Automotive Co (SBA) against the Middle Eastern branch of Audi Volkswagen.⁴⁵ While the award itself is not public, the dispute concerned respondent’s termination of distribution agreements, by which claimant was to distribute Audi and Volkswagen vehicles and their spare parts in Qatar, and ensure aftermarket services.

iii) Disputes arising out of licensing, sponsorship or related agreements

One unpublished ICC case involved a straightforward trademark licensing agreement, entitling the Asian licensee (respondent) to use a European publishing company’s trademark and logo in their publication. The tribunal ordered respondent to permanently refrain from using claimant’s trademark, pursuant to the valid termination of the agreement:

In its notice directed to the automotive industry…Respondent made it clear that it was willing to continue to publish the magazine…and maintained that it was entitled to use Claimant's trade mark…Thus, it cannot be said that the danger that Respondent could unlawfully use Claimant's trade mark for the purpose of publishing an automobile magazine in [Respondent’s country] no longer exists… For these reasons, the Sole Arbitrator…orders Respondent, its officers, servants or agents, to permanently and for ever refrain from in any manner using the trademark, name and logo … and/or any variation or adaptation thereof, in relation to any product, publication or services, thereby constituting infringement of Claimant's trademark and logo or passing off Respondent's product or business as that of Claimant or directly or indirectly connected with Claimant.

Other studied cases have however involved licenses for the right to use technological software or engineering designs developed for the automotive industry. For instance, in an ICC unpublished case, a company had a license agreement to use the claimant’s IT system automotive services, such as renting and leasing vehicles to customers in claimant’s country. Upon an audit of respondent’s books, claimant alleged that it found irregularities which led to underpayment of the due license payments. The tribunal held that claimant was entitled to payment of the outstanding amounts, and that respondent’s removal of claimant’s logo and signs from its premises and website amounted to respondent’s repudiation of the contract, justifying the claimant’s termination:

I accept that the conduct of the Respondent in the non-payment of the license fees and in the removal of the Claimant’s signage and branding was a breach going to the heart of the Agreement, one which is properly said to be considered a fundamental breach… I have no doubt that the Respondent indicated its intention not to abide by its obligations under the Agreement, and no doubt that the Claimant accepted that renunciation of the contract.

Another unpublished case involved a dispute between an engineering design and analysis company and a car manufacturer that signed a non-disclosure agreement following a meeting discussing software technology. Respondent (the car manufacturer) ended up partnering with another company for their technology, and claimant alleged that respondent had shared the confidential information with such company. The arbitrator held that, while claimant and its competitor’s software technology both allowed for identical simulations, there was no evidence that the other company had copied claimant’s technology, or that claimant had misused confidential information:

For a coincidental identical or in this case similar idea, the Sole Arbitrator is of the opinion that both Parties had at the relevant time been active in the field in a way that allowed to develop the approach in parallel without interaction and knowledge of the other side... The Sole Arbitrator is of the opinion that Claimant has not evidenced circumstances which would allow to conclude an unlawful copying of an idea.

Another case studied involved a contract for design, development and manufacturing of a prototype by claimant. When the delivered product ran into performance issues, a dispute arose as to the nature of claimant’s obligations under the contract. The tribunal ultimately held that the contract did not merely oblige claimant to provide a vehicle conforming to regulations, but also imposed an obligation of reasonable care and skill to supply products at a level capable of meeting the performance results specified in the agreement:

Claimant had an obligation under the Agreement to provide its services, including in choosing and appointing subcontractors, with reasonable care and skill and, further, to ensure that any subcontractors appointed also carried out their services with such reasonable care and skill… I believe that Respondent's notion that the [vehicle] be at a level capable of meeting the relevant results … is correct. It makes no sense to speak of targets unless one foresees a [vehicle] capable of meeting them. … I also believe that no sensible construction of the Agreement would permit Claimant to provide a [vehicle] that was unsafe.

Finally, one of the disputes related to an automotive sports competition although it arose out of a sponsoring and marketing agreement between two marketers, rather than a vertical licensing agreement. In this case, a marketing agent, on behalf of its client, signed a sponsoring and marketing agreement with a company, which was to provide marketing opportunities and services to said client in the context of competitions. Pursuant to respondent’s non-payment of the last instalment due under the agreement, the arbitrator found in favor of claimant and ordered such payment.

c) Disputes involving external parties to the automotive sector

Beyond the strict industry actors, available awards revealed that there are disputes arising out of investment treaties (i) and product liability claims (ii).

i) Disputes arising out of investment treaties

As a result of globalization, disputes involving automotive industry actors have also arisen in the context of investment arbitration. The few ICSID cases known to have been brought by auto industry actors against States did not however involve industry-specific issues.

