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Beware of Supplier Contracts

November 24, 2015

In opening and operating your restaurant, you will enter into contracts with a variety of vendors. You might have a trash contractor, a linen supplier, a credit card processing company and service companies for your HVAC system and equipment. In addition, you will do business with alcohol and food purveyors. Below are some helpful pointers to keep in mind before signing a supplier contract.

Read and Understand the Contact

                  This may seem obvious, but we have seen many situations where restaurant operators have come to us concerning a dispute with a vendor and they were unaware of what was in the written contact until it was too late. If there is a written contract, it is highly unlikely you will be able to rely on oral promises or assurances which may have been given to you by the vendor. That is why it is important for you to read and understand the agreement with the vendor. If there is any provision which you do not understand, either have it changed to plain language that you do understand or have it reviewed by a competent legal professional who can advise you of its meaning.

                  Do not assume just because it is a “form” contract, it cannot be changed. In a competitive market, vendors will accommodate your concerns to get your business.

Avoid Automatic Renewal Provisions

                  Although your contract with a vendor might be for a specific term, you should make sure that it does not contain an automatic renewal provision. For example, you might enter into an agreement with a linen contractor that provides for an initial term of a year. You might think that the year represents a reasonable period of time for you to judge the vendor’s performance and incorrectly assume that after one year you can easily change to a new vendor. If there is an automatic renewal provision in the contract, however, changing vendors might not be possible without serious financial repercussions.

Vendors often structure their contracts such that they can terminate the agreement with thirty or sixty days’ notice, but hold the customer to a fixed term. In addition, many vendor contracts provide that if the contract is not cancelled by a specific number of months before the expiration date of the term, the contact automatically renews for an additional term. You might believe your contract is up after one year, but if there is an automatic renewal provision and you fail to give the cancellation notice as required before the end of the then current year term, you will be bound for an additional year.

Ideally, in such vendor agreements, you should seek a right to terminate the agreement upon no more than sixty days’ notice. That way, if the vendor does not perform as expected, or the vendor’s prices are not competitive, you can terminate the agreement upon notice without financial consequences to your business.

Beware of Liquidated Damage Clauses

You should carefully read the default and damages clauses of any contract. In many cases, vendor contracts will contain a liquidated damages provision which guarantees that certain amounts are payable to the vendor if you cancel the contract during the term, or during an automatic renewal. These amounts are payable to the vendor even though they are no longer servicing your account.

A long term contract or an automatically renewed term combined with a liquidated damage provision can result in your business paying significant sums for services it is no longer using.

Look Out for Secret Guarantees

                  You formed an LLC or a corporation for your business venture because you wanted to limit your personal liability. Make sure you do not destroy that protection by inadvertently signing a personal guarantee.

                  We have seen instances where vendor credit applications or initial order forms contain language that the signatory personally guarantees the obligations of the company to the vendor. The sales person will simply tell you to “sign here, here and here”. Make sure you read and understand the language before you sign. Unless you are specifically agreeable to a guarantee, cross out and initial any language that seeks to hold you personally responsible and always sign in your capacity as an authorized representative of your business entity by including terms such as “President”, “Manager” or otherwise, depending on your title.

Andrew J. Kline is a principal in the Veritas Law Firm. | 202-686-7600