We want to let you in on one of the "dirty little secrets" of the garbage business: Many customers don’t read the fine print on their waste collection contracts. Countless businesses are locked into "evergreen" contracts tying them to a waste collector for indefinite periods of time, with prices, terms, and conditions that are skewed in the collector’s favor. A member of our staff calls these "stealth" contracts because they sneak up on you and renew automatically while you aren’t looking. Some businesses don’t even know the contracts exist until they want out, when the contracts become very expensive - if not impossible - to terminate. Often they require written notice by certified mail 60 days before the equipment delivery date (which is usually not stated in the contract). There also may be significant liquated damages for early termination, in essence a costly buyout of the unused portion of the contract.

The consolidation of waste companies has resulted in a few large, publicly traded corporations that now dominate the industry. Their marketplace influence has caused the Department of Justice (DOJ) and state attorney generals to scrutinize and intervene in some consolidations. Few significant new competitors are entering the marketplace.

In many areas, the merger of very large, vertically integrated waste companies could lead to increased prices for consumers. The mergers might diminish competition by enabling the few remaining competitors to engage more easily in coordinated pricing and contracting terms.

In many cases, this coordination makes the "evergreen" provisions of the collection contract almost inescapable. If most waste collectors in a less competitive market offer the same terms and conditions, customers have difficulty negotiating these terms out of the contracts.

The simple fact is that solid waste collection contracts seem so benign that they are often overlooked. But for the collector, increasing prices add up, and anything that can be done to lock-in a customer for the long run is a good thing.

Local governments are well positioned to respond to the lack of competition, price increases, and decline of services and quality in their jurisdictions. What can be done? Plenty. Here are some suggestions for dealing with stealth contracts:

1. Write the contract "your way." Mark it up and send it back to the collector. Take out any automatic rollover provisions. Test the theory that "everything is negotiable."
2. Have the customer’s accounting department maintain a "tickler file" for contract renewal dates. If they don’t wish to renew, follow the termination process of the contract to the letter.
3. Include language in the contract that gives the customer the explicit right to approve assignment of the contract to a new collector if the business is sold. Most contracts do not have a prohibition on transfer or assignment; therefore, when buyouts or mergers occur, the contracts become assets that can be sold just like the truck or landfill.
4. Maintain control in the contract over such variables as container size, frequency of pulls, and choice of recycler. This is important to meet the mandates for waste reduction. If the business significantly reduces the waste generated, they will want to reap the economic benefits by reducing the number of pulls or container size or by contracting for a better price on recyclables.
5. Redraft liquidated damage clauses to reflect an even-handed risk-sharing allocation, and strike large liquidated damage clauses from the contract.
6. Pay attention to the potential impact of mergers and consolidations. Learn who the DOJ players are who follow antitrust matters in your region and establish a relationship. Do the same with the state attorney general.
7. Learn as much as you can about the number of haulers, market share, types of customers, pricing practices, routing patterns, and service levels in your area. DOJ and others are interested in this information as they analyze possible antitrust violations. Note the different names on the trucks - it is not always obvious who the owner is.
8. If your region is affected by a consolidation, find out if any divestitures are being required. If so, make effective arguments to the DOJ for revisions to existing and to-be-directed contracts and any new contracts requiring evergreen clauses.

In the age of mergers and acquisitions, pay particular attention to the waste collection agreements. Be ever vigilant, and read the fine print.

Michael D. Long is the executive director of the Solid Waste Authority of Central Ohio. Ronald J. Mills is the chair of the Board of Trustees of the Solid Waste Authority of Central Ohio and a senior associate with Malcolm Pirnie Inc in Columbus, OH.

MSW
September/October, 2000