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 monthto-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 30 California New Car Dealer Quarterly
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