The Written Deal

Ten Top Touchstones for MSW Contracting

This is the sixth in a series of articles that identify issues frequently encountered when procuring, negotiating, and drafting MSW service contracts. These articles constitute a practical contracts manual that describes approaches MSW service providers and local governments can take to share risk and reward—and reach a mutually satisfactory agreement.

You draw on customer demand, political preference, regulatory mandate, and fiscal practice to define the scope of the MSW services that you want to procure. (How many bulky items can customers set out at annual curbside cleanup events? Will the second greenwaste cart be provided without an additional customer charge?)

You rely on your experience and citizen complaints to set the performance standards you expect. (If a missed pickup is called in by 3 p.m., must the hauler return that same day? At what hour can commercial pickup commence within 500 feet of residential premises?)

You also rely on your past experience to identify historical problem service issues. (Was greenwaste commingled with garbage? Is the on-street staging area for scooter service a source of litter?)

But when it comes to administering and enforcing service scope and performance standards, you will find yourself turning to the written pages of your service contract. (What happens if the hauler charges customers excess rates? Can you get copies of customer complaint records? How long can the hauler fail to secure valid workers’ comp insurance before you can exercise your contractual remedies?)

This article suggests ways that you can work with your contracts counsel—whether in-house or retained for a specific procurement—to ensure that the printed word of your contract empowers you to secure the service scope and performance standards that you solicited and ensure that your residents and businesses get what you bargained for them.

Although most examples come from collection contracts, many of the principles apply to other MSW services as well. The article highlights 10 important aspects of an MSW contract:

1. Term
2. Enforcing Service Scope and  Performance Standards
3. Excuses for Non-Performance:  Uncontrollable Circumstances/Force Majeure
4. Performance Assurance
5. Indemnification
6. Liability Insurance
7. Assignment
8. Contract Construction and Interpretation
9. Expiration or Termination
10. Obligations That Survive Expiration or Termination

Term
The length of your contract term is not mandated by Internal Revenue Code depreciation schedules or solid waste regulations. But the length of the contract term may largely determine your service price.

Naturally, contractors lobby you and your local officials for longer terms. Term translates into money. Contractors don’t have to face immanent renewed competition and the considerable expense of preparing proposals. You may similarly want a mid-to-longer term in order to delay your budgeted time and expense and the political dance of a competitive proposal process.

On the other hand, you may desire a shorter term to test-drive a newly implemented program. You may want to eventually procure bundled, integrated services, thereby coordinating termination of one contract (for example, collection) to occur at the same time another one ends (for example, a disposal contract).

Recovery of capital investment—But contractors prefer recovering their capital investment during the contract term. Understandably, they prefer not to assume the risk of capital recovery dependant upon your discretionary contract extension or renewal. The shorter the term, the more likely that contractors will correspondingly compress their capital amortization, which will increase your service price. (Remember, if you own the capital assets, such as containers, rolling stock, a materials recovery facility (MRF), or a transfer station, then you may free the contract term from capital recovery considerations.)

Competitive attractiveness—Worse still, if the term is too short, potential contractors may decide to forego submitting proposals altogether. Contractors will earn proportionately more aggregate revenue over a relatively longer-term agreement, which makes that longer-term agreement a more attractive piece of business and whets more contractors’ appetites to compete.

Service fee adjustment—In addition to minimizing capital recovery risk and maximizing competitive attractiveness, the length of the contract term shapes the service price in a less obvious but equally important way. Since potential contractors will probably not assume the risk of cost inflation for more than a few years, in most service contracts the service price is adjusted over the term of an agreement, resulting (usually) in higher unit compensation as the term matures. For a detailed discussion of the implications of short-, mid-, and long-term agreements for choice of rate adjustment protocol, see “Preserving the Benefits of Your Bargain: Rate Adjustment Options,” in MSW Management Elements 2005. But here is a summary.

Short term—No rate adjustment may be appropriate for short-term agreements. Expect to pay higher rates, reflecting both contractor’s increased assumed risk of cost inflation and/or reduced competition. Consider this option only if you prize rate stability and do not anticipate program or regulatory changes that would increase contractor’s costs.

Mid term—Index-based rate adjustment is appropriate for short- to mid-term contracts (five–seven years), especially if your initial service fees were procured competitively.

You can develop a bundle of weighted indices, such as labor, fuel, and equipment replacement/maintenance, or just use a percentage of your regional CPI or the new chained CPI (C-CPI-U). (The chained CPI results in lower escalation because it accounts for changes in customer purchasing habits as prices rise, not only changes in the price of goods. For example, as the price of blueberries rises throughout the summer, the consumer may switch to cheaper, seasonal apples.)

Compare average annual changes in index values from year to prior year and not from month to month or from year to base year. (Month to month may capture a nonrepresentative spike; year to base year compounds inflation of less than 100% of the index.)

Coordinate index-publishing dates with your budget process (such as the July 1–June 30 fiscal year).

Consider capping increases.

Do not adjust the profit component of rates; where possible, competitively bid profit/operating ratios and apply them to adjusted costs.

Use the word “adjust” instead of “escalate” in order to capture possible deflation. (You can dream.)

