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 10 Essential Clauses Hotels Need to Request
or Avoid in Vendor/Supplier Agreements

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By: Diana S. Barber, Esq., August 2004

Have you ever been surprised to learn that your vendor or supplier agreement did not expire, but continued on for another year 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.  For example, if your supplier changes ownership or begins to sell you inferior products or service fails to meet your expectations, changing vendors may be important to your ability to service your customers.  Also, if technology changes the way you operate your business or the owner of your facility 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 vendorís or supplierís quality.  Small printed vendor forms can not only be difficult to read, but can be full of traps to keep you in the relationship. Below is a list of a few clauses essential to all vendor and supplier contracts to reduce your liability exposure and some clauses you should avoid in your negotiations and the written agreement. 
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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 notice written notice to your supplier will be fair and sufficient to avoid such penalties.   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 reference.  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 of the property, your officers, employees and agents harmless against any acts or omissions of the vendor or supplier (including their employees and contractors) that directly or indirectly cause harm or damage to your property or anyone in, on or about your property, such as employees, guests or other vendors.

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.  At a minimum, the vendor or supplier should list your company and the property 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 in your finance department for future use. 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 yourself 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 property changes ownership or management company 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 vendor, however, should not be free to assign the contract without your prior approval.

10. No Personal Guarantees.  Some vendor forms require the property owner or manager to sign a personal guarantee primarily used for securing payment in the event the property 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.

Although not exhaustive, the foregoing discussion of clauses will go along way in preventing liability to your hotel or restaurant.  Carefully review each one of these clauses in all contract negotiations.



Diana S. Barber, Esq. is the founder of LodgeLaw, A Division of Barber Law Associates, and a law firm specializing in hospitality law.  She also teaches at Cecil B. Day Hospitality School at Georgia State University and is a member of Georgia Hospitality & Travel Association.  For more information, Ms. Barber can be reached at (770) 813-9363, www.lodge-law.com or diana.barber@lodge-law.com.

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.


 
 
Contact:
 Diana S. Barber, Esq. 
Barber Law Associates, P.C.
5925 Masters Club Drive 
Suwanee, GA  30024
(770) 813-9363 
diana.barber@lodge-law.com
www.lodge-law.com
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Also See: 10 Safety Mistakes Hotel Managers Make And How to Avoid Them / Diana S. Barber / July 2004
10 Ways to Bulletproof Your Hotel Against Legal Attacks / Diana S. Barber / June 2004
Accepting Minor Guests in Your Hotel; A Checklist for Handling the Challenges of Underage Guests / Diana S. Barber / May 2004
High Speed Internet Access in Hotels; A New Amenity Opens Up New Liabilities / Diana S. Barber / March 2004
How to Safeguard Your Guests from Being the Next Identity Theft Victims / Diana S. Barber / February 2004
LodgeLaw, P.C., a Hospitality Specialty Law Firm, To Open in Northeast Atlanta; Firm President is former Ritz-Carlton Vice President and Associate General Counsel / June 2003


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