Contract Terms in Hardened Times

Contracts in the travel business, whether between airlines, agents or corporates, or between travel management companies and their corporate clients, do not come in a “one size fits all” format and reflect the power of the parties, and the agreed terms. Many contracts assume a volume of bookings or business, or a particular mix of business and the price paid often reflects this. Many contracts were negotiated in a buoyant market, and say nothing about a slump in the estimated turnover, or a change in the type of business or bookings. Contracts should try to reflect how the parties intend their position to be in a falling market, as well as a rising one. Similarly, contemplated service levels may fall when cost savings are made, and the head count goes down. Understandably a party affected by substantial falls in turnover, or falling service levels may wish to re-negotiate, or terminate the agreement and look for better terms elsewhere.

Your Present Contract

If your present contract is unsatisfactory, with an underperforming business partner, you may well be stuck with it until you are able to validly terminate, or the contract comes to an end. Just because the contract is un-commercial, doesn’t mean you can terminate. If there is a breach of contract by wrongful termination, this might give rise to a claim, represented by the cost to the other party of contracting elsewhere and claiming the difference between the price in your contract and the increased price with the competitor. If your contract is uneconomic, it will always be worth seeking to negotiate if the financial landscape is radically different. If you can achieve this, it is vital to get the new terms put into writing and signed off in a new agreement.

Contract Terms for Underperformance

If the contract is to reflect a price based on a given level of transactions, then it should state a higher price to be paid if the target is not reached, and a lower price if the target is exceeded. It is always worthwhile setting out arithmetic examples of how it is intended price banding works to ensure it is clear.

Similarly, a contract may state the consequences of a change to the “business mix” where the agreed booking fee, or management charges may not be adequate, particularly where volumes fall. A change of business mix clause entitles the parties to seek to renegotiate the commercial terms of the agreement, or alternatively to terminate on a relatively short notice period.

Incentives

These are often offered to counterbalance penalties for underperformance by seeking to provide financial incentives for exceeding targets. These might be contained in a bonus pool, for the benefit of the overperforming agent. Benchmarking clauses also seek to encourage cost savings where the saving can be shared by the parties.

Service Level Agreements should be realistic, and the contract should provide for a mechanism where a series of minor failures can result in the ability to terminate.

With underperformance, it is vital that contracts contain an exclusivity clause, to stop your business partner diluting the business you receive by placing orders with a competitor.

Adjusting the Price

Larger suppliers, may seek to avoid long term contracts running for many years, with fixed prices which may become uneconomic as time goes on by having short notice periods. At the very least, prices should be linked to inflation by the usual formula, so that profits should rise at the same level as overheads.

Some contracts include the ability to seek to re-negotiate or terminate where the cost of certain supplies rise above a certain level. This flexibility usually means that your business partner can exit on short notice when market conditions are tough.

Notice Periods

The easiest way out of a contract that becomes uneconomic, is termination. Contracts typically contain three categories of termination clause:

1. termination without cause
   allows one party to terminate on written notice without any reason at all, simply by giving a written notice.
2. termination for cause
   Allows one party to terminate if the other is in material breach, or usually if there has been a repeated breach of the SLA or non-payment of fees.
3. Immediate Termination
   Allows an immediate exit for events such as insolvency, threats of insolvency, making an arrangement with creditors, or losing trade licences.
4. The Future
   Whilst we need to be friendly with our trading partners, particularly in these difficult times, a properly drawn contract will help to prevent your business being dragged down by a poorly performing business partner, one that isn’t paying its way, or where contract rates become uneconomic.