‘Sole-source’ guarantee not enough to keep Ontario auto-parts plant open

Nemak plan had to make economic sense: arbitrator

‘Sole-source’ guarantee not enough to keep Ontario auto-parts plant open

A multinational company’s agreement that its Ontario facility would be the sole source of a product didn’t keep it from closing the plant and moving production when the plant was no longer economically viable.

Nemak of Canada was part of a multinational conglomerate that operated a plant in Windsor, Ont. that manufactured auto parts. In 2015 the company realized that work for the Windsor plant would run out by 2019 and it would probably have to close the plant. However, there was an opportunity to take over a contract from its Mexican facility that would give the Windsor plant work until 2023.

In order to take over the contract, however, Nemak had to ensure cost certainty. In February 2016, the company asked the union to extend the existing collective agreement, which expired in 2019. In return, Nemak would commit to performing all the work from the new contract in Windsor. It was an urgent situation, so the union had to agree by the end of February.

The union said it would agree to the extension on the condition that the Windsor plant be the “sole source” of the product under the contract. It proposed adding a clause that stated that the 
Windsor facility would be “fully utilized for the product before any other facility is awarded 
the product.”

Nemak was concerned about this clause in case demand for the product exceeded the Windsor plant’s capacity. The company estimated the range of production fluctuation would be between 91 and 115 per cent of the project volumes, so the union agreed to some flexibility if demand exceeded capacity.

The new clause stated: “Based on the current volume projections, the company will designate [the Windsor plant] as the sole source for the [product]. This assumes that the [Windsor plant] will be able to meet customer demand, delivery and quantity requirements.”

With the new clause, the collective agreement was extended until 2022.

However, the product had design problems that led to delays and significantly reduced volumes at the Windsor plant. Nemak was unable to obtain other contracts, so the company was faced with millions of dollars in losses. As a result, the company decided to close the Windsor plant in mid-2020 and move the existing production under the contract back to Mexico.

The union challenged the closure, arguing that the collective agreement prevented Nemak from manufacturing product under the contract anywhere but Windsor unless demand exceeded the plant’s capacity.

The arbitrator noted that at the time the parties negotiated the extension, neither seemed to consider the possibility that production volumes could drop below projections, perhaps because they had to act quickly. In addition, both parties agreed that if the contract ended, there was nothing to prevent Nemak from closing the Windsor plant.

The arbitrator found that the union’s proposed clause stated that the Windsor plant had to be fully utilized before outsourcing production, but this was changed in the final agreement. The revised wording stated Windsor’s “sole-source” guarantee was based on the volume projections and the assumption the plant could meet delivery and quantity requirements.

In the circumstances, the volumes dropped so low that the Windsor plant couldn’t meet delivery and quantity requirements in an economically sustainable way. The change in the clause’s wording protected the company against volume reduction, said the arbitrator.

The arbitrator noted that if Nemak had obtained other contracts for Windsor or full production under the contract was only temporarily delayed, the work would have to be done in Windsor.

However, there was no indication things would improve.

“I cannot conclude that there was a clear promise made that even where volumes were so low as to be negligible, that there was a clear promise to maintain production in these unique circumstances,” said the arbitrator in dismissing the grievance.

Reference: Unifor, Local 200 and Nemak of Canada. Norm Jesin — arbitrator. Michael Wills for employer. Anthony Dale for employee. Nov. 29, 2019.

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