Keep Them Short and Sweet

My law firm regularly gets some version of this call: My service manager signed a three-year contract with a uniform supplier. He's not an officer of our corporation. We don't have to honor the contract, do we? Usual answer: Yes, you do. Under the laws of most states, a contract signed by a dealership employee who has the apparent authority to enter it will be binding on the dealership. For example,

My law firm regularly gets some version of this call: “My service manager signed a three-year contract with a uniform supplier. He's not an officer of our corporation. We don't have to honor the contract, do we?” Usual answer: “Yes, you do.”

Under the laws of most states, a contract signed by a dealership employee who has the apparent authority to enter it will be binding on the dealership. For example, a dealership-service manager who is in a position to negotiate for waste removal, environmental compliance or similar services has the “apparent authority” to contract for uniforms.

What steps should a dealership take to protect against unnecessary long-term contracts?

  • Have a policy. A written policy for entering contracts on behalf of the dealership is a must. It should specifically identify that only the dealer or another dealership executive may sign a supplier contract.

  • Make sure the policy incorporates a specific review process. Any potential supplier agreement must be carefully analyzed, compared to bids of other vendors and presented to senior management for approval. The primary reason is obvious — that's the best way to be sure you are getting the most suitable products or services on the best terms.

    But there is an important secondary reason. Almost every dealership has entered a contract for something that a manager has identified as the only method to success, only to have the manager resign leaving the dealer paying on a useless contract for months or even years. In considering a supplier contract, delay can be a valuable tool to help you consider whether the contract is for something the dealership really needs and can afford.

  • Circulate the policy. Make sure the contract policy is circulated among the employees of the dealership. Placing it into the company personnel handbook is an excellent idea.

  • Notify suppliers by a form letter. Simply having a policy is not notice to potential suppliers. A letter notifying who may sign contracts for the dealership removes doubt. A supplier cannot then claim that it thought the assistant service manager could bind the dealership. Send a letter describing your policy to existing suppliers and to potential suppliers contacting dealership employees.

  • Why a long term contract? Whenever you receive a contract from a potential supplier, ask why a long term contract is necessary. Why must a janitorial or waste removal contract last for a year, or two, or even three? Why must it be anything other than a month-to-month agreement, cancelable with thirty days notice?

    There may be reasons why a supplier is entitled to a longer term contract, for example if the supplier makes an upfront investment in materials that will be recouped over the course of the agreement. There are reasons why you may want a long term contract, for example if the terms are favorable. However, you should have a solid reason for signing a contract with a term greater than month-to-month.

  • Watch for rollover clauses. Many suppliers like to include rollover clauses into their term agreements. A rollover clause automatically extends the contract duration at the end of the initial term, for example one more year at the expiration of the first year unless either party gives notice.

    What reason is there for a rollover clause other than to stick you with a contract for another year? Even when a contract longer than month-to-month is appropriate, the contract should terminate at the end of the initial term. If the parties wish, they can provide that it will go month-to-month thereafter until either party decides to terminate.

    There are a lot of reasons dealers try to end supplier agreements — the terms become uncompetitive, or the service level becomes unsatisfactory, or the dealer sells its business. It's a lot easier to make sure that agreements are month-to-month from the start than to break binding, long term agreements.

Michael Charapp, an attorney with Charapp & Weiss, LLP who specializes in representing motor vehicle dealers, can be reached at (703) 564-0220 or [email protected]

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