Even though you may choose an index-based rate-adjustment methodology, identify and carve out costs that are not directly related to indices, such as tipping fees, host fees, scheduled lease, or capital finance costs. Define those pass-through costs carefully. Include specified conversion ratios to translate costs to service fees (for example, conversion of subscribed residential gallons or commercial cubic-yard weights to tipping fees expressed as tons). Alternatively (and more simply), assume that a specified percent of service fees is attributable to a pass-through cost (such as x% for disposal tipping fee). If possible, keep the risk of waste volume on your collection contractor, even if you go through changes in disposal tipping fees.

Long term—Cost-based adjustment may be appropriate for long-term contracts (10–20 years). A longer term allows the contractor to recover its capital investment in a facility.

Consider whether your rate base is sufficiently large to spread the cost of conducting cost audits and implementing a cost-based adjustment protocol that is more time-consuming and expensive than index-based adjustment. (You are more likely to hire outside consultants.)

Ensure that your cost-based rate-adjustment methodology clearly defines (non)allowable cost. Include sufficient detail of operational obligations to clearly define the denominated “reasonable and necessary” costs.

Secure audited financials for your contract services only. Be alert to corroborate fair cost allocations among your contract services and those of others and to ascertain that compensation paid to principals, affiliates, and parent companies is kept at arm’s length.

Consider reconciling all projected depreciation expenses with all actual expenses that have been incurred.

Provide a conclusive administrative dispute resolution protocol in the event of your contractor objecting to your rate adjustment determination.

To reduce fees in longer-term agreements, consider establishing a cycle of several years using index-based rate adjustment punctuated by cost-based adjustment.

Even in shorter-term agreements, consider the right to require a specified number of cost-based adjustments at your option. This maintains your flexibility to implement program changes.

Term Extension
The contract expiration date is fixed but may be flexible.

Ideally, you may want the right to extend the term for a number of annual or biannual increments at your sole discretion.

Alternatively, you might give your contractor performance incentives by offering the contractor the right to earn extensions for objective, measurable, superlative performance (such as for low amounts of liquidated damages or fee increases, or for meeting guaranties for recyclables diversion in collection, recyclables recovery in MRF operations, or compaction in landfill operation).

Unexpected delays and roadblocks can easily stretch out even the most well-planned reprocurement schedule. Secure the right to short extensions of the stated expiration date of your contract (such as six one-month extensions) to give you flexibility to complete a sole-source negotiation or competitive procurement for a new agreement.

Enforcing Standards
If your contractor’s performance is slipping, it’s not likely that you will be able to quickly or cheaply terminate your service contract.

Termination of even the best-drafted contract will almost certainly involve contractor contest and expensive litigation. And if the contractor is failing because of its lowball price proposals, termination and reprocurement will only result in a higher (market) price.

Your contract must give you interim remedies short of default and termination. Even better, pay performance-based compensation that rewards superlative service. Carrots are better than sticks. Especially in a competitive procurement, you may be able to secure termination-for-convenience (no-fault) termination, which you can exercise at your discretion without proving contractor breach.

But in order to attract proposers, you—or your replacement contractor—will have to buy undepreciated assets. Fix the depreciation schedule and/or purchase price in the contract, before trouble materializes. For more detailed discussion on remedies and performance-based compensation, see “Money Talks: Financial (Dis)incentives for Performance.”

In summary, consider the following.

Performance-based compensation or compensatory (cost-demonstrated) damages are preferable to liquidated (pre-“guesstimated”) damages, since liquidated damages are vulnerable to judicial challenges by your contractor as unenforceable penalties. If you cannot implement performance-based compensation, negotiate liquidated damage provisions where possible and make certain that you recite detailed acknowledgments to support their enforcement.

Budget and/or set rates and tipping fees to fund a cushion for potential compensation bonuses. When establishing compensation bonuses/reductions or damages, consider the trigger, timing, and amount as they relate to contractor control and (mis)conduct, as well as to fiscal and political stakes.

For example, with respect to control, provide less for missed pickups that could be late set-outs, and more for a contractor’s failure to return your calls in a timely manner. Include modest amounts of liquidated damages merely to get the contractor’s attention.

Remember: Contractors worry that you will assess liquidated damages when customers are at fault or in instances where contractor can’t control the breach. Excessive number or amounts of liquidated damages may squelch contractor competition for your contract.

Control the purse strings. Pay your contractor so that you can offset fee reductions or damages. (If you do not collect rates, hire your contractor as your billing and collection agent.)

If you have service fee offset rights, collecting service fees may reduce the amount of performance assurance you demand from your contractor.

There is one caveat worth remembering: In states such as California, collecting rates might transform your MSW contract from private to public service, triggering state constitutional procedural notice and substantive compliance requirements with respect to service fee change and
revenue use. Require a readily accessible and liquid letter of credit rather than a performance bond.

Prescribe simple and inexpensive dispute resolution procedures. De-politicize it; keep dispute in your administration and management departments, if possible, not in public forums. Avoid multiple levels of appeal to allow for quick, definitive, and final resolution.

Remedies include not only suspension or termination, and liquidated or compensatory damages, but also the right to provide substitute service.

