Contractual Education

Chris Della Pietra of Potters & Della Pietra LLP led an informative WasteExpo session Wednesday morning titled "Practical Advice on Waste Industry Contracts." Della Pietra went in depth on a range of issues related to successfully crafting and negotiating waste contracts to ensure that both parties are satisfied and protected.

Della Pietra began by detailing the types of contracts waste companies will be dealing with. He emphasized the importance of considering all aspects of a contract before going into negotiation. "Leverage is best at the outset of a relationship," he said. All contracts are governed by the universal commercial code. Della Pietra noted the importance of using a contract to lock in a client. "One of the key things you're trying to do when you write a contract is ensure exclusivity," he said.

From a practical standpoint, Della Pietra recommended that haulers keep contracts to one page (to avoid confusion and prevent complications like a second page being lost through FAX, etc.). "In this day and age, more folks are incorporating contract terms and conditions on their websites," he added, noting that such a measure will help ensure that your contract takes precedence if a client tries to make claims based on their own in-house contract.

After outlining the different types of contracts, Della Pietra noted that it is important to know all the parties involved in a contract, as sometimes the affiliates and subsidiaries involved may not be readily apparent. He advised against providing personal guarantees.

A large section of the presentation was devoted to the commercial terms covered in a contract. These were broken out into scope of services and performance obligations, prices and fees, price adjustments, and payment terms. In general, Della Pietra urged that these elements be as specific as possible. Among the tips offered:

  • If comments are invited (even before a bid has been accepted), "give yourself a place-holder" in the contract to make necessary changes later.

  • Detail in the contract, as specifically as possible, the types of waste your company will collect/accept.

  • While long-term contracts are desirable, don't fix rates for more than one or two years. Della Pietra suggests floating the rate beyond the second contract year in exchange for a volume discount.

  • "Put or pay" requirements offer the client a discount in exchange for guaranteeing that a quota volume of waste is maintained.

  • Note whether prices in the contract include taxes, fees, etc. Include provisions that allow for flexibility (surcharges) in the event of a substantial rise in fuel prices, new taxes, etc. Be sure to remove the surcharge if fuel prices fall again.

  • "Cash flow is king." Net 30 to 45 day payments. Avoid anything over 60 days.

  • Consider offering an "early-pay discount" as an incentive.

  • If providing services for a municipality, see if they are willing to handle billing. That's one less headache for your firm. "Acquiring 30,000 customers with someone else responsible for collecting payment is a great place to be."

Next, Della Pietra broke down specific contract provisions, including term of renewal, representations and warranties, indemnification and insurance, damages, non-competition and non-solicitation clauses, environmental provisions and title to waste, and contract termination. Some tips here:

  • When setting an effective date with a new business, include a qualifier like "provided it's no later than" to protect against delay in the business coming online.

  • Certain municipalities have laws precluding contracts longer than one year. Be prepared to renegotiate the contract every year, even if the only thing changing is pricing.

  • Haulers should get representations and warranties from the landfill they will be using, lest unforeseen variables place an undue burden on the hauler or its clients.

  • A contract should indemnify the other party for your negligence and vice versa. Mutuality should be a given here. Request "indemnification, defense and hold harmless" language ("the trifecta," per Della Pietra) in the contract to fully protect your firm.

  • Non-competition clauses are a fact of life and you may have to live with them, but make sure they are reasonable (e.g., no clause insisting on lifelong non-competition).

  • "Whenever there's a breach in a contract, you want adequate time to repair the breach." Write that time into the contract. If you don't cure the breach in that time, the other party has cause to vacate the contract. A force majeure provision covering acts of God such as floods, hurricanes, etc., ensures you are not held responsible for not providing services when doing so is impossible.

  • The recession produced a wider range of force majeure claims, with wild fluctuations in fuel costs and other economic pressures being cited as "acts of God" and justification for vacating or renegotiating a contract — sometimes successfully.

  • Watch out for municipalities trying to "terminate for convenience" when they're simply unhappy with pricing or clients trying to negotiate "subject to market pricing" clause into the contract.

  • Avoid arbitration, which may depend on the whims of a "cranky judge." Conversely, if going to trial, waive a jury, if possible, in favor of a judge.