Times are changing for the automotive industry. The introduction of autonomous vehicles (AVs) is changing the players involved in the development of vehicles.
What once was a relationship between automakers and hardware component suppliers now also includes technology companies. Automakers relied on component suppliers to provide the hardware needed to manufacture a vehicle. With AVs, automakers have turned to technology companies to supply the software and platforms used to make a vehicle autonomous---allowing the vehicle to perform all aspects of driving tasks traditionally managed by a human driver. With start-up technology companies entering the automotive industry, their ability to leverage bargaining power, as they have in the software licensing context, may decrease in favor of the more traditional supplier/purchaser relationship that has existed for years in the automotive industry.
Typical Hardware Component Supplier Liability Framework
More than one thousand parts fit together like a puzzle to make an automobile operational. The starter, alternator, airbag and wheel assembly are some of the parts that automakers traditionally purchased from a supplier and incorporated into a vehicle. Although automakers need the hardware supplier to manufacture their vehicles, purchase agreements establishing the automaker/supplier relationship include provisions requiring the supplier to maintain insurance and indemnify the automaker for damages or injuries caused by the products supplied.
Automakers have required parts suppliers to assume the risk associated with injury or damage caused by the component part. For example, a typical agreement may include a provision that states:
“Supplier shall indemnify and hold automaker harmless from and against any and all loss, liability, damages, costs and all expenses, including attorney fees, arising directly or indirectly out of Supplier’s performance of work under this Agreement or the use or sale or importation of any Parts.”
Further, supplier agreements would typically require the supplier to maintain General Liability and Automobile Liability Coverage in amounts not less than $1,000,000 per person, $1,000,000 per occurrence Personal Injury, and $1,000,000 per occurrence Property Damage. These provisions relieve the automaker of liability and put the supplier on the hook if any accident is attributed to the component part.
Technology or Software Component Agreements
Software that will run each component of an autonomous vehicle as well as the software systems that will manage the coordination between the components to ensure seamless operation will be provided by a mix of software engineers employed by the automakers and external sources. And with the amount of data an AV will generate as it navigates various driving environments, there will be a need for onboard computing, wireless connectivity for communications with other vehicles, infrastructure (vehicle-to-everything communications or V2X), and connectivity for communications to conduct cloud-based computing and updates. Each one of these components will be essential to the smooth, safe, and secure operation of the vehicle and each present a point for consideration of the assignment of liability in the supply chain.
Depending on the nature of the arrangement between the automaker and the software developer, either a Software as a Service (SaaS) Agreement or a Software Licensing Agreement will be needed. The key distinction between these two agreements is that in the SaaS agreement, the supplier is acting as a service provider to the buyer; whereas in the software licensing context, the supplier is licensing its product for use by the buyer (licensee). Regardless of the agreement, the parties will need to address which party will bear responsibility for potential “errors” or anomalies that cause operational or security issues. Reliance on traditional liability, indemnity, and warranty provisions, which disclaim or greatly limit liability on the part of the supplier in the software context, may be insufficient where the consequence of system failure could result in a loss of life scenario.
SaaS agreements and software licensing agreements utilize indemnification and warranty provisions as tools for managing the risk exposure of the supplier vis-à-vis the buyer, and, in the case of SaaS agreements, are typically constructed with monetary caps on liability, with a higher cap for exceptions where knowing or negligent actions and breach as a consequence of supplier error has occurred. The monetary caps represent the risk tolerance that the parties are willing to accept while moving forward with the agreement, and are quite often, in the SaaS context, tied to the value of the services provided under the contract. Further, in negotiating these agreements the parties will factor in insurance coverage that each entity has or will put in place to cover the potential obligations created.
Similarly, in the software licensing context, liability is often limited or disclaimed outright, requiring the licensee to agree that the supplier of the license cannot be held liable for damages resulting from use of its software. This is done to relieve the supplier of liability for instances such as the malfunctioning of a device (in this case, the AV or the system in the AV that uses the software). In addition, software licenses typically disclaim all warranties, offering the licensee terms which require the user to accept it “as is” or “as available.”