Excuses for Non-Performance
One law school legend recounts that a tough old torts professor posed a particularly complicated set of facts in a final exam and asked, “Against which party(ies) could you bring actions for damages?” A canny law student responded succinctly: “Sue Him”—and supposedly received a grade of “A”. In contracts, too, there are instances when nonperformance is not due to either party’s fault. Referred to as “uncontrollable circumstances,” or the Latin force majeure, they typically include events such as diverse natural and manmade disasters (earthquakes, war, etc.) and other “acts of God.”

But don’t forget that you can contractually define your list of events that excuse performance. One of the most likely —and therefore important—causes of service interruption is labor-related. For a more in-depth discussion, see “Sharing and Minimizing Labor Risks,”www.forester.net/mw_0311_legal.html.

Some summary tips follow.

Especially in a competitive procurement, you might be able to entirely exclude labor-related disturbances from your definition of “uncontrollable circumstances,” meaning that your contractor will be in default during strikes. But such a harsh provision may be the proverbial straw that breaks the camel’s back, scaring off potential proposers. And in practical terms, garbage is piling up during a strike, and instituting contract termination actions would be time-consuming. Rather, grant your contractor some degree of flexibility to resolve labor disputes by including labor disturbances within the definition of “uncontrollable circumstances” for a limited period of time.

But correspondingly secure the right to provide substitute service (yourself or, more likely, a third-party contractor) using contractor’s service assets, employees, and routing/customer billing records. (Routinely enforce a contractor’s ongoing obligation to provide you with updated routing maps so that you don’t scramble during a crisis.) Secure the right to audit customer accounts not only for the purpose of confirming franchise fees, for example, but also for the purpose of having access on prescribed timely notice.

If you do not collect customer service fees, require the contractor to forward customer service fees to you during the continuance of the force majeure strike and secure that obligation with a liquid instrument, such as a letter of credit.

Performance Assurance
If your contractor does not meet its performance obligations fully and in a timely manner, you want access to cash so that you can hire someone else to pick up, transfer, or dispose of that rotting garbage and protect the public health. Sample areas of performance obligations include:

• Core service specifications (such as picking up those putrescibles)
• Service standards (such as keeping bins painted and water-tight)
• Operations (such as safe truck operations and maintenance and maintaining your immediate access to customer complaint files)
• Subcontracts (such as paying disposal tipping fees)
• Keeping records and reporting
• Paying the insurance premiums and the assurance fees
• Liquidity and creditworthiness

Good performance assurance should be liquid (to provide quick cash infusions). It should provide sustained creditworthiness to ensure that your contractor is good for the money for the duration of the contract.

Sizing your performance assurance is not merely a comparative exercise, looking at the size of your neighboring community’s performance bond. Your neighbor’s contract may have an entirely different substitute service cost than yours. Instead, do the math: Estimate the substitute performance cost for the period of time from breach, cure, notice of default, termination, and reprocurement specific to your contract, mindful that your mid- to long-term contract cost is probably less than substitute service cost on a temporary, spot basis.

Add reprocurement costs for event of termination.

Add your franchise and other fees.

Forms of Assurance
Performance bonds or letters of credit, parent guaranties, and insurance are means of providing cash flow for performance assurance.

Performance bonds are generally intended to complete construction of a building, not to provide ongoing service. They are not liquid, and the surety may contest draws—while the garbage piles up. Performance bonds may not clearly provide coverage for all of the contractor’s pecuniary obligations, including liquidated damages, indemnifications, cost reimbursements, or fees (both franchise fees that the contractor may owe you or other solid-waste-management fees that it may collect from customers on your behalf). Since you may have chosen your contractor based in part on its MSW experience, environmental and litigation record, and client references, you probably don’t want a bond surety to foist another contractor on you. So if possible, your contract should not allow forms of performance bonds that allow the surety to substitute contractors.

Letters of credit provide superior liquidity. You can draw upon a standby letter of credit by submitting a draw certificate to the bank without contractor authorization. (Your contractor may dispute your right to make the draw, but meanwhile, you will have the cash to pick up the garbage.) Contractors may complain that securing letters of credit makes rates less “competitive” than performance bonds. Bonds may (or may not) cost more than letters of credit, since the cost of both letters of credit and performance bonds is based in part on the contractor’s creditworthiness. (Unlike insurance claims, the contractor must repay draws on letters of credit and performance bonds.) But if you require all proposers to provide letters of credit, the playing field is level. Credit costs may differ among potential contractors, but that is true regardless of whether you require a bond or a letter of credit. The contractor’s real objection to letters of credit may be that they use up part of their line of credit or require disclosure as a contingent obligation on their books. As a compromise, you might allow the option to provide a performance bond for a larger amount than a letter of credit, reflecting the probable greater time and expense of liquidating the performance bond and giving the contractor the fiscal incentive to choose the letter of credit option.

Secure guaranties by a contractor’s parent corporation, principal shareholder, or partner. (If it is a personal guaranty, make certain you get a spouse’s signature in community property state.) Guaranties are not necessarily redundant with letters of credit, but one more option in your arsenal of remedies. Secure the guaranty of the ultimate parent that holds revolving credit line, that has audited financials, and that has filed 10Ks with SEC. In your contract, include a cross default for defaults under the guaranty. Only accept a parent guarantor with audited financial statements. Ideally, municipalities should impose financial tests to ensure continuing creditworthiness of their guarantor (or contractor), but few local governments to date have secured this assurance. Short of breach, failing to meet financial tests (such as maintaining a specified corporate bond rating or meeting certain financials ratios) might trigger the obligation to provide further assurances of performance . . . as may be required in event of judgements over specified dollar amounts, prolonged labor disputes, or failure to pay creditors or debts (such as tipping fees).

