This article covers some general concepts about managing dealership vendor agreements and provides suggestions on areas to cover when negotiating these agreements.
In the normal course of operations, an automobile dealership is a party to many types of vendor agreements, such as those relating to dealer management systems (Reynolds, CDK and others), uniform and laundry services, janitorial services, credit card services, employment management systems, environmental health and safety compliance, privacy compliance, warranty processing, customer relationship management, copy machines, postage machines, information services, key tracking, alarm services, telephone systems, Carfax, landscaping, body shop agreements, signs, content providers for websites, website maintenance, digital marketing, advertising and F&I products. These are just some of the many vendor agreements dealers have.
Dealers are sometimes surprised to discover how many agreements they have, and their cost. What is sometimes even more surprising is the length of time many contracts run. Dealers can determine what vendor contracts they have by looking at their payables general ledger or subledger, which should identify the agreements. The dealer should have a complete signed copy of each agreement. For ease of access, it is good to have all vendor agreements in one file or computer folder.
Often, dealers cannot locate complete, signed copies of the vendor agreements. In that case, it is best for the dealer to contact the vendor and ask for a complete copy. Dealers are often reluctant to do this, believing that vendors will speculate that a buy-sell is being considered. To alleviate this concern, dealers sometimes tell vendors they need copies of the agreement because they are doing an audit of all existing agreements and establishing a contract management system.
Each agreement has a specific term showing how long the agreement is effective. It is very common for vendor agreements to contain an “evergreen clause.” An evergreen clause means the agreement automatically renews for a specific period (often the same period as the initial agreement, or longer) unless the dealer gives notice to the vendor within the time specified in the agreement that the dealer is terminating the agreement. Unless a dealer has a system that flags the time when the dealer must give this advance notice, such an “evergreen” renewal may occur. It is very easy for a dealer to miss the advance notice and be stuck for a long term, thus the term “evergreen clause.”
Most vendor agreements also have a notice provision that describes to whom notices are to be given and the way they are to be given, such as by overnight delivery, certified mail or another method. It is important that any notices required by the agreement be given in the manner prescribed in the agreement.
In a buy-sell of a dealership, vendor agreements are always a somewhat difficult issue. The seller will have agreements with terms that sometimes extend for years beyond the close of the buy-sell. If they are not assumed by the buyer, the seller will be responsible for them and must buy the agreement out or continue to make payments. The agreements the buyer will assume should be included in the sale agreement. It is a mistake to leave this issue open for determination by the buyer and seller after the agreement has been signed because disputes often arise about what agreements the buyer will assume. The time to resolve this is before the sale agreement is signed. The reality, however, is that many parties choose not to address this issue at the time of signing the buy-sell agreement and leave it to be determined during the buy-sell process. If the sale occurs by a stock purchase, rather than an asset sale, the buyer of the stock will be assuming all existing agreements unless they are excluded by the agreement. Most dealership sales are by asset purchase agreements, not stock sales.
In handling vendor agreements that are not being specifically assumed by the buyer in the buy-sell agreement, the agreement sometimes provides that the buyer will agree to also assume vendor agreements that, for example, cost less than five hundred dollars a month and can be canceled with a 90-day notice. For all vendor agreements that won’t be assumed by the buyer in the sale agreement, the seller should give notice to the vendors that agreements will be terminated at the earliest date allowed by the vendor agreement. Sometimes vendors will allow the agreement to be terminated on the date of the sale closing, or will at least agree to a reasonable termination date or buyout of the agreement, considering the business relationship the dealer and vendor have had over the years.
To be ready if the time comes when a dealership will be sold, it is a good practice to insist with every vendor when the vendor agreement is signed, or amended, that there be a clause which will give the dealer the right to terminate the agreement on the close of a buy-sell. Such a clause might read: “Notwithstanding anything to the contrary in this agreement, or any amendments or extensions of it at any time after the date of the agreement, if the dealer determines to sell the dealership, the dealer may terminate this agreement by notice to (name of vendor) not less than 30 days before termination, with the termination to be effective the later of the closing date of the dealership sale or 30 days after the termination notice.” Dealers are advised to obtain their own legal counsel about the use of such a clause.
