Get it in Writing

When it comes to settling claims, vendor contracts solidify a business’ protection

There was a time when a verbal agreement, sealed with a handshake, was enough to establish and maintain a business partnership. But those days are long gone. Any business today that operates without the proper written contracts in place leaves itself vulnerable. A recent example from the restaurant industry illustrates what can happen when business partnerships are not spelled out in black and white.

A large restaurant chain with a license to serve beer on tap had a longstanding agreement with a cleaning vendor for bi-weekly beer line servicing in their facilities. Unfortunately, the restaurant only had a verbal agreement, and not a written contract, with the vendor. This arrangement worked well for a while, until the one time it didn’t.

One evening a restaurant guest ordered a beer on tap. The waitperson drew the beer from the tap and delivered it, along with the beers ordered by the other guests at the table. The guest took a sip of the beer and immediately felt a burning sensation in her mouth and throat. She spit out the beer, grabbed water from an adjacent table and ran to the bathroom to rinse out her mouth. When the guest continued to feel pain and burning in her throat, she went to the hospital where she was diagnosed with caustic burns to her mouth and throat caused by sodium hydroxide. The restaurant investigated the event and learned that their cleaning vendor failed to fully rinse the beer lines during the bi-weekly cleaning and had left sodium hydroxide in the lines. The unlucky guest’s beer was the first beer pulled from the tap after their cleaning.

The guest hired an attorney to recover damages from the restaurant for the burns and the increased risk of cancer caused by her exposure to sodium hydroxide. She alleged the restaurant was negligent in serving her a contaminated beer and in failing to have procedures in place to ensure that their vendor safely completed its work. The guest also sued the cleaning vendor alleging negligent line cleaning.

Beer line cleaning involves disconnecting the lines from the kegs, draining and rinsing the lines with sodium hydroxide, rinsing them with water, reattaching the lines to the tap and, finally, running beer through the lines. The restaurant’s subsequent investigation showed that the vendor was solely responsible for cleaning the lines and that none of its employees assisted in anyway. In addition, the presence of sodium hydroxide in the beer was not evident as it did not change the color, texture, consistency or smell of the beer. There was nothing about the beer served to the guest that could have warned anyone of the presence of sodium hydroxide.

Even though the vendor was solely responsible for cleaning the lines, because there was no written contract outlining the agreement, the restaurant was held potentially negligent.

To make a bad situation worse, the incident occurred in Massachusetts, which has an unusual statute governing contributions between co-defendants. The statute holds that all negligent defendants share equally in the exposure. This means that even if the restaurant was allocated 5 percent of the fault, they would still have to pay 50 percent of any recovery. So without a written contract transferring risk to the proper parties, the Massachusetts business statute potentially made the restaurant statutorily responsible for the loss regardless of the vendor’s role. And because the restaurant had deeper pockets than the vendor, the plaintiff’s attorney took advantage of the unusual statute and focused his attention on the restaurant.

All of this presented the restaurant’s defense team and insurance carrier with a real challenge and forced them to aggressively pursue evidence to show that the restaurant was not at fault for the accident. The defense was able to develop a case against the vendor, leveraging the risk to the longstanding business relationship between the restaurant and cleaning vendor, to get the vendor’s insurance carrier to pay the majority of the settlement reached with the guest. The agreement also included a non-disclosure agreement to protect the restaurant from negative publicity.

Vendor Contracts

With the lawsuit behind them, and with guidance from their insurance carrier, the restaurant management drafted and negotiated the appropriate vendor contracts to protect their operations should this scenario ever happen again. These contracts not only detailed the level of service provided by the vendors, but also included favorable defense, indemnity and additional insured language, which allows the restaurant to tender the claim and lawsuit to the responsible party — the vendors.

While the original claim involved just the cleaning vendor, the insurance carrier outlined steps the restaurant could take to improve the risk transfer language in all its vendor agreements and contracts, such as snow and ice removal, landscaping, cleaning, and construction contracts. All of these relationships created potential loss exposures for the restaurant based on the hazards inherent in the services the vendors provide. And all created opportunities for the restaurant to ensure they had in place the right level of service and risk transfer protection.

Regardless of the type of operation you run or the kind of relationship you have with your vendors, entrusting your company’s existence to a “gentleman’s handshake” is bad business.

When creating a vendor contract make sure to address the when, where and what services the vendor provides.

In the restaurant’s case, the work was to be done twice each week and the taps were to be left “ready to serve” meaning the insured would not need to do anything in addition to the vendor’s cleaning to be able to serve a beer. This is to avoid a vendor’s insurance carrier arguing in the future that the restaurant was to further drain the line by “pulling” a couple of beers to make sure it was all beer.

Vendor contracts should also be careful not to recommend any specific instructions on how the vendor does its work. The vendors are the experts at how their job is done and you do not want to inadvertently assume any responsibility that can trigger negligence.

Vendor contracts should clearly and fully assign the appropriate responsibilities to the vendor and add risk transfer language, defense, indemnity and additional insured requirements to the contracts.

It is strongly recommend that all contracts, especially those with risk transfer language, be reviewed by counsel familiar with the jurisdictions where the contracts are drafted and/or the work is being performed.

Also, make sure you obtain certificates of insurance (COI) to prove your status as an additional insured on your vendor’s policy and establish a protocol for monitoring receipt of the signed contracts and COIs.

With all your vendor agreements in written, legally binding contracts, you will help protect your business when a claim occurs as well as ensure that vendors provide the level of service you want. It is a scenario that leaves nothing to chance.