For further discussion of performance assurance, see “Tra$headed Ca$h: Contractor Credit Risks That Can Trash Your MSW System” (MSW Management, September/October 2003).

Indemnification
Beware of false security. The form of your contract will doubtless contain indemnification-and-defense provisions. Your contractor promises to pay or to reimburse you for liabilities that you may incur rising out of the contractor’s (negligent) performance or nonperformance of the contract. Your contractor further agrees to defend you in related litigation. You may have one of many variations of this general indemnification commitment (e.g., with respect to sole or comparative negligence, approval of counsel, etc.), but the basic indemnification provision is aimed primarily at protecting you against likely tort suits by persons injured or property damaged in accidents with the contractor (such as auto collisions with the contractor’s collection vehicles, or self-haulers injured unloading their vehicles at the contractor’s transfer station or landfill), or statutory liability (such as Superfund/CERCLA cleanup costs).

However, indemnification may have the effect of lulling you and your elected officials into an false sense of protection. Indemnities are corporate (or partnership or personal) promises to pay. They are unsecured obligations. Indemnities are worth only as much as your contractor’s applicable insurance coverage or available credit. Your contract may require that your contractor secure insurance (or performance bonds) from insurers (or sureties) having specified capitalization or credit rating ranked and rated by A.M. Best. But A.M. Best does not rate the creditworthiness of your contractor. Strive to require performance assurance by third parties (such as banks issuing letters of credit) that cover your contractor’s indemnity obligations. Visualize indemnification obligations that may be covered by insurance proceeds. (For further discussion, see “Evaluating Indemnification Clauses,” MSW Management, May/June 1999.)

Insurance
Insurance backstops your contractor’s indemnification. Your risk management department doubtless specifies that all public contracts contain insurance requirements detailing named additional insureds (and requiring applicability to each named insured), types and amounts of coverage, deductible levels, covered risks and (im)permissible exclusions, insurer licensing and rating qualifications, notification requirements, self-insurance conditions, and miscellaneous provisions regarding primary coverage, and excess/not-contributory status. Commercial general, auto, employers and umbrella, or excess liability insurance address the probable tort damages. More specialized environmental impairment/pollution liability policies (or endorsements) address concerns of cleanup of landfill leaks and associated liability. (For MSW transport by barge, include wharfing liability. With respect to workers’ compensation, include US longshoremen and harbor workers’ coverage as per the Jones Act, seaman.)

But your risk-management department may not frequently deal with MSW risk issues. And there may be more questions than ready answers with respect to MSW liability. You may be well-served to work with a knowledgeable broker who can grapple with MSW coverage questions, such as the following:

1) Require a pollution overturn endorsement (generally to an automobile liability policy) to delete the pollution exclusion relating to discharges of pollutants that are in or upon, being transported or towed by, being loaded onto or being unloaded from a covered vehicle. Here, the question arises: Is there a gap in coverage for intentional discharge? (For example, what if a driver dumps a burning load onto the street and it pollutes the storm sewer? What if the driver tips the load at the landfill and hazardous waste is exposed?) To cover intentional discharges, consider pollution liability coverage for transported cargo.

2) The value of commercial general liability coverage can be diluted if your contractor includes you as an additional insured along with tens or maybe hundreds of other municipalities. The question now is: Can you avoid coverage dilution in parent contractor policies by endorsement (such as Endorsement CG 25 034 97) providing that general aggregate limit applies to you? Or does it much matter? What is the major risk covered by commercial policies? If it is accidents and damage caused by dumpsters that crush fingers or roll into parked cars, contractors may routinely pay associated damages as part of their deductibles without ever making claims on their commercial liability policies.

3) Contractual indemnity provisions in a commercial general liability policy may support the indemnities that your contractor provides in your contract, but read the definitions and conditions in the policy closely. Your contract may have to be specifically named by endorsement to trigger contractual liability coverage. The question here becomes: Does a contractual indemnity provision cover comparative negligence or non-tort liabilities, such as CERCLA?

Pollution/environmental liability policies are often written on a claims-made basis, which means claims must be filed while the insurance is in effect. However, pollution/environmental liability claims may not arise until many years after your contract has expired or terminated. Consider requiring your contractor to continue naming you as an additional insured and secure a claims-made endorsement to extend the reporting period. Make that obligation survive the expiration or termination of your contract. But develop an in-house protocol ensuring that you and your staff will monitor that continuing contractual obligation.

4) If your jurisdictional waste ends up in a Superfund site, you will likely be named a “potentially responsible party” (PRP). You must ask: As an additional insured required under a disposal contract, are you covered for your liability as a PRP? Remember, an additional insured is covered only for the named insured’s (contractor’s) primary liability. As a PRP, your liability does not derive from your contractor’s.

Yet another relevant question is: Can you be an additional insured (for example, on disposal facility policy) if you have no contractual relationship with the primary insured (for example, if you have a collection contract that includes disposal)?

