by Diana S. Barber, J.D., CHE
Have you ever been surprised to learn that your vendor or supplier agreement did not expire, but continued on for another year or longer because you missed the window to cancel the agreement prior to automatic renewal?
Sure, if your vendor is meeting your needs and you are comfortable with the relationship, you might not ever need or want to terminate your agreement or the relationship.
However, a number of reasons could cause you to want to out of that agreement. If your supplier changes ownership or begins to sell you inferior products or service fails to meet your expectations, for example, changing vendors may be important to your ability to service your own customers. Also, if technology changes the way you operate your business or the owner of your restaurant has a closer relationship with a competitor of your vendor or supplier, you might want or need to change your vendor or supplier for pure business reasons unrelated to the vendor’s or supplier’s quality.
Small printed vendor forms cannot only be difficult to read, but can be full of traps to keep you in the relationship longer than you want to be. Below is a list of clauses essential to all restaurant vendor and supplier contracts to reduce your liability exposure as well as some clauses you should avoid in your negotiations and the written agreement.
1.   Need Early Termination. Because any number of reasons can arise in which you want or need to terminate your current supplier or vendor, make sure you negotiate an early termination provision that allows you to terminate for any reason or no reason during the term without having to pay a fee or penalty. Usually, a 30, 60 or 90 days written notice to your supplier will be fair and sufficient to avoid such penalties. There may be a certain time period in which the vendor must recoup out of pocket investments so be flexible on the early notice provision if it makes sense. The time period is negotiable and some vendors will not agree to allow an early termination. Other vendors and suppliers show confidence in their products and services by allowing an early termination clause. Although some agreements provide a termination mechanism for nonperformance of the parties, an early termination clause provision will allow you to avoid the task of justifying your termination of the agreement.
2.   Check Licenses and Permits. Do your homework on all your vendors and suppliers. Ask for copies of their business and operating licenses and permits. You need to know who you are doing business with and that they are current on their licenses and permits. Be particularly cautious with new vendors or suppliers with whom you have no prior relationship or good references. The clause in the contract should obligate the vendor or supplier to obtain the proper licenses and permits, keep all of them up to date and provide copies to you upon request. Additionally, the failure to have, maintain and provide such licenses and permits to you needs to be expressly listed as a default under the contract.
3.   Obtain an Indemnification. The contract should provide that the vendor or supplier will agree to indemnify, defend and hold you, the owner or manager of the restaurant, your officers, employees and agents harmless against any acts or omissions of the vendor or supplier (including their employees, agents and contractors) that directly or indirectly cause harm or damage to your restaurant or anyone in, on or about your restaurant, such as employees, patrons or other vendors/suppliers.
4.   Obtain Current Insurance Certificates. An indemnification from the supplier or vendor is only as good as their ability to stand by their agreement. If the company providing the indemnification has few assets to make good on any claim, it is essential to have a third party to look to for relief if you suffer damage. At a minimum, the vendor or supplier should list your company and the owner/manager of the restaurant as an additional insured (or named insured, if acceptable to the vendor) on the vendor/supplier general liability insurance policy. The clause should obligate the vendor/supplier to provide copies of insurance coverage via a certificate of insurance, obtain sufficient amounts of coverage depending on the type of product or service offered by the vendor, keep the insurance coverage current and provide that the insurance company will give you written notice of any lapse in coverage. Obtain copies of the certificate of insurance upon signing your agreements with vendors and suppliers and keep them on file for future use. When damage or injury occurs, it will be very difficult for you to obtain this vital information about the insurer from the vendor/supplier. Failure to comply with these requirements needs to be a default under the contract.
5.   Provide Details of the Product or Service. Many managers make assumptions regarding the quality of product or services they are expecting to receive from suppliers and/or vendors. These assumptions can be very expensive. If you are expecting first-class or luxury quality, it is essential to spell it out in the agreement. The standards of quality should be communicated and then delineated in the contract in sufficient detail to avoid disputes later on during the term of the agreement.
6.   Need to Provide the Term of the Agreement. It is essential that the contract contain a beginning or delivery date and an expiration date. Be clear in the contract as to your expectations to avoid a dispute. In addition, make sure all blanks (including the blank for the date at the beginning of the contract) are filled in prior to executing the contract, and certainly prior to the commencement of services.
7.   Define the Remedies for Nonperformance. The contract should contain provisions that will explain the procedures or remedies for nonperformance or poor performance. Written notice of the default, if it is to your benefit to require such notice at all, should be delivered by certified mail or overnight delivery in order to track receipt of the notice. It is common to allow a certain time period to cure defaults prior to terminating the agreement, if possible to cure under the circumstances. Make sure your contract contains these provisions so you will know how to handle these types of situations or that you made an informed decision to leave them out of the contract.
8.   No Automatic Renewals. Make sure your contract does not automatically renew so your company is not obligated to accept the products or services for another term. Some agreements provide a certain time or window for you to terminate the contract, usually 30 or 60 days prior to the anniversary date. If you allow this type of clause without having an early termination right as mentioned above and you miss this cancellation window, you will be locked into another year (assuming it is an annual renewal term). Even with an early termination clause, it is best to have the term of the agreement expire on the anniversary date and a new agreement may be entered into between the parties. Over time, too many variables can change and the best way to protect you and your business from a bad deal is to avoid committing yourself to long-term arrangements. At the very least, if automatic renewal must be part of the deal, you should be compensated for allowing the clause into the contract.
9.   No Restrictions on Assignment. Many standard vendor and supplier forms prohibit the customer from assigning the agreement to another party. There may come a time when the restaurant changes ownership or management and there is a need to transfer the agreement to the new owner or manager so that the product and/or service will continue uninterrupted. Having the flexibility of assignment built in to all your vendor/supplier agreements will save you the time and money needed to obtain vendor/supplier approvals of the assignments when an event occurs that requires obtaining consents. The reverse is not true. The vendor, however, should not be free to assign the contract without your prior approval.
10.   No Personal Guarantees. Some vendor and supplier forms require the owner or manager to sign a personal guarantee primarily used for securing payment in the event the restaurant business is unable to pay. I suggest you negotiate the deletion of these clauses. Provide financial records or bank references to the vendor or supplier to achieve the comfort level needed to omit this requirement. If you do enter into a personal guarantee, make sure you fully understand all of the ramifications to your personal assets. On suggestion is to allow them for a set period of time only.
Although not exhaustive, this list will go along way in reducing liability to your restaurant. Carefully review each one of these clauses in all contract negotiations.
Diana S. Barber, J.D., CHE is a hospitality lawyer and also teaches full time at Cecil B. Day School of Hospitality, J. Mack Robinson College of Business at Georgia State University. For more information, Ms. Barber can be reached at (770) 813-9363 or dsbarber@gsu.edu.
This article contains general information. It is not designed to be and should not be relied on as your sole source of information when analyzing and resolving a specific legal issue. Each fact situation is different; the laws are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult with competent legal counsel.
