by RAHUL B. PATEL and CYRA A. DUMITRU
Hoteliers consistently face new challenges to accommodate their guests in an increasingly competitive market. Whether the challenges come from a global pandemic, evolving technology, or rising costs, hoteliers are encountering a growing need to review their business practices to ensure their brand remains current. One way hoteliers can foster a competitive edge is by negotiating their third-party vendor contracts.
WHAT IS A THIRD-PARTY VENDOR CONTRACT?
A third-party vendor contract is an agreement between a hotelier and an entity or person to provide products or services to the hotelier’s guests on the hotelier’s behalf. Some examples include transportation, a fitness room, a bar lounge, concierge services, and amenities, such as breakfast.
Prior to selecting third-party vendors, hoteliers should review their franchise agreements to determine if the brand is requiring the use of any particular third-party vendor, and if so, for which item(s) or service(s). Alternatively, may the brand require prior approval of third-party vendors? As such, the first step in negotiating third-party vendor contracts is to review your franchise agreement to ensure you don’t commit a default right off the bat.
After determining which type of third-party vendor is permitted and/or required, it may be advisable to seek out referrals or references to “friendly” third-party vendors from other hoteliers to help narrow the field regarding which third-party vendor to actually hire.
COMMONLY NEGOTIATED CONTRACT PROVISIONS
After determining what the franchisor requires as far as third-party vendors, the next step is to ensure the vendor in question can provide goods or services that comply with brand standards and your franchise agreement.
Prior to entering into a vendor contract, a hotelier should request samples of the vendor’s product and confirm if the vendor has provided the same or similar item or service to the hotelier’s brand before. For example, a common service that hoteliers need is a property management system (PMS). When selecting an appropriate vendor, hoteliers should inquire whether a potential vendor has provided and managed a PMS system for the brand in question before. The next step would be to conduct initial research into the vendor itself regarding any positive or negative reviews.
After performing this essential due diligence, and if the vendor can meet brand requirements, the next step is to request a copy of the vendor’s contract and read the document in full. It’s crucial to understand and comprehend what the contract will and will not cover prior to signing. Depending on the contract, it may be advisable to engage legal counsel to ensure you are properly protected and understand your obligations under the contract in question. Keep in mind, the worst thing that can happen during a negotiation process is asking for certain edits to the contract and the vendor simply says “no.” Don’t be afraid to negotiate your contracts, it is important to protect yourself and your hotel.
Importantly, regardless of the product or service provided, hoteliers should ensure they have friendly termination provisions in their vendor agreements. It isn’t uncommon for brand standards to change and evolve, so hoteliers should ensure they have the ability to terminate a vendor contract if a service or product becomes obsolete or if the vendor can no longer meet brand standards. The termination provision should be without penalty and upon notice from the hotelier.
PROTECTING YOURSELF FROM LIABILITY IN THIRD-PARTY VENDOR CONTRACTS
In addition to reserving the right to terminate a vendor contract, a hotelier should attempt to limit its liability as much as possible. For example, negotiate for an indemnification provision. Hoteliers should additionally require their third-party vendors to maintain liability insurance.
When selecting third-party vendors, it’s important to ensure the vendor can provide goods and/or services in accordance with brand standards and the hotelier has recourse in the event the vendor fails to do so. ■
Patel Gaines has represented 200-plus hotels, working with brands such as Hilton, Marriott, Choice Hotels, IHG, and Wyndham, ranging from franchise, transactions, banking, and more.