Most vendor agreements have been carefully drafted by attorneys for the vendor and include favorable language for the vendors. The vendors will say company policy does not allow for any changes. A dealer’s response to objectionable provisions can be that if the vendor wants your business, some changes must be made. The ultimate decision on objectionable provisions will depend on the negotiating leverage of each party, the size and scope of the transaction, the risk tolerance of each party, and which party is likely to breach the agreement.
The following is a checklist that highlights some areas of vendor agreements that need to be considered.
Description of parties and effective date. The parties should be identified by their legal names. The effective date of the agreement should be clear.
Scope of services or products. This section of the agreement should clearly describe in detail what the vendor is providing.
Pricing and payment terms. The pricing and payment terms, including any taxes, should be clearly provided. The due date of payments should be stated. Any late payment penalty should be reasonable.
Definitions. Some agreements will include a list of definitions that will affect the terms of the agreement. Any definitions should be carefully reviewed to show how they impact the agreement and to make sure they are consistent with the terms of the agreement.
Reference to other documents. Attachments to the agreement must be reviewed. Some agreements will provide a website link that contains part of the agreement which must also be carefully reviewed. A dealer should object to any unfair provision in the agreement that binds the dealer to any changes on the website document whether or not the dealer is aware of or consents to the changes. When possible, it is a good practice to remove references that incorporate documents that are not attached to the vendor agreement, such as agreements on the vendor’s website, and to instead attach those to the vendor agreement so the terms of the entire agreement are clear.
Term and termination. The term of the agreement and termination date are very important provisions. Vendors want to bind the dealer to as long a term as possible. Dealers who don’t pay attention to these provisions will find themselves locked into a term that is far longer than anticipated. A good position for the dealer is to have an initial term that is as short as possible, with a provision that when the term ends, the agreement is terminated, but if the parties continue with the agreement, it goes on a month-to-month basis and can be terminated by either party on 30 days’ notice. A dealer may want to lock in good pricing for a longer period, but when that period ends, the contract goes month-to-month. The dealer should avoid an evergreen clause discussed above because of the risk of failing to give proper notice that would terminate the agreement and prevent the evergreen term from going into effect. Some agreements allow a party to terminate the agreement for convenience at any time without providing a reason.
Representations and warranties. There are usually representations and warranties in vendor agreements whereby each party states that certain matters are true. These create claims against a party if any representations are inaccurate or are breached. The scope and language of the representations are determined by the nature of the agreement, and the dealer should carefully review its representations and warranties to ensure they are true, accurate and reasonable.
Compliance with laws. Every vendor agreement should have a compliance with laws section that provides that the vendor will always comply with all federal, state, local laws, ordinances and regulations applicable to the agreement and the vendor’s business.
Indemnification. Vendor agreements should have an indemnity provision which is an agreement to hold the other party to the agreement harmless from certain costs, expenses and damages. It is a risk-shifting tool that can be drafted to cover liability for third-party claims and direct claims of one party against the other. Indemnity clauses should protect both parties to the agreement and should cover all losses of the indemnified party, including attorney and expert witness fees. Vendors typically draft indemnity provisions to be one-sided in the vendor’s favor. Moreover, it is a common practice for vendors to limit their liability under any indemnification they offer as discussed below, so indemnification provisions need to be read in concert with limitation on liability provisions.
Limitation on damages. Vendor agreements presented to dealers will almost always have a provision that severely limits the amount of damages that can be claimed against the vendor if the vendor breaches the agreement. It is not unusual for the limitation clause to state that the vendor will not be liable for any indirect, punitive, incidental, special or consequential damages. In addition, some agreements further provide that any damages suffered by the dealer will not exceed the amount paid to the vendor by the dealer over a defined time period, or some similar unreasonable limitation. In responding to these types of limitations, the dealer should consider what damages would occur if there were a breach and then negotiate a provision that would compensate the dealer for those damages. Damages because of a breach can include lost profits and ideally the limitation clause should not exclude those damages.
