January 19, 2007 | General

Smart Contracting

BioCycle January 2007, Vol. 48, No. 1, p. 20
Partnership arrangements between the municipality and private processor must address potential problem areas that include site access, feedstock quality, tonnage, odors and other “hot” contract issues.
Robert Spencer

THE road to Compost City is littered with the skeletons of failed facilities, some of which might still be in business were it not for poorly drafted contracts. A recent review of factors in closure of six food residuals composting facilities in Massachusetts during the period 2003 to 2006, identified the following:
o Neighborhood opposition due to odor, noise, truck traffic;
o Higher than anticipated operational costs;
o Under-capitalization resulting in inadequate facility design and/or technology;
o Lack of composting experience;
o Poor geographic proximity to food residuals generators;
o Inorganic contamination of compost product;
o Excessive residue disposal costs;
o Political and local government interference.
While the most ironclad contract in the world can’t compensate for lack of composting experience, inadequate capitalization and poor geographic proximity to generators, the other factors can and should be addressed in the procurement and contract process for a compost facility operated by a private vendor under contract to a municipality. Inclusion in a contract does not guarantee success, but if such factors are anticipated in a contract they may be successfully managed.
Although there are a number of privately owned, “merchant” composting facilities operating in the country, an increasing number of cities, towns and counties are seeking private operators for their municipally owned composting sites. In some cases, these government entities are requiring that the operation accept source separated food residuals. Generally, success of such public-private partnerships can be defined where the municipality’s organics stream is successfully recycled without causing nuisance conditions, and the private operator can pay its bills, and make a profit.
Thomas Mackie, an attorney who specializes in municipal solid waste facility development, including composting plants, has worked on numerous projects that involve controversy, permit violations, political interference and neighbor opposition. “It is very difficult to contractually allow a facility to operate in the face of public opposition, particularly when voters elect an official who is hostile to the facility,” says Mackie, a partner in Mackie Shea & O’Brien, PC, a Boston law firm. Therefore, he recommends the type of contract, and its specific contents, be carefully considered when initiating a composting project.
This article is written around issues related to composting as the service being provided under contract to a municipality. Most of the principles and guidance would apply to other organics recycling projects that involve a partnership arrangement between a public entity and private sector operator, e.g., a biomass energy facility, anaerobic digester, etc.
So how can a partnership between a municipality and a private composter be structured to protect the interests of both parties? Mackie describes two basic types of contracts – service provider and partnership.
Service Provider Model: This approach follows the more typical fee for service or unit price arrangement typical of a municipality that wants its waste privately managed at a set price. In these contracts, the municipality usually restricts the vendor to the processing of just that municipality’s organic waste. There is no revenue sharing, and the primary objective is privatized, professional operations – a model that can work well, but as with all solid waste contracts, must be carefully crafted.
Partnership Model: This type of contract establishes an arrangement where risk and reward are shared, and both sides succeed if the project works and neither one loses too much if the project fails. Those contracts establish a revenue sharing partnership in addition to the basic service of processing the municipality’s waste. Perhaps as important as the profit a private compost operator can make from such a partnership is the shared sense of ownership with the public entity. This can make the difference in project longevity if elected officials stand by the contractor during periods of controversy, which are often inevitable at some point in a project’s life.
“That’s why it is very important to have the municipality’s full participation on the permitting side of projects, with the municipality named as ‘Owner’, and the contractor as ‘Operator’ in the state and local permits,” Mackie explains. Such public-private partnering could be the difference in a project surviving a change in public sentiment against the facility, or a change in the elected officials.
In addition, notes Mackie, “there needs to be relief to the private operator from changes in law and the operator must be able to get out of the contract if unreasonable or excessively costly new requirements are imposed on the facility.” Similarly, contract default provisions must be well defined, “and negotiated on a project specific basis in order to anticipate situations that could lead to default,” he says. Default applies to representations and guarantees from both parties. For example, a minimal amount of waste guaranteed to the composter at a certain tip fee must be delivered, or at least paid for (put or pay). If such waste is not delivered, the municipality is in default. Similarly, if the composter is not able to process the minimum tonnage guaranteed due to equipment problems, and does not dispose of such waste, then it may be declared to be in default.
