European legal challenges arising from a strategic alliance for the development, sale and purchase of batteries for electric vehicles

A manufacturer of electric vehicles faces certain challenges to reach an agreement for a long-term relationship with a supplier whereby that supplier will develop and supply battery products to enable their incorporation into those electric vehicles.

These challenges include warranty issues, intellectual property rights, aftermarket conditions, volume commitments, the compensation model, sustainability and raw material commitments, raw material costs fluctuations, force majeure events, remedies, and limitation of liability.

Warranty issues

One of the major challenges involves modifying traditional warranty provisions to the electro-mobility space.

Batteries are different from other components used by vehicle manufacturers due to their expensive, heavy and potentially hazardous nature.

A vehicle manufacturer could incur liability where battery cells fail in the field and cause fires and explosions. The majority of these failures will relate to software and connection issues. It is imperative from the vehicle manufacturer’s perspective that the warranty agreement with the battery supplier covers these failures.

The parties will need to agree under the warranty, inter alia, upon:

• The length of the warranty period;
• The frequency, location and attribution of costs of the technical analysis of the batteries whenever the vehicle manufacturer discovers quality issues with the batteries;
• The party upon whom the burden of proof lies to establish the root cause of the quality issues with the batteries;
• The attribution of warranty costs where no root cause is found for the battery quality issues;
• How to distinguish between defects in the batteries covered by the warranty and normal wear and tear; and
• Corrective action processes including logistics issues for defective batteries.

Intellectual Property Rights

The parties will need to exchange intellectual property rights through licenses in order to ensure that the intended use of the batteries under the agreement can be fulfilled.

This will require extensive negotiations regarding, inter alia:

• The scope of the license rights;
• The use of the background IP rights (i.e. IP that is relevant to the venture that is supplied by the partners at the start of the project);
• The use of foreground IP rights (i.e. IP produced within the venture during the project’s tenure);
• Exclusivity provisions e.g. an undertaking from the battery supplier to ensure that the license granted to the vehicle manufacturer shall, during a limited period of time, be exclusive as regards certain battery packs;
• Ownership rights e.g. which foreground rights will be jointly owned by the parties; and
• The amount of the license fee and any cap regulating the license fee.

Aftermarket conditions

The parties should avoid agreeing on a non-compete obligation to prohibit the battery supplier from selling batteries on the aftermarket (even for a limited period of time) as this would constitute a hardcore restriction of competition law.

Furthermore, in accordance with competition law, the parties need to allow the size and position of the trademark and other supplier related information to be applied by the supplier in an easily visible manner on the batteries.

Volume commitments and term

The parties should consider the length of the agreement taking account of volume commitments. Where the vehicle manufacturer enters into a commitment to purchase from the battery cell supplier more than 80% of its expected total purchases of the type of battery cells covered by the agreement, this would amount to a “non-compete” clause.

However, such a clause would not be illegal under competition law as long as the term of the agreement does not exceed 5 years in accordance with Commission Regulation 461/2010 on the application of Article 101(3) of the Treaty on the Functioning of the European Union to categories of vertical agreements and concerted practices in the motor vehicle sector.

Compensation model

The parties could agree a compensation model based on an annual firm volume of purchased batteries agreed in advance for each calendar year. The electric vehicle manufacturer would then compensate the battery supplier in accordance with a formula where the volume of batteries which the vehicle manufacturer has actually purchased is a more than a certain percentage lower than the annual firm volume for that year.

The parties may also consider agreeing a one-time compensation for the supplier’s investment into its battery assembly line.

Sustainability and raw material commitments

The vehicle manufacturer should consider agreeing with the battery supplier a sustainability and raw material commitment which entails, inter alia, that the battery supplier will exercise due diligence in accordance with the OECD Due Diligence Guidance for Responsible Supply Chains of Minerals from Conflict-Affected and High-Risk Areas in respect of sourcing certain minerals, and work on further identifying all actors and tiers in the supply chain of such minerals.

Raw material costs fluctuations

The parties may enter into a raw materials agreement whereby the price of the batteries is adjusted in accordance with raw material costs fluctuations under certain conditions (in relation to raw materials such as nickel, copper, aluminium, cobalt and Lithium hydroxide).

Force Majeure events

The parties will, in particular, need to take into account the impact of COVID 19 in relation to Force provisions. For example, they may agree that further waves and/or break outs of COVID 19 are considered to be foreseen and will thus not constitute a Force Majeure event.

Remedies

The parties may agree, inter alia, that the electric vehicle manufacturer has a right to get paid for warranty claims by withholding payments due to the battery supplier and ultimately by set-off.

Limitation of liability

The parties will need to agree provisions regarding the limitation of their liability (such as the exclusion of liability for indirect and consequential losses as well as any incidental, special or punitive damages) and the monetary cap. Each party should consider covering risks beyond the other party’s liability cap via insurance.