By Constance Hornig

This is the first in a series of articles identifying issues frequently raised in negotiating and drafting MSW service contracts. Collectively, these articles will 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.

The specter of strikes that cause rotting garbage to pile up on the streets worries both local governments and haulers alike. Although apprehension is most acute in the context or collection contracts, it occurs with respect to transfer station or disposal facility/landfill service or operating agreements as well.

Are Strikes Included in Events of Force Majeure?

Just because waste isn't being picked up does not mean that your hauler is in breach of a waste collection contract. Certain circumstances may excuse nonperformance. These circumstances, often referred to as force majeure or "uncontrollable circumstances," are most typically natural disasters, war, and civil unrest. In a competitive procurement where proposers might lose evaluative points by taking numerous exceptions to a proposed form of agreement, strikes, work stoppages, or other labor disputes or disturbances of the proposer or its defined affiliates might also be excluded from the list of force majeure events. In sole-source negotiated agreements they are more likely to be included in that list.

Excludingstrikes and so on from the definition of force majeure means that strikes do not excuse missed collection, and failure to pick up waste during strikes constitutes a breach of contract. In that event, examine closely how and when your remedies for default are triggered. Unless failure to pick up a particular percentage of accounts or for a specified time period is defined to be an event of default, generalized breaches may be subject to cure again ... and again ... and over again. Your ability to exercise remedies might be constrained if the contractor is diligently trying to perform, and the interpretation of "diligence" might embroil you and your contractor in argument.

Includingstrikes and so on in the definition of force majeure means that strikes excuse missed collections. Failure to pick up waste during strikes does not constitute a breach of contract. If the contractor collects rates from customers, be very careful that you secure a source of cash to pay for substitute service during the force majeure strike event.

Since piles of uncollected putrescible waste constitute a public health threat, many contracts limit force majeure strikes to a specified period of time (15 days, one month, and so on) to allow the contractor to conduct labor negotiations but nevertheless protect the public. Again, however, if the contractor collects rates from customers, make certain that you secure a source of cash to pay for substitute service during the pendency of the force majeure strike event.

Secure the Right to Provide Collection Service Yourself or Via a Third Party

If the contractor is not picking up waste due to a force majeure strike event, secure the right to provide services either yourself or through a third party. Because of the public health threat, you should be able to exercise your right to provide services after a relatively short period of time, such as 48 hours. No customer should be without service for more than a week. Your right should include using the contractor's service assets (bins, trucks, maintenance facilities), engaging its employees (especially customer service and billing staff and management), and accessing its routing and customer service/billing records. This should be specifically enforceable (subject to injunctive relief).

Your agreement might provide that if contractor is not picking up waste due to a force majeure event, then you must pay contractor fair rental value or other described compensation for use of its service assets. However, argue to except force majeure strikes.

And ask yourself: In the event of a force majeure strike, how will I reimburse my contract hauler for providing use of its service assets or pay a third party for providing substitute service?

Ensure cash flow to pay for use of a contractor's service assets or third-party service. Your contractual compensation provision should clearly provide for payment to the contractor only for providing actual service so that you may redirect rates away from contractor (who is not providing service during a force majeure strike) to a third party (who provides substitute services in event of a force majeure strike).

If you collect rates from customers, use them to secure substitute service. If you collect rates from customers and normally pay your contractor a collection service fee, you can use that cash flow to pay your contractor for use of its assets or to hire a third party.

If your contractor collects rates from customers, secure an alternate source of funds. This eventuality often is overlooked in agreements, leaving a local government with the right to secure substitute services but without money to pay for them. Envision the cash flow in the worst-possible-case scenario.

Comprehensive rights to secure substitute services include rights to routing and customer service/billing records, which you could provide to the third party supplying the substitute service, which in turn could bill customers in arrears. (In cases of nonexclusive contract service, the contract hauler may strenuously object to providing customer lists.) But if the contract hauler has already billed customers for services in advance, then the substitute hauler cannot bill for those same services a second time in arrears.

To provide the necessary cash flow, your agreement might provide that, in the event of a force majeure strike, the contractor must pay you the rates it has collected in advance. If the contractor fails to forward that payment in a timely manner, you can draw on any form of performance security (performance bond, letter of credit, parent guaranty, and so on). The urgency of picking up waste underscores the problems presented with performance bonds, which are unlikely to be liquidated on a short-term basis, and the preferability of a letter of credit that you can draw up on your own recognizance.

A Caveat: Liability for Vehicular Accidents

Many local governments do not envision ever using contractor service assets (other than containers) but merely hiring a third party to provide substitute services. If the substitute hauler has insufficient extra fleet, however, it might need to use the contractor's trucks. A local government's right to provide substitute service often includes the contractor's obligation to maintain liability insurance despite local government's use of assets. Local governments' contractual right to use the vehicles arguably constitutes consent under liability policies, thereby extending coverage to the local government or the third party. But your agreement might specifically state that you and your contractors are permitted users under liability policies and that your use and possession does not constitute ownership for purposes of liability policies. Furthermore, it might specifically provide that the contractor will execute any policy endorsements necessary or desirable to effectuate your coverage and that contractor will authorize and direct its insurance broker or insurer to confer and cooperate with you to ensure that you are adequately protected.

With respect to containers: Provide that customers' use and possession of bins, carts, and other containers is deemed local government possession for purposes of exercising your right to use service assets. Note that liability policies should cover bins, which are a source of liability claims if they roll into and damage vehicles or other property.

In conclusion, you can grant your contractor some degree of flexibility to resolve labor disputes by including labor disturbances within the definition of force majeure events for a limited period of time. But correspondingly secure the right to provide substitute service with use of contractor's service assets, employees, and routing/customer billing records. If you do not collect customer rates, require the contractor to pay you rates during the continuance of the force majeure strike and secure that obligation with a liquid instrument, such as a letter of credit.

Constance Hornig is an attorney represents local governments in MSW contract procurement.

MSW - November/December 2003