What about deductibles? Specify deductible levels prior to securing proposals or bids. If you require higher deductibles after awarding the contract (after competition has dispersed), your selected contractor may raise his service fees and recoup more than the incremental premium cost. You might conservatively size deductibles based on projected contract profit—mindful that the lower the deductibles, the larger the premiums and the higher the service rates. However, many contractors—especially larger companies—have relatively high deductibles in omnibus policies that cannot be tailored for your contract. (Some contracts also require letters of credit that cover the gap between contractually required deductible levels and lower, actual deductible levels.) When allowing exceptions to deductible requirements, remember: The insurer must pay claim regardless of whether the insured contractor pays the deductibles. Yes, deductibles raise indirect contractor creditworthiness issues. But they may be a red herring. The more important credit issue is that of self-insured retention (SIR). An insurer is not obligated to pay SIR, which raises direct creditworthiness issues. Prohibit an SIR unless the contractor provides additional performance assurance (letter of credit).

In summary, this is the most important insurance lesson: Liability insurance from rated insurers is superior to indemnification that is not supported by ongoing financial covenants. Allocate and devote more time to establishing or negotiating insurance requirements than indemnification provisions. (For further discussion, see “Insuring Against Integrated Waste Management Risks,” MSW Management, July/August 1996

Assignment
Why do you care if your contractor sells its business to another company? You may have foregone a competitive procurement and contracted with a local, family-owned hauler that has provided service in your community for many years. The next generation of the principal’s family may not want to stay in the garbage business; a larger company may give your small contractor a lucrative offer it can’t refuse. For either reason, you may find yourself faced with a contractor you did not choose for a price you did not
competitively procure.

Contrariwise, you may have conducted competitive procurement and awarded your contract after careful consideration of many factors in addition to price, such as experience, references, creditworthiness, environmental responsibility, and litigation and regulatory compliance record. You don’t want to work with a contractor that doesn’t meet those same criteria.

Your region may be experiencing MSW industry consolidation, and you want to maintain service provider diversity in the face of monopolistic price threats.

In order to foreclose the possibility that you may be forced to work with a service contractor that you did not choose or do not want over the remaining term of your agreement, your contract should give you the right to consent to a broadly defined assignment or transfer of your contract—or the “transfer” of a parent guaranty that provides credit support for your contract—to another company. Transfer should include:

• Sale, exchange, or other transfer of “ownership” or control of your contractor
• Issue of new stock or sale, exchange, or other transfer of x% or more of the then outstanding common stock of, or partnership shares or equity interest in, your contractor
• Dissolution, reorganization, consolidation, merger, recapitalization, stock issuance or reissuance, voting trust, pooling agreement, escrow arrangement, liquidation, buyout, or other transaction resulting in a change of ownership or control of your contractor
• Assignment by operation of law, including insolvency or bankruptcy, making assignment for the benefit of creditors, writ of attachment of an execution being levied against your contractor, or appointment of a receiver taking possession of any of your contractor’s tangible or intangible property
• Sale or other transfer of x% or more of the value of assets of your contractor, except in the event of closely held contractors, for sales or transfers to parents, grandparents, siblings, children, and grandchildren of persons having a shareholder, partnership, or other equity interest in your contractor on the agreement execution date (“immediate family”) or trust created primarily to benefit members of the immediate family
• Substitution by a surety company providing any performance bond of another person or entity for your contractor to perform services under your contract
• Assumption of any of your contractor’s rights under your contract or assumption by, delegation to, or takeover of any of your contractor’s obligations, duties, or responsibilities under the contract, by anyone other than your contractor, whether by subcontract (unless you approve it), or any other mechanism
• Any combination of the forgoing (whether or not in related or contemporaneous transactions), with or without consideration, which has the effect of any transfer or change of “ownership” or control of the your contractor

One can define ownership, for example, by reference to provisions of the Internal Revenue Code.

Cost Recovery
Provide for your contractor’s up-front deposit to cover your assignment due diligence, together with obligation to reimburse you for additional investigation costs and the cost of enforcing your assignment consent rights.

Sole Discretion
Although it may seem reasonable to agree that you will be “reasonable” in granting or withholding your assignment consent, this is an important instance where you do not want to be second-guessed in court as to whether or not your denial was “reasonable.” It may be important to your elected officials and citizens to do business with locally owned and managed haulers or to do business with environmentally responsible contractors. If the proposed acquiring company shows billions in assets and credit lines, millions of residential and commercial accounts, and many thousands of municipal contracts, a court may find that your denial is unreasonable. Reserve your right to consent in your sole discretion.

Some contracts list documentation that the assignee company must submit covering your potential due diligence concerns. Although including a list may not weaken your straightforward, contractual, and legal right to grant or deny consent in your sole discretion, it may create political or practical constraints on exercising that discretion. The assignee company may produce documentation demonstrating compliance or reasonable satisfaction of every item on the list, making it difficult to raise unlisted or less quantifiable concerns. If you reserve sole discretion, presumably the acquiring company will be cooperative in providing you with requested documentation to facilitate consent, whether or not the documentation is itemized in your contract or merely in your due diligence request letter.

