For years we have emphasized the importance of a company policy for supplier contracts. There are many suppliers of many goods and services. For dealers, it is a buyers’ market. Why then do dealers not use their buying power? Do not just sign the form agreement tendered by a supplier without a careful review.
One of the most common examples of dealers disarming themselves in supplier contracts is the choice of law, venue, and jurisdiction provisions in form supplier agreements. Generally, a supplier seeks to have the choice of law, venue, and jurisdiction where it has its home office, not where a dealer does business. The home office of the supplier may be thousands of miles from the dealer. If there is a dispute, the dealer might as well just write a check to the supplier.
Let’s look at a hypothetical situation. Dealer in Florida signs a contract with Vendor, a company from Portland, Oregon. Vendor’s representative went to Dealer’s place of business, demonstrated the products and services there, and presented Dealer with a contract there. A provision of that contract states:
Choice of Law; Venue; Jurisdiction. The terms of this Agreement and any dispute relating thereto will be governed by the laws of the State of Oregon, without regard to conflict/choice of law principles. You and we agree that any dispute will be heard in a state or federal court in Portland, Oregon, and you and we agree to submit to the exclusive jurisdiction of the state and federal courts located in Multnomah County, Oregon.
Vendor claims it provided goods and services to Dealer. Dealer disputes that and says it does not owe the $10,000 invoice Vendor sent. Vendor sues Dealer in Portland, OR.
Before analyzing how this matter will play out, understand each of the concepts used in the contractual provision.
Choice of Law. A court deciding a case between parties in different states must decide what state’s law applies. A dealer should want the law of its state to apply since its lawyer is most familiar with those laws. A court will apply the law of the state named in the contract.
Venue. At its most basic, venue is the site where the trial of a case can take place. A court will likely decide venue is proper if agreed.
Jurisdiction. To require a party to appear in court, the court must have jurisdiction. That means the court must be able to compel the party being sued to appear there or suffer an enforceable judgment otherwise. In the hypothetical, Dealer is in Florida. It does no business in Oregon, has no property in Oregon, and has no contacts with Oregon. Normally an Oregon court would probably not find it has jurisdiction over Dealer. However, where a contract provides that Dealer agrees to jurisdiction in Oregon, a court will generally enforce that.
Applying these concepts, how does the contractual provision quoted above affect the outcome of the dispute?
Dealer cannot use its regular attorney to defend the Oregon lawsuit. It must hire a lawyer in Oregon who must expend substantial time learning about Dealer, its business, the contract in issue, and much more. Since the Oregon court is likely to find that the case will be heard in Oregon with Oregon law applied, the dealer must pay the Oregon lawyer to prepare to defend and to try the case. Besides those fees and the normal expenses of engaging in discovery and preparing for a trial, the dealer may have to fly its witnesses over 3,000 miles to Oregon for depositions and a trial. The Dealer may well decide that it is not worth contesting the case since the Dealer may incur costs of $20,000 or more to challenge the invoice for $10,000.
The problem is that if the Dealer doesn’t appear and a default judgment is entered for $10,000, Vendor can hire a lawyer in Florida and sue to enforce the judgment. The only defense the dealer will have is there was no jurisdiction over it in Oregon and that the Oregon judgment is defective. But where the agreement provides for choice of law, venue and jurisdiction in Oregon, that is unlikely to be a winning argument.
The result? Because of the provision to which the dealer agreed, it faces a losing choice either to spend as much or more than the amount claimed to defend the case or to fail to appear in the far-away state and suffer a judgment of $10,000 collectible in its home state. That is why a dealer faced with this choice might as well write a check to the supplier of the amount in dispute (plus its attorneys’ fees since the contract likely provides for those for the supplier.)
So what is the lesson from this?
The supplier comes to your dealership, in your town or city, in your state. Why should you agree to applicable law, venue, and jurisdiction in a state far from you? If the supplier can find your dealership in your area in your state, it should be prepared to litigate or arbitrate a dispute in your area and in your state.
This brings up other issues we have warned dealers about when signing a supplier contract. When signing a supplier agreement, your best bet is to seek the counsel of a qualified attorney to help you understand any pitfalls and negotiate them if necessary. The reason is there are many pitfalls. Here are some of which you should be aware:
DURATION
- Duration of the Agreement. There are contracts in which a term a longer than month to month is appropriate (for example, a uniform contract where the supplier may make an investment in the uniforms). However, how many contracts are like that? If you are looking at a contract with a duration of anything more than month to month, ask yourself why. Unless you should be bound, or you have terms or pricing where you want the supplier to be bound, for an extended duration, do not simply agree to a term beyond month to month.
- Automatic Rollover. Besides remote locations for dispute resolution, the other most frequent supplier contract problems for dealers come from automatic rollover provisions.
Dealers are often not careful and sign agreements for an extended term (for example, three years). The contract then provides that unless the dealer gives 90 days notice of termination, it will automatically rollover for another three years. The dealer is not only struck for a three year term, that doubles when the general office does not note the renewal date and the notice date, and the rollover deadline passes without action. Do not agree to automatic rollover provisions. Even if you agree to a definite term for an agreement, the contract should go month to month after that. - Termination for dealership closedown. What do you do with a contract with an extended duration if you close your dealership or you sell your dealership? If you close it, you do not want to continue paying. If you sell your dealership, the buyer may not want to assume the contract and you don’t want to continue paying. Consider including a provision for the dealership to have the flexibility to cancel a supplier contract if the dealership is closed or sold.
WHAT ARE YOU GETTING?
- Performance Standards. Suppliers are notorious for including little into their contracts about what they will be providing, how the products or services will perform, and standards those products or services will meet. When reviewing a contract, ask yourself what you are getting. The contract should be definite about what you are getting, how the products or services will perform, and the standards that will be
- Most supplier contracts include a disclaimer of all express and implied warranties. Why? What you contract for, particularly goods, should have warranties.
DATA
- Safeguarding data. Does your contract provide that the supplier will have access to your data, particularly your customer data? If so, you have an obligation to make sure that your supplier agrees that it will safeguard data covered by the FTC Safeguards Rule. Many form supplier agreements contain provisions in which the dealer agrees it will comply with the Safeguards Rule for any data of the supplier, but they are silent about obligation of the supplier. The FTC Safeguards Rule says you must have a safeguarding agreement for your data from a supplier with access to your data.
- Ownership of data. Who owns your data to which the supplier may have access? Particularly your customer data? Does the supplier own it once it has access to it or downloads it? It should remain your data.
- What can your supplier do with your data? There should be strict limits on how any data to which the supplier has access to can be used. It should only be used to provide services to your dealership, and for no other purposes.
UNILATERAL PROVISIONS
There are generally two key provisions in supplier agreements that protect only the supplier, when they should protect both the supplier and the dealer.
- Attorneys fees. Many supplier contracts provide that if there is a dispute, the dealer will be responsible for attorneys’ fees. The winner should be entitled to attorneys fees, whether it is the supplier or the dealer.
- Most supplier agreements provide that the dealer will indemnify the supplier against liability. Why? The potential for an action against a dealer because of goods or services being provided by the supplier is far greater than any legal action against the supplier because of the dealer’s behavior. The supplier should indemnify the dealer.
HIDDEN LIABILITIES
- Personal Guaranties. Read the form supplier agreement carefully. Does the language, particularly in the verbiage above the signature lines, provide that the signatory for the dealer is personally guaranteeing the dealership’s obligations? Not only should you never agree to this, question whether you even want to do business with a company sneaking this in.