Negligence, gross negligence and willful misconduct. Vendor agreements will sometimes state that the vendor is not liable for any negligence of the vendor, but rather that the vendor is only liable for conduct described as gross negligence or willful misconduct. This language might be found in the sections of the agreement regarding indemnification, the representations or in some other place. Ordinary negligence is a violation of a reasonable standard of care. Gross negligence is a departure from the reasonable standard and requires conduct which is blatant and reckless. Vendors should be liable for their ordinary negligence, not just liability for gross negligence or willful misconduct.
Liquidated damages. Some agreements have a liquidated damages clause. Liquidated damages are a fixed dollar amount a party breaching the agreement owes to the other party. Parties sometimes negotiate an amount of liquidated damages where it is difficult to estimate what damages a party would suffer if there were a breach. In some instances, liquidated damages can work if the parties make a reasonable attempt to determine the amount that would compensate a party for a breach of the agreement.
Force majeure. Force majeure is a French term that literally means “greater force.” It relieves parties to the agreement from liability under the agreement due to events beyond their control, sometimes called “acts of God” such as natural disasters, war, pandemics, and the like. A force majeure clause is a standard contract provision and should clearly define the events that are considered force majeure.
Insurance. If the agreement provides for vendor services which could cause some type of injury or damage, there should be a provision requiring the vendor to provide proof of insurance to cover any liabilities the vendor may have to the dealership and naming the dealership as an additional insured.
Audit rights. There may be a need for a section in some agreements allowing the dealer to audit the vendor’s services. These rights can include access to books, records and other items to verify the vendor’s compliance with the agreement.
Confidentiality and privacy. If confidential matters must be disclosed in certain vendor agreements, it is important to have a confidentiality clause. The clause should describe what is confidential, specify the obligations of the vendor regarding the confidential information, and how the information will be returned to the dealer when the agreement terminates. Many vendors give themselves the right to use customer data for their own purposes. Dealers should resist provisions that allow this. The agreement should ensure that the vendor will comply with all customer data privacy requirements.
Notices. There should be a notice section in the agreement stating to whom and where notices are to be sent and the way they are to be sent.
Governing law and jurisdiction. Many vendor agreements require that if there are any legal disputes over the agreement, the law of the state chosen by the vendor applies and that disputes must be litigated in that same state. This language should be resisted. If a business chooses to do business in California, California law should apply to any dispute and the matter should be litigated in the county where the dealer does business.
Entire agreement. Every agreement should have an “entire agreement” clause. This is a clause that basically states there are no other agreements between the parties other than those stated in the agreement. It is also known as a “merger” or “integration” clause.
Dispute resolution. Every agreement should address how disputes under the agreement will be resolved. This is usually done by court litigation, mediation or arbitration. It is usually best to have a clause that provides that the prevailing party in any legal action will recover attorney and expert witness fees spent pursuing or defending the action. If the agreement requires arbitration of disputes, it is good to have a provision that the arbitrator is bound to follow the law in making decisions because, for example, in California arbitrators are not required to follow the law and can apply their own sense of justice in their decisions. California also has a method of dispute resolution called “judicial reference” which is akin to a private court action that proceeds in the same manner as a court proceeding and is often presided over by a retired judge. Judicial reference requires that the hearing officer follow the law. It also allows an appeal of the decision.
Counterparts. There should be a provision allowing the agreement to be signed in counterparts (signatures not all on the same page) and that copies of the signed agreement will be treated as originals for all purposes.
Signatures. The signature area of the agreement should include the legal name of the party, the signature of the person signing on behalf of the party, and the printed name and title of the person signing. The signor should not sign as an individual unless that individual has agreed to be personally responsible for obligations under the agreement.
Attachments and exhibits. Ensure that all attachments and exhibits referred to in the agreement are physically attached to it.
Manning, Leaver, Bruder & Berberich LLP is a Los Angeles law firm that practices throughout California and has been in existence for over 100 years. It has a strong automobile dealer practice covering all areas related to the automobile dealer industry, including dealership buy-sells, real estate transactions, business and consumer litigation, regulatory compliance, dealer association law and franchise law. See www.manningleaver.com for more information and areas of practice. Nothing in this article may be considered as legal advice. Contact legal counsel for legal advice.