Due Diligence
When you solicit competitive proposals (or bids) for services, you may often begin with a request for qualifications or request for proposals that contains detailed requests with respect to the proposer’s financial creditworthiness, applicable waste service experience, litigation and environmental compliance history, or municipal references. Make these same enquires about a proposed assignee. And due diligence is now easier when you can surf the Web. Helpful sites include Edgar, which lists securities filings, related news articles, and analysts’ reports: www.sec.gov/edgar.shtml. You can access news articles for papers located in the relevant local jurisdictions. McGraw Hill offers its Focus reports on industries, including date of founding, employees, shareholders, subsidiaries, revenues, officers, directors, auditors, banks, news items including new offerings, and mergers and acquisitions, as well as litigation lists.

Conditioning Consent
After conducting your due diligence, you may conclude that you will consent—but only if you receive additional protection. For example:

Criminal conduct—Local events may make you or your elected officials more or less sensitive to assorted criminal conduct. If your contract does not already include criminal conduct prohibitions, you might add one such as the following, specifying bad acts by named bad actors (persons or related corporations):

• Fraud or criminal offense in connection with obtaining, attempting to obtain, procuring, or performing a public or private agreement related to recyclables, greenwaste, or solid waste services of any kind
• Bribery or attempting to bribe a public officer or employee of a local, state, or federal agency
• Embezzlement, extortion, racketeering, false claims, false statements, forgery, falsification or destruction of records, obstruction of justice, knowingly receiving stolen property, theft, or misprision (failure to disclose) of a felony
• Unlawful disposal of hazardous or designated waste
• Violation of antitrust laws, including laws relating to price-fixing, bid-rigging, sales and market allocation, and unfair and anti-competitive trade practice laws, including with respect to inflation of waste collection, hauling, or disposal fees

In the event of criminal conduct by the named persons or related corporations, the contractor may effectuate a cure, such as firing the responsible person or removing that person from your contract administration. If the proscribed conduct occurs within your jurisdiction or with respect to your contract, you may want to have termination rights.

Flow-control challenges—competition with local government, transfer, processing, and disposal. Large companies experience enormous volumes of litigation, including insurance and employment claims, which may or may not be directly relevant to providing waste collection service in your community. However, your staff or elected officials may be very concerned about a history of litigation with municipalities, especially with respect to flow-control challenges. Your decision to allow assignment may depend on what integrated waste management services you provide. If leaking waste from your system to the proposed assignee contractor’s own vertically integrated system concerns you, add a facility designation provision to your contract. Make the designation clause non-severable, cite its breach as an enumerated event of default, and specify compensatory (or liquidated damages) for breach.

Vertical integration—collection, transfer, and disposal. If vertical integration is an issue for your community, you might qualify your assignment consent as follows:

• Secure the right to consent to provision of goods and services by the proposed hauler’s related companies in order to preclude circumvention of existing assignment rights.
• Require a rate adjustment to share cost savings resulting from the consolidation with your rate-payers.
• Secure contractual termination-for-convenience rights, including buyout prices so that you would have greater flexibility to substitute a new service provider in the event that the proposed hauler’s business strategy adversely affects competition in your collection market or threatens the economic viability of your waste system.
• Secure equipment acquisition rights under your collection agreement to further facilitate hauler substitution in adverse
  circumstances.
• Condition consent on the proposed hauler’s committing not to compete with you (if legal under your state law) for waste disposal if its counsel delivers an opinion that non-competition commitments were legal, valid, and enforceable.
• Get a guaranty of performance from the parent of the proposed hauler, including guaranty cross defaults under the collection agreement.
• Be sure to secure a schedule of payments for any future consented assignments.

For further discussion of contractual assignment language, due diligence requests, and consent conditions, see “Protecting Yourself From the Vertical Integration Grab,” MSW Management Elements 1999.

You may dismiss these contact provisions as “boilerplate,” but they can determine your destiny when performance goes awry.

Definitions
Precision, precision, precision! Use defined terms, even for those that may seem obvious but lie at the heart of service (“residential/commercial”, “solid waste,” etc.). Beware the danger of inconsistency between the text of the contract and appended attachments, such as rate methodologies, acceptance tests, or hazardous-waste screening protocols written by different authors.

It’s not micro-managing or nit-picking: Define time-sensitive words and phrases, such as prompt, immediate, as soon as possible. (These prove especially important if you want to assess liquidated damages for breached performance obligations.) Specify if a day is uniformly a calendar day or your contractor’s or your own workday. Say it once in a contract section governing construction and interpretation of the contract (for example, including means “including, without limitation” everywhere it occurs in the contract). Don’t interject such modifiers in some places and not others, thereby risking that a litigator subsequently cites uses or omissions of such words to draw negative inferences.

Provide that all discretionary actions, such as consents or approval, are deemed to be exercised “reasonably” unless sole discretion is reserved.

Include an “integration” clause. It provides that the contract language supersedes RFP/RFB, proposals, correspondence, drafts, or minutes. You may feel that you put much time and effort into drafting your RFP/RFB, and that your contractor spent much thought and consideration into preparing its proposal. You may be loath to relegate them to the file cabinet. Do it, or you’ll be sorry! Inconsistency born of proposals that are incorporated by reference into the executed agreement can lead to litigation. Instead of appending procurement documents, substitute detailed findings such as preambles or “whereas” clauses to tell your story.

