Outsourcing

The problem

A hotel chain has outsourced all its catering requirements to an external catering company. Things start well, but then problems start to develop. Two of the hotels fail a health inspection and, at a number of others, guests have complained about the quality of food and the belligerent attitude of serving staff.

The law

Poor performance and payment disputes are generally governed by the express terms of the contract. If there is no written contract, or an incomplete contract, then some terms may be implied.

Under the Supply of Goods and Services Act 1982 there is an implied term that all services will be provided with reasonable care and skill. There is even an implied term under the act that a reasonable price will be paid, if this has not been agreed.

Breach of contract may give rise to a claim for contractual "service credits"; a claim for other damages; and a right to terminate.

Expert advice

Assuming the objective is not to terminate the contract, but to get the catering company to perform according to expectations, it is important to open a dialogue. Before doing so, it is important to know what the contract says about these issues.

The hotel group needs to look carefully at the contract and review what has been agreed. Is the contract silent on these issues, or does it specifically address payment, hygiene, meal quality and personnel attitudes? Or does it fall somewhere in between?

If the contract addresses these issues, then the catering company can easily be reminded of its obligations. If not, it will be important to combine any general contract provisions of persuasive value with the hotel group's specific expectations in addressing any issues of substandard performance.

In most cases, outsourcing relationships benefit from the collection of performance data, irrespective of whether the contract contains a precisely defined service description and/or performance indicators.

Not only will this assist in managing any ongoing performance issues, but such data will be useful when considering the potential for terminating the contract for breach in the event that performance does not improve.

Termination for substandard performance may be an option in theory, but selecting another provider is costly and time-consuming - it may be better to try to get the caterers back on track. In any case, in the absence of a serious breach (eg, failing a health inspection), a clear right to terminate may not exist.

Charging mechanisms, like performance issues, can be complex. It is important to know what elements of the service are included and excluded from the fixed charges. The procedure for controlling supply and the basis of charging for services excluded from the fixed charges also needs to be understood. The level of charging, like performance, ought to be monitored on an ongoing basis.

Subject to contract limitations, an open dialogue will always remain key to managing performance and charging issues.

Check list

\* Have a well-drafted contract describing the services, resources and infrastructure, service dependencies (including initial and ongoing investment levels and responsibilities), precise service levels, and a clear charging mechanism. This gives certainty for both parties.

\* Have an operating knowledge of your contract - especially a knowledge of what services fall within the fixed charging and variable charging elements of the contract. Also, understand the basis of supply of any variable services and the manner in which these can be controlled.

\* Implement a system of measuring and monitoring performance and charging. Keep records of substandard performance and charging levels - vague anecdotes are not enough. Keep open a regular dialogue and have contractors justify performance and charging levels from time to time.

\* Make sure invoices are scrutinised before payment is made. It is very difficult to recover sums once paid.

Beware!

A common pitfall is coming to a conclusion that is premature or based