• AMT v. Zaire, in which a US company engaged in the production and sale of automotive and dry cell batteries in Zaire successfully argued that the State’s failure to pay compensation for the Zairian armed forces’ destruction of claimant’s property amounted to a breach of the US-Zaire BIT.⁴⁶
• Metalpar v. Argentina, where claimants, including a Chilean bus body manufacturer, unsuccessfully argued that Argentina breached the Argentina-Chile BIT by passing its ‘Pesification Law’, which established that obligations in US dollars were to be converted to Argentinean pesos.⁴⁷
• More recently, Transban v. Venezuela rendered its award in a case brought by a Barbadian car importer against Venezuela under the Venezuela-Barbados BIT.⁴⁸ While the outcome and details of the case are not publicly available, it is reported that claimant disputed Venezuela’s introduction of regulation requiring state agency’s approval prior to payments in foreign currency to manufacturers at each shipment of imported vehicles.

According to a 2016 survey reporting on the general under-utilization of free trade agreements by companies, only 29% of automotive industry respondents indicated that they take full advantage of free trade agreements available to them, due in part to the challenges comprised of complex rules of origin regulations, raw material origin documentation, and bill of material and sourcing origins.⁴⁹ Moreover, 41% of auto respondents reported that they had begun preparing for the ratification of the Trans-Pacific Partnership (‘TPP’).⁵⁰ Following the US’s withdrawal of its signature in 2017, the remaining 11 countries recently signed an amended agreement, the ‘Comprehensive and Progressive Agreement for Trans-Pacific Partnership’ or ‘TPP-11’,⁵¹ which includes an attenuated investor-state dispute settlement provision.⁵² As signatories include Japan and Canada, respectively the third and tenth largest auto markets in the world in 2017,⁵³ the agreement’s entry into force may lead to an increase of auto industry-related investment arbitrations.

ii) Disputes involving product liability claims

Before the Volkswagen case brought this issue to the fore, automakers had preemptively studied the possible impact of product liability claims on the different actors involved in production. Even when the claim itself does not seem so complex, product liability claims in the auto industry can produce a chain reaction of disastrous and exponential consequences.

Indeed, in the event of a defect in the final product, the cooperation and interventions of different auto operators on a same vehicle raises the question of shared liability. For many years, multidisciplinary working groups – across different companies and departments – have been formed to determine the scope of liability for each actor involved in the production and supply chain of a specific product, and limit repercussions of product liability claims on the various actors. As such, auto manufacturers have implemented expensive but effective preventative mechanisms, such as recall campaigns, and sometimes require their suppliers and subcontractors to purchase recall insurance.⁵⁴

Regardless of these mechanisms, the owner of a defective vehicle himself can file a product liability lawsuit against the automaker. Though a consumer can only sue, in principle, the automaker and its distribution network, it is not unusual for automakers to sue, in turn, commercial and industrial partners that participated in the design and manufacture of the vehicle, in order to share the liability for the defect. In such cases, a large-scale chain reaction is likely to follow, capable of implicating all companies involved in production. Such a risk is even higher in the US market, in the context of class actions.

ICC studied cases show that manufacturers and suppliers sometime conclude indemnification agreements, whereby a supplier is to cover the costs of repairs made by the automaker for any defects, which may give rise to disputes as regards the scope of such indemnification clauses. Where a previous court judgement had established the equipment supplied as defective, of negligent design and/or testing in the course of a liability claim, an arbitrator interestingly held that the car manufacturer was entitled to indemnity pursuant to the indemnification clause. Another arbitral tribunal had to examine whether the indemnification clause covered costs incurred by repairs not made in response to an officially announced recall of the products; the tribunal decided in the negative.

Safety concerns are currently front-page news, with numerous automakers recalling vehicles equipped. For instance, defective airbags made by Takata – a Japanese automotive parts company, which, before the recalls began around 2013-14, had 20% of the global market for airbags – ⁵⁵ can spray shrapnel when deployed and have been linked to 23 deaths throughout the world.⁵⁶ In 2014, the US Department of Transportation’s National Highway Traffic Safety Administration (NHTSA) ordered a nationwide recall of all vehicles with Takata airbags affecting 19 auto manufacturers, 34 million vehicles and approximately 46 million defective Takata air bags.⁵⁷ Recently, in February 2018, the Australian federal government also ordered the compulsory recall of all vehicles with Takata airbags.⁵⁸ Despite the intervention of governments, many vehicles with defective Takata airbags remain, due to a shortage of available replacement airbags.⁵⁹

In such circumstances, Takata has faced lawsuits from both automakers and regulators. It is reported that the US branch was finally, in February 2018, able to reach settlements with numerous state attorneys general and automakers, enabling Takata US to proceed with its bankruptcy and reorganization.⁶⁰

III - Need for a specialized arbitral institution?

