Myths: Supplier Contracts

We write regularly about myths in the car business – things people think are true but are not. Unfortunately, some myths are potentially damaging, and that is as true for your dealership’s supplier agreements as it is for any other aspect of your business.60508554

Dealers often sign vendor contracts after just a cursory reading. They get caught up in the prospect of a new tool for productivity, a new service that the sales manager promises will lead to added sales, or a program that another dealer has used successfully. Many dealers put their faith in the vendors’ salespeople, and sign form contracts without doing more than confirming the pricing.

Sometimes, a dealership may enter a contract for a product or service about which the dealer or general manager is not even aware. For example, the service manager may feel that a program is necessary for the service department and signs up.

Not all products and services for which you contract provide what you expected. So then what do you do? The answer may well be in the fine print of the contract you never really reviewed.

You can only protect your dealership if you understand each contract your dealership is entering and its impact. Here are some myths about supplier agreements that can damage your business and what you can do about them.

  1. Myth: If a department manager signs a contract, I can challenge its validity if I don’t like it. Only the dealer or the general manager can bind the dealership.

That is not so because of the doctrine of apparent authority. A manager for your dealership who appears to have the authority over an area that is the subject of an agreement can bind the dealership by signing the contract. If your service manager signs an agreement for an expensive diagnostic machine that your technicians ignore because it is too complicated, do not think you will escape the obligations simply because you or your general manager did not sign it. A service manager signing a contract for service department equipment will be deemed to have apparent authority to sign it, and your dealership will be bound.

Protection: Have a contracting policy for your dealership you follow for every contract your dealership enters. The policy should state how you shall evaluate the dealership’s need for a product or service, how you will obtain proposals, the process for evaluating competing proposals, who may decide on behalf of the dealership, and who may sign to bind the company. Enforce your policy. If one of your managers signs a supplier contract he or she should not, discipline that manager. Make suppliers aware of your policy – those with whom you do business and those with whom you are working on potential transactions. Control who may sign contracts that bind your dealership.

  1. Myth: If we don’t get what we expect, we’ll sue the supplier.

Unless the agreement specifies what you will get, do not expect to win a lawsuit. Many supplier agreements contain fine print disclaimers of all warranties. That is standard. Nevertheless, you should expect the product or service you buy to do what is represented to you. Unfortunately, if you get into a dispute, and you finally read the contract to determine your rights, you may well find that the supplier has provided no performance standard that its product or service must meet. In fact, you may find that the supplier has agreed to deliver the product you bought, or the service for which you contracted, but there is language disclaiming any standard that the product or service must meet.

Protection: Read carefully what the contract says you will get. If there is descriptive literature describing the level of performance or service, or you have a proposal which promises particular performance levels, have those incorporated into the contract.

  1. Myth: If the product or service I buy is so bad it hurts my business, I can sue the supplier for damages.

If you have taken the time to make sure that the product or service you are buying meets specified standards, you still might not have a meaningful remedy if it does not. Why? Many supplier contracts severely limit the damages to which a dealer is entitled. There may be a dollar cap, there may be a cap limiting damages to the dealership’s payments, or there may be significant limitations on or deletion of types of damages you may seek. If you have agreed to that, and your dealership is damaged, do not expect to be fully compensated for your damages.

Protection: If limitations on damages will prevent recovery if the products or services you are buying damage your dealership, remove them. Remove limitations on types of damages you may recover, such as damages to your business. Read the attorney’s fee provision. Many supplier agreements provide that only the supplier may recover attorney’s fees in litigation. Make sure your agreement provides that the prevailing party will be entitled to attorney’s fees and costs.

  1. Myth: It’s too difficult to audit every bill sent by the supplier, so we’ll do a year-end audit and demand a refund if the supplier billed us improperly.

You may do that, unless the contract includes an artificial statute of limitations. That is a provision stating you will review every bill sent to you, and unless you dispute the bill within a short period of time – usually ten days – the bill will be considered valid and not subject to challenge. So while you may decide you will audit at contract end all of the payments you have made, particularly if you have not been fully satisfied, you may get an unpleasant surprise that all the payments you made have been deemed valid, damaging your ability to challenge the billings.

Protection: If there is a provision deeming invoices valid after a set period, delete that. Always have the ability to challenge and correct improper billing.

  1. Myth: If I am not getting the services from the supplier I expected, I will end the contract.

Not always. You cannot simply end an agreement for a specified term. Pay attention to the duration of the contract you are signing. Sometimes, a dealer will sign up for janitorial or other services for three years. Why? There may be reasons for an extended duration contract such as uniform supply where the vendor will provide employee clothing of a specified type or other types of services where the supplier will have an investment. But always determine if it is a contract where the supplier will have costs to recoup over time – or where you are so happy with the pricing you want to lock it in. If not, why agree to anything other than a month-to-month contract where either your dealership or the supplier can end it?