Specify that the contract will be governed by the law of your state, “without giving effect to the states’ principles of conflicts of laws.” Especially if your contractor is a national company, you want assurance that your state law applies.

Excise or sever contract provisions that courts having jurisdiction should hold unenforceable, unconstitutional, illegal, void—but perhaps do not sever a facility designation clause. If designation is central to your deal, retain the right to terminate.

Consider contract interpretation rules such as the following: “This Agreement must be interpreted and construed reasonably and neither for nor against either Party, regardless of the degree to which either Party participated in its drafting. Contractor acknowledges that it determined to participate in the procurement of this Agreement upon its own choice and initiative and during the course of that procurement [City] solicited Contractor’s comments, exceptions, and proposals with respect to provisions in the Agreement and incorporated certain of those comments, exceptions and proposals. The Parties have negotiated this Agreement, including liquidated damages, at arm’s length and with advice of their respective attorneys, and no provision in this Agreement is construed against the City solely because it prepared this Agreement in its executed form.”

Plain English
A savvy city attorney once admonished: “Give me an easy-to-read MRF agreement. I want the shift supervisor to be able to throw this contract down on the sort line, read it, understand it, and enforce it!” Much talk circulates on transforming opaque, abstruse (some would say “maddening”) legal-ese language into plain English and make it reader-friendly.

This need may not be wishful thinking. You can begin with these suggestions:

• In the explanatory preambles or findings at the beginning of the contract, using the word whereas is not necessary. You can use complete sentences, even paragraphs, to tell your story.
• Don’t use herein, but rather in this contract; instead of hereafter, use after the execution date.
• Outline (sub)sections, clauses, and lists; avoid run-on sentences and “provisos.” Using outline and bullets can clarify meaning and is easier to read.
• Avoid defining terms parenthetically within a sentence. The meaning may seem clear to you, but later on litigators may question where the definition inserted in a long, compound sentence begins or ends.
• Limit such to examples. Such actually expands meaning. For precise reference, use that (or which) or simply the.
• Shall is not what it seems. And this is the most surprising plain English suggestion: purge shall, replacing it with must, will, or may. (This is referred to as the “A-B-C rule” in Britain and Canada.) Or use shall only when the actor is the subject of sentence. (This is referred to as the “American rule.”) Think about it: Shall is not only used to mandate an action.
• Shall actually has many meanings, some of which are not obligations. For example:
• Contractor shall perform imposes a duty on the subject contractor, but notice shall be made imposes a duty on an unnamed person.
• • Contractor shall be insured seems to impose duty on the contractor, but it actually imposes a duty on an unnamed person.
• Time shall not further be extended means Time may not be extended.
• Objections shall be filed is a discretionary or a conditional duty rather than an absolute one.
• • Contractor shall have provided notice is in the future-perfect tense. Use the present tense.
• City shall be reimbursed is an entitlement, not a contractor obligation.
• Party filing claim shall notify is directory, meaning should.

Before sending out your next draft agreement, do a global replacement of will for shall.

And when you proofread those substitutions, invest another hour or two to transform all passive sentences into clear contractor obligations using active verbs: not All reports shall be submitted but Contractor will submit reports.

Expiration or Termination
Words matter, especially in contracts. A contract expires automatically after a stated term, such as seven years. A contract terminates only by affirmative action of one of its parties in accordance with the language of the agreement, such as for 1) defaults, 2) continued uncontrollable circumstances, or 3) convenience.

For more detailed suggestions on how to provide for smooth transition to new contractors upon expiration or termination of your contract (especially for collection services), and how to articulate your rights and contractor’s obligations after your contract ends, see “In the Beginning Is the End: Planning for a Smooth Transition Following Expiration or Termination of Your Collection Contract."

In summary, consider:

Expiration—Termination may never occur, but sooner or later—even after extensions or renewals—every contract will expire. Be prepared.

Absent specific purchase rights and obligations, in the contract your contractor should acknowledge that it has no right to recover any unamortized asset value upon the expiration of the agreement.

The contractor must leave premises (such as a MRF or transfer station) clean—including hazardous waste remediation; reconvey/discharge any ground or site lease.

If the contractor has financed capital assets on your behalf, the contractor must transfer title of real or personal property, along with requisite warranties/deed, as negotiated.

Termination—Depending on the circumstances of termination, your options—and contractor’s obligations—vary. For example, you may have the option, or the contractor may have the obligation, to purchase/sell or transfer assets. Determine asset purchase price, if any, under the following scenarios:

• Convenience no-fault—Convenience termination provides an alternative to litigious default termination or where you want to implement new program changes at a competitive, market price. Pay the contractor its unamortized capital investment plus a specified “lost profit.” Specify the time/manner of depreciation for asset type (such as a seven-year, straight-line depreciation for carts), or a protocol to select a mutually acceptable appraiser to determine market value. Consider having competing contractors propose the “lost profit” component. In competitive procurements, you have greater likelihood of securing a liquidated dollar amount or prescribed formula (such as nine months defined “net” service fees based on contract-to-date average).
• Uncontrollable circumstances—Termination for contractually defined “uncontrollable circumstances” that continue for a specified period of time is an exercise in risk-sharing. This can include not only prolonged labor disputes but changes in law that require additional capital investment or altered operational protocols that increase the service fee more than a specified amount annually or in the aggregate over the contract term.
• In event of default—In this type of termination, the contractor has not fully or timely met its obligations. It is at fault. Ask this: Should the contractor forfeit its assets (such as cart ownership)? Consider assessing compensatory damages for costs of contract enforcement and reprocurement and also for your projected increased incremental costs of substitute service. (These damages—as well as unpaid fees, reimbursement costs, and other damages—should be covered by your performance assurance. Be careful—many performance bonds may not only limit liquidated damages, judgments, and regulatory fines and penalties, but also contain broad exclusions that prevent recovery or your compensatory damages.)