As seen in the previous section, many disputes in the automobile sector are in fact classic commercial or corporate disputes. Some auto industry-specific dispute resolution forums have however emerged, with limited mandates (a). In order to assess the added value of such specific dispute resolution forums, a comparison with services provided by other industry-specific arbitration centres may be helpful (b).

a) Auto sector-specific arbitration centres

The National Automobile Dealer Arbitration Program (NADAP) is a forum that is available for the resolution of manufacturer-dealer disputes in the Canadian automotive industry. The NADAP was established in 1997 following the recognition of the interdependence of auto manufacturers, distributors and dealers,⁶¹ is administered by the Toronto-based firm ADR Chambers, and offers mediation and arbitration services.⁶² It was jointly created by The Canadian Automobile Dealers Association, the Canadian Vehicle Manufacturers Association and the Global Automakers of Canada so that ‘respect, trust and confidence can be enhanced and differences that develop between manufacturers and dealers may be resolved amicably’.⁶³ Main features are as follows:

• Manufacturers that participate in the NADAP must offer the dealer an opportunity to sign an Implementation Agreement, by which both parties agree to submit any future disputes arising from their dealer agreement to the NADAP.⁶⁴
• The parties must first attempt to resolve their dispute under any internal dispute resolution mechanism provided by the manufacturer.⁶⁵ If they do not succeed, they may proceed to mediation, failing which they may advance to arbitration as a last resort.⁶⁶
• Since the 2012 amendments to the NADAP Rules, either party may terminate its participation by giving 30-days written notice to the other.⁶⁷ Any manufacturer giving termination notice ‘would then be at liberty to behave as would any contracting party in any other industry, and dealers would be deprived of the advantages of NADAP both procedurally and substantively’.⁶⁸

Despite the 2012 amendment to the NADAP Rules, the NADAP represents a dispute resolution mechanism created by members of the automotive industry for their own industry, and it is reported that over 70% of submitted disputes have been resolved through mediation.⁶⁹

AAA’s Automobile Industry Special Binding Arbitration Program. The American Arbitration Association (‘AAA’)’s Program is another automotive industry-specific initiative for the resolution of disputes between manufacturers and dealers, this time in the US. However, unlike the NADAP, this program was set up legislatively for a specified time period and purpose, and is no longer running.

The program was set up by the US Congress in the aftermath of the 2008 financial crisis. Specifically, the crisis had put the viability of the two major American auto manufacturers, Chrysler and General Motors, at stake.⁷⁰ The government, mindful of the potentially catastrophic consequences that their uncontrolled insolvency would have on the US economy, including the forecasted loss of one million jobs, had set itself to stabilize the industry. Since the bankruptcies of Chrysler and GM did not allow terminated dealerships to contest or seek remedies, Congress created the ‘Automobile Industry Special Binding Arbitration Program’ to address the concerns of aggrieved dealerships.⁷¹ Since its mandate has run out, the program is no longer in force, but it was widely viewed as a success.⁷²

b) Comparison with other specialized arbitration centers

Successful specialized arbitral forums exist in other industries, such as the Court of Arbitration for Sport (CAS) for sports-related disputes,⁷³ and the Grain and Feed Trade Association (GAFTA) for grain and feedstuffs-related disputes.⁷⁴

These institutions boast of their ability to provide industry-specific expertise within time limits that are sensitive to user needs. In the sports sector, the timely resolution of eligibility disputes (eligibility to compete), for instance, dictates the smooth functioning of major sporting events,⁷⁵ and in the grains sector, even a short delay in the transaction of perishable goods can lead to significant damages.⁷⁶ These sectors notably also promote the establishment of international and harmonized standards – such as common anti-doping regulations for international sporting competitions,⁷⁷ and standardized contracts depending on type of grain handling or terms of shipment, among others⁷⁸ – in order to promote consistency and uniformity.

In contrast, time constraints are not as absolute in the automotive industry, though swift resolution is obviously desirable. The industry is deeply intertwined with economic, consumer, social and political interests, which make global harmonization inconceivable. The automotive sector similarly lacks harmonized standards as each territorial market caters, at least for now, to different consumer preferences and buying power, and provides for a different set of regulations.⁷⁹ The relative success of the NADAP and AAA programs were likely due to their limited temporal, geographic and substantive scope and to the fact that they were created either out of political will or collaborative efforts, which brought defined groups of the automotive industry together.

Conclusion

Known for its oligopolistic nature, the automotive market is marked by a high level of interdependence between actors. The transformation of the market with new technologies is likely to further increase such interdependency, as Silicon Valley heavyweights enter the game.

As shown in the above study of arbitral awards, most arbitrations that are known to have taken place involved vertical distribution agreements. While a few such cases related to the definition of auto parts covered by an exclusivity clause, most involved issues such as non-conforming goods and unilateral terminations; legal issues which are not specific to the automotive sector. The same conclusion can be drawn for horizontal and external disputes, where known cases involved non-industry specific issues such as standards of protection under investment treaties and defective product design.

Thus, with a few exceptions, the types of auto disputes submitted to arbitration are – from a legal standpoint – similar to contractual disputes that arise in other industries, and are routinely submitted to non-specialist arbitral institutions, such as ICC. Arbitral tribunals constituted under such arbitral institutions are thus well able to address and adapt to the users’ specific needs, whether procedural or substantive, stemming from the auto industry.

In this light, while automotive industry-specific bodies with limited scope may facilitate dispute resolution within a specific context, an arbitral forum dedicated to international automotive disputes does not seem necessary for the time being. Auto industry actors, therefore, should not feel daunted by the lack of such a specialist forum.

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