Protection: Always choose the shortest term possible in a contract. By default, any agreement should be month to month. If the supplier believes it should be for a specified time, have the supplier justify that duration.

  1. Myth: I negotiated with the supplier and got a contract limited to a year. If I am not happy with the services, I will have to stay for the year, but then the contract will end.

You will escape the contract if it terminates at the end of the year. However, many supplier contracts contain a rollover for the same duration as the base contract term. So if the supplier justified a one-year contract based on the supplier’s investment in starting business with you, why should that contract automatically roll over for another year unless you give notice? Often the dealership will fail to give notice thirty, sixty or ninety days before the end of the term, and the dealership will find itself renewing for another year despite the dealer’s unhappiness with the services.

Protection: Carefully review the renewal provision in a contract for a term. If there is a renewal provision, insist that at the end of the term the contract will renew on a month-to-month basis where either party can get out with thirty days’ notice.

  1. Myth: If I have a dispute with my supplier and we can’t resolve it, we will fight it out in a lawsuit in a local court.

You may sue the supplier in local court, unless you give up your right to do that. There is often a provision in a supplier agreement that the applicable law will be that of the state where the supplier is located, with jurisdiction and venue where the supplier has its business. Do you think that is meaningless boilerplate language? When parties to a contract agree where a dispute will be heard, that can be binding. Suppliers want to battle over disputes where they are located, because they know dealers are reluctant to pursue a claim, or even defend against a claim, in a distant court where a dealer must hire a lawyer and often spend more than the claim might be worth.

Protection: Have a provision that any lawsuit or arbitration will be heard in the city or county where you do business. The supplier has come to you to do business at your dealership, in your city or county, in your state. If a dispute must be litigated or arbitrated, that is where the proceeding should take place.

  1. Myth: I may have signed up for a long-term contract, but at least I know my monthly financial obligation is set and unchanging.

Have you read the fine print? Some supplier contracts include an automatic cost of living or percentage increase. Or there may be the right to increase your payment because of the supplier’s increased expenses with no obligation for the supplier to justify that increase.

Protection: Review the contract carefully for language permitting the supplier to increase your monthly obligation. If you expect that your price will remain fixed over the term of the contract, insist on that.

  1. Myth: The supplier is providing services to my customers. If the supplier damages a customer, it will have to defend the lawsuit against my dealership.

The supplier may only have to indemnify you against legal actions by a customer if there is an indemnification obligation in the contract. Often, suppliers include provisions for indemnification by the dealership for the benefit of the supplier, but the contract fails to provide supplier indemnification for lawsuits against the dealer.

Protection: Review the indemnification language of the supplier agreement. If it is one way benefitting the suppler, insist that it be bilateral with each party having indemnification supplier. And ask why you should be indemnifying the suppler when it is the party providing the services under the contract. If you must indemnify the supplier, make sure that it is only for some wrongdoing that can actually damage the supplier.

            10. The supplier will have access to my customer data. We are protected because it promises to care for the data in compliance with the FTC Information Safeguards Rule.

Your dealership is required by the FTC Safeguards rule to ensure that those businesses with access to your customer data have protections in place. Now that the Rule has been in place for more than a decade, suppliers understand this obligation and are including language to that effect in their agreements. (You should be especially wary of a supplier with access to your customer data whose contract does not provide for FTC Information Safeguards Rule compliance.) Unfortunately, this protection is not enough. A supplier does not have to sell your customers’ names and personal information for the data to be valuable. Compilations from the data, even if not specific to particular customers, are valuable. If you believe that you are paying your supplier enough for the service it is providing, you should be careful that the supplier cannot use your information to enhance its profitability.

Protection: Besides the supplier’s obligation to protect your information under the FTC Information Safeguards Rule, it should also agree that it shall not use the information itself, or sell compilations of the information to others. Your information, and that of your customers, should remain confidential for all purposes, should be used only to service your account, and should not be used in compilations for the supplier’s own use or to sell to others.

You are in the negotiation business. Every vehicle sale in your dealership results from a negotiation between one of your salespeople and a customer. Why ignore what you know as a seller when you become a buyer? Once you have decided to do business with a supplier, review the agreement carefully. Better yet, have your attorney review it. Let the supplier know what you will do and what you will not do. You will often be surprised at how flexible the supplier will be when it wants your business.