For facility operation agreements, the same issues described above under “Expiration” apply (acquire assets; clean the site; reconvey or transfer title, etc.).

But, in addition, your facility contract should obligate your contractor to assign subcontracts, supply contracts, operating permits, or maintenance agreements
to you. For either expiration or termination with respect to collection services, make certain that the responsibilities of the outgoing and incoming collection contractor dovetail, especially with respect to containers: Who picks up old ones? Must they remain for a specified time, or until new ones are delivered? Consider container purchase options upon both expiration and termination (convenience, uncontrollable circumstances, and default) scenarios.

Termination Protocol
In competitive procurements where proposers lose evaluative points for taking exceptions to contract terms, you can often secure termination protocols that are simpler to effectuate:

• Instead of arguing over materiality, list the major performance defaults that trigger termination (such as failure to pick up specified number or percentage of customers, not accepting waste for specified number of consecutive/aggregate days, failing to provide insurance or performance assurance, failure to pay fees).
• Avoid the cycle of breach–cure–breach. Make repeated breaches an itemized default.
• Allow contractor to cure the balance of minor breaches within specified time periods. Tailor notice periods to the type—and seriousness—of the breach. Avoid open-ended cure periods and arguments over “diligent” efforts to fix the breach.
• De-politicize the termination protocol.
• Tailor the notice period to each default immediately to protect health and welfare or failure to maintain insurance, and 30 days for other defaults.
• Indicate which defaults (such as service defaults) are excused by “uncontrollable circumstances” and which are not (fraud, misrepresentation, failure to procure insurance, or failure to pay monetary mounts).
• Give your contractor a second chance by including temporary suspension in lieu of termination.

Survival
For most things, it’s not over till the fat lady sings. But for MSW, it’s never over. There’s always garbage. Make certain that you protect yourself after your contract expires or is terminated.

In legal parlance, these provisions should survive, meaning that you can continue to enforce them:

• Leaving, removing, or selling assets
• Paying damages or reimbursement
• Defenses and indemnities
• Completing and submitting reports (for example, disposal reports for potential Superfund defense, or financial date for franchise fees)
• Maintaining insurance (endorsements to extend reporting the periods on claims made policies or to make you additionally insured)
• Record inspection / audit rights
• Notice of record destruction
• Right to take custody of records that may be lost or destroyed
• Acknowledgments and contractor’s representations and warranties that speak as of the date you and the contractor executed your contract or when the contractor submitted a report or certification

Secure the right to specifically enforce (enjoin) these continuing obligations. Require that the contractor maintain performance assurances until these specified obligations satisfied.

Conclusion
In conclusion, be prepared to implement these practical 10 tips:

1. Term—Begin structuring your business deal by setting contract term. Consider capital amortization. Pick the most appropriate corresponding service fee adjustment methodology. Allow short-term, monthly term extension options, at a minimum.

2. Enforcing Service Scope and Performance Standards—Offer performance bonuses. Create remedies short of termination, such as compensatory and modest liquidated damages reflecting degree of contractor control. Control the purse strings for damage offsets.

3. Excuses for Non-Performance—Allow labor disputes for a limited time period with your right to provide effective substitute service with the contractor’s service assets.

4. Performance Assurance—Secure performance with letters of credit rather than performance bonds. Size them based on your contract enforcement timing protocol and service fees. Also secure parent guaranties.

5. Indemnification—Don’t be lulled into a false sense of security by securing contractor indemnities without credit assurances.

6. Liability Insurance—Get good advice on insurance coverage. Read the fine print of policies knowledgeably.

7. Assignment—Secure the right to consent to the broadly defined “transfer” of your contract.

8. Contract Construction and Interpretation—Don’t scorn “boilerplate” rules of contract construction and interpretation. Spend a day to convert your draft agreement to plain English.

9. Expiration or Termination—Visualize service transition at the end of the contract. Analyze different reasons to terminate and prescribe what happens with service assets. Sit down in a quiet moment and walk yourself through the termination protocol.

10. Obligations That Survive Expiration or Termination—List the obligations you need to enforce after contract ends in order to preserve health and safety and maintain customer satisfaction.

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And finally, even in a competitive procurement, solicit your potential contractors’ comments on the contract that you prepare.

Address your contractors’ comments and questions. Consider their requests so that you procure a win-win contract that works for you both, throughout the term of your mutual agreement.

Author's Bio: Constance Hornig is an attorney who represents municipal governments in MSW contract procurement, drafting, and negotiating.