Mackie has seen project developers, particularly entrepreneurs willing to take risks in an effort to establish their first “reference” facility, take major contract shortcuts. “Developers can be at fault by rushing into projects, and not doing their homework in evaluating the entire legal framework of a project,” he explains. In his 20 years of solid waste project contracting, he has observed a paradox where “the better the relationship developers think they have with a municipality, or a particular elected official, the more likely they are to have a problem in the future.” This is due primarily to overconfidence by the developer, who fails to identify and contractually anticipate problems that may surface in the future, particularly once the initial elected supporter is no longer in office, and the project has developed opposition. “Go into a project as if it will be on the front page of the newspaper,” suggests Mackie.
One such example was a compost project with a 20 year contract term, ratified by a vote of the City Council, and signed by the officials as required in the City Charter – the mayor, chief procurement officer, and city solicitor. During the permitting process, the developer and the mayor unilaterally amended the contract to increase facility capacity, and other significant contract terms, without going through the same approval process. At the November election, the incumbent mayor suffered a surprise defeat, and when the mayor-elect reviewed the amended agreement, his legal advisors concluded it needed a new vote of the City Council to ratify such substantial amendments. Eventually, over a period of months, during which construction on the project ceased, the contract was amended, but had it not been approved the developer was looking at potential losses of millions of dollars invested in project development. Mackie points out that even if the original mayor had been reelected and the contract not challenged, at some point the legal status of the contract probably would have been called into question, jeopardizing the entire project with far greater consequences for both the developer and the city.
Based on his experience in the solid waste industry, and more specifically with composting, Mackie identifies three issues that must always be addressed in contracts between municipalities and private sector service providers. These are governmental contracting, contaminants in the waste stream, and odor generation.
Use Of Municipal Land: In general, exercise extreme caution when contracting with any governmental body, particularly municipal governments. There is a maze of state procurement requirements that may apply, and uncertainty about who has authority to bind the municipality. If municipal land is being used for a private facility, be extra cautious.
In Massachusetts, for example, the Uniform Procurement Act requires the municipality to advertise the availability for sale or lease of the parcel of land, and go through a Request for Proposal process of any interest in property valued above $25,000. The municipality may be required to obtain an appraisal to determine the value before issuing the Request for Proposal. The municipality must publicly open the proposals and select the most advantageous one; the name of selected proposer and the amount of the transaction must be published in the Central Register.
Another consideration when using municipally-owned property is to be certain the municipality has the legal authority to “dispose of” the relevant property. In Massachusetts, this may require local legislation in the form of a Town Meeting or City Council vote. Additionally, the parties involved need to be certain that use of the land has not been restricted, e.g., for use as a park, or is otherwise restricted by local or state law.
A private facility on public land is subject to political vicissitudes. Thus, any clause that leaves the fate of the facility up to the “discretion” of the municipal board will be dangerous. On the other hand, any clause that requires a town to issue permits and approvals for the facility will likely be unenforceable and should not be relied upon. This is because permitting is an exercise of a governmental police power that cannot be negotiated away in a commercial contract. However, if operating on public land, it is important to include conditions that the municipality “cooperate” in the permitting process (such as by agreeing to execute and serve as applicant on permit applications where the town is owner of the facility). Also it is recommended that the composter have conditions in the contract that if negative permitting or enforcement actions take place, the composter has a remedy under the contract. Finally, avoid overbroad indemnity clauses that run the risk of implicating the composter in preexisting environmental conditions on the site.
Feedstock Contamination: This hot issue is easier to deal with. The solid waste and hazardous waste industries have models that allocate risk for contaminated loads, which have withstood the test of time. Don’t reinvent the wheel, says Mackie. Borrow from what has worked.
Most contracts have definitions of “acceptable waste” and “unacceptable waste.” These are extremely important in their power to protect the operator from both physical and chemical contamination by including physical and chemical limits and restrictions with regard to inorganic materials, moisture content, and heavy metals. The contract requires that customers deliver only “acceptable waste” and prohibit “unacceptable waste.”
Other contract language that Mackie suggests for minimizing contamination in the feedstock include:
o Operator will inspect incoming loads and is allowed to reject any unacceptable waste upon delivery.
o Customer is responsible for taking back unacceptable waste. Operator does not take title to unacceptable waste.
o Customer is responsible for operator’s additional costs arising from an unacceptable waste delivery, including removal and disposal. Include a provision for the operator to work with the customer to try to adjust pricing and management requirements to take unacceptable waste or make the waste acceptable.
o Operator can terminate if customer repeatedly delivers unacceptable waste.
Odor Incidents And Management: Odors happen, so how do operators deal with this reality from a contractual perspective? Use of clear and established scientific thresholds are essential in the contract language.
The first step is to conduct a baseline odor survey to determine existing conditions. Where such information is available, it may be possible to establish an odor standard that acknowledges preexisting odor conditions, such as if the compost facility is located at a wastewater treatment plant or landfill.
The next step is to identify an odor performance standard. Typically, these are determined by state air quality and odor regulations. Some states have a “nuisance odor” standard that basically says that if a property owner is denied use or enjoyment of their property due to odors, the generator of the odors may be subject to enforcement action. Another regulatory option is to establish a measurable odor concentration and duration such that the facility shall not produce an odor beyond the property line that exceeds that concentration, e.g., 5 dilutions to threshold (5 D/T) for continuous periods of longer than two hours more than three times in any one month.
Another approach is to establish a maximum odor emission concentration from the biofilter or scrubber device used to treat odors, and monitor those odor emissions. Of course, experience has shown that if regulators receive frequent odor complaints that are blamed on a composting facility, no matter what the monitoring results show, the facility is likely headed for regulatory enforcement.
Scope of Work: Make this as clear and accurate as possible to avoid future disputes. Don’t accept the other party’s language. Write your own description of the work, service or product to be performed, or consider hiring a consultant in the field to draft the scope of work.
Definitions: These can be critical. Key terms should be defined so all parties understand the meaning, particularly if there is specific industry meaning. One man’s “waste” is another man’s “cover” material. This will help resolve issues in advance.
Payment: How often, when, where, and based on what? Should there be a right of setoff, i.e., deductions from amounts owed to the contractor or what the contractor owes to the client, such as damage from some action? Is there interest charged on late payments? Undisputed amounts should be paid while disputed amounts negotiated.
Acceptable Waste/Waste Acceptance Criteria/Nonconforming Waste: This is probably the most important protection to include in order to avoid being responsible for a bad load that contaminates an entire facility.
Change in Law: The deal should be changed to the extent that there is a change in law, regulation or another governmental action that affects performance. This is standard in all waste contracts.
Force Majeure: Acts of God, war, insurrection, terrorism, strikes, etc. are a valid excuse for delay or nonperformance. Be careful about “any other act or event outside the reasonable control of the party seeking relief.”
Term: How long is the business relationship going to last? Can it be extended and if so, by whom? This can be key to reliability and continuity of the relationship. Remember to put a tickler on the calendar for notice of extension or termination since these are often forgotten and there is no remedy for missing the deadline. With regard to length of contract, what is good for the goose may not be good for the gander. If one party fails to perform, it will be liable to the other party for contract damages for the term of the Agreement.
Indemnification: It is very important to try to get mutual indemnification clauses. Include legal defense. Be careful about indemnifying against things outside the composter’s control or that are not the operator’s defaults or negligence.
Insurance: This clause does no good if not policed. Get certificates of insurance from the other side and read them. Do the certifications match the coverage asked for? Make sure that an “additional insured” is not just a “certificate holder.” Get a “contractual liability” endorsement to cover the other party’s contractual assumption of liabilities. If a party agrees to insure a job and does not provide the insurance, that party can be liable for the damage that would have been paid by the insurance.
Representations: Be careful here. These should be mutual and are usually negotiable. This is the “no surprises” section that can sometimes come back to haunt you. One example is representations that signatories are authorized to sign.
Warranties: Be extremely careful here, especially if the composter is providing a “product” such as mulch or soil amendment. It is not a good idea to give any warranties. Even with a “no warranty” clause, if selling “goods” (i.e. compost) the operator will be considered to have given warranties under the Uniform Commercial Code that they may not want to back up. If the composter is a product provider, try to disclaim all warranties, express or implied, if possible.
Subcontracting: This may limit or conditionally allow subcontracting. Careful consideration should be given to potential types of subcontractors that may be desired, such as a compost marketing company.
Compliance with Laws and Regulations: This seems pretty obvious, but it could add significantly to grounds for default or damages beyond performance related issues. Facility operators, if identified in the permits as the owner and/or operator, must keep the facility in compliance.
Termination: Describes circumstances under which the composter or the other side can walk away from the deal. When developers are going to make a big investment or are relying heavily on the contract, limit termination to breaches of the contract and only after written notice and an opportunity to cure the breach. If the developer wants to be able to walk from the contract, expressly reserve the right to terminate for convenience.
Default: If developers are making a heavy investment, they may want the ability to get all contract damages if the other party defaults and may want to be explicit about their ability to recover their investment. On the other hand, if they are a small company that will be wiped out by a big damage claim, they should try to limit damages to actual damages arising directly from a default of the contract. They can even agree upon a formula for damages and provide that the damaged party must make efforts to replace the service/supply at fair market rates in order to protect against unlimited exposures. Avoid or prohibit consequential, special, punitive and multiple damages.
Amendments: These need to be written and signed by each party. Beware when dealing with municipalities and other governmental agencies. You cannot rely upon a public official’s informal agreements, even if in writing and consistent with your course of dealing. Per the example earlier in this article of a City contract amendment, a developer needs a formal contract amendment approved by the appropriate public body to modify a municipal contract. There is no right to payment or performance if not properly authorized.
Dispute Resolution: Arbitration, mediation, formal negotiation. Is it binding and final or just a step in the process. (Pay attention here but if you have to focus too hard on dispute resolution before the business relationship starts, think twice about doing business at all.)
Entire Agreement or Merger Clause: This is the entire and final agreement and there are no other agreements, oral or written. Any other oral or written agreement is superceded and not binding. This means that you cannot go back and say that the deal is really contained in earlier letters, emails or conversations.
Assignment: All contracts can be assigned freely unless they say that they cannot be. So if you want to deal only with the person across the table, make the contract nonassignable. If you want to be able to sell the assets of the business or have flexibility to get out of the Agreement, try to make it assignable. m
Robert Spencer is Contributing Editor and an Environmental Planning Consultant based in Vernon, Vermont. He can be contacted at spencebbc@aol.com. This article is based on a presentation by Thomas Mackie, “Smart Contracting for Composters” at the Massachusetts Department of Environmental Protection’s Sixth Annual Organics Recycling Summit in March, 2006. Mackie can be contacted at tam@lawmso.com.
Checklist And Definitions PAGE 22
Means the Agreement binds successors and assigns.
Useful if everyone will not be signing one copy of the Agreement.
Remember to fill in the blank.
Key if you are in multiple states. Try to make it the home state if possible. Otherwise, the law of the state where performance is to occur is a nice compromise and makes sense.
Legal name and address. Be sure parties are contracting with a viable entity. If not, ask for assurances (bonds or other forms of security) or guarantees from owners.
Where litigation will occur. Try to avoid an inconvenient jurisdiction. This is usually negotiable. If not, do the parties really want to do business together?
It’s hard to believe how many contracts are not signed or are signed by someone without authority. If possible, get the president, mayor, selectmen or other chief executive to sign and avoid a headache later.
Extends the contract statute of limitations from six to 20 years. Don’t add to contract forms unless both parties really want a 20-year right to sue.
Sets the table. Be careful, as things said here may come back to haunt both parties.

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