Team VADA eViews
The Digital Newsletter of Your Virginia Automobile Dealers Association
May - June 2008
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Every dealership should have a contracting policy
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Dealers should be wary of the terms in all types of contracts
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Failure to do so can result in costly contract buyouts,
Have you ever wanted to sue a supplier, only to find that the contract required you to go to Texas to arbitrate? Have you ever received a bill for a contract that an assistant service manager signed without your knowledge? Have you ever considered selling or closing down a dealership, only to discover that it has dozens of long-term contracts for which you must negotiate expensive buy outs or pay outs for years?
Every dealer should have a contracting policy. And, while each type of contract – advertising, uniforms, hazardous waste removal, computers or phone systems, equipment, etc. – has specific substantive terms that are important, all contracts have terms about which dealers must be wary. Here is a simple checklist to guide you in adopting a contracting policy and in reviewing and requiring contractual terms critical to the dealership.
1. Adopt a written contracting policy
2. The policy must specify who may review and sign contracts
3. Have a form letter to inform potential suppliers of the policy
4. Require competitive bidding where possible
6. Train contract reviewers in the critical terms to protect the dealership
7. Minimize long term contracts
8. Avoid rollover provisions in long term contracts
9. Consider a provision allowing the dealership to terminate in the event of a sale or close-down
10. Decide disputes where the dealership is located
11. Never allow the supplier rights to own the dealership’s information
12. Require the supplier to protect non-public personal information of customers
13. A written policy for entering contracts on behalf of the dealership is a must. Circulate it. Put it in the dealership’s employee handbook. Have managers, since they are most likely the folks who will seek to enter contracts, specifically acknowledge the policy.
14. All managers and employees must know who in the company may review contracts and bind the company. The policy should specifically identify those who may do so.
15. Simply having a policy does not qualify as notice to potential suppliers concerning your policy. Because of the law, a potential supplier can assume that the person at the dealership with whom they are dealing has the apparent authority to enter a contract. However, if you give specific notice to potential suppliers, they cannot claim that they were not aware of the people in the dealership who can bind it to a contract. If the dealership is aware of a potential supplier who is contacting dealership employees, the dealership should send a form letter to the supplier making it aware of its contracting policy and should state specifically that no contract will be binding unless signed by a person in authority.
16. Busy dealer executives may not want to spend time reviewing competitive proposals, but how does the dealership’s management know that it received the best available terms without shopping?
17. When a manager without authority to do so signs a contract, the dealership must discipline that employee. Like all dealership policies, a contracting policy is only as good as the dealer’s willingness to enforce it.
18. Train contract reviewers about the critical terms to look for.
19. Whenever a dealer receives a contract from a potential supplier, the dealer should ask why a long term contract is necessary. Why must a janitorial or waste removal contract last for a year? 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 long term contract, for example if the supplier makes an upfront investment that will be recouped over the course of the agreement. There are reasons why a dealer may want a long term contract, for example if the terms are favorable and the dealer wants to protect the terms. However, a dealer should have reason for a long term contract before agreeing to one.
20. Many suppliers like to include rollover clauses into their longer term agreements. A rollover clause is one providing that at the end of the contract term, the contract automatically rolls over for another specific 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 the dealer for another year to a contract? Even when a longer duration is appropriate, the contract should terminate at the end of the initial term. If the parties wish, they can provide that it go month to month until either party decides to terminate.
21. Give the dealership the flexibility to cancel contracts in the event the dealership is sold or closed. Even if you are not even considering such a prospect, protect the dealership if this course of action is someday necessary.
22. Most contracts specify what state’s law will apply and where disputes must be determined. While a dealership should seek to have the law of its state apply, that is not the critical term to insist on. The supplier comes to your dealership, in your l in your state, to do business with you. If there is a dispute, the supplier should come to the locality where you do business, in Virginia, to have that dispute determined. When you are presented with a contract that establishes a geographical location for determination of disputes outside the city or county in which you do business, strike through it and write in your city or county and your state. Initial the handwritten term and tender that contract to the supplier. You may be surprised to find that the supplier wants to do business with you badly enough that it will go along with your change.
23. Leads and customers are expensive, and protecting confidential information is important to your business. Make sure that you maintain the rights to your information. Review contracts for provisions making your information the property of the supplier and eliminate them.
24. The FTC Information Safeguard Rule applicable to your dealership requires that suppliers with access to non-public personal information of your customers agree to safeguard that information. Make sure that any agreement under which the supplier may have access to such information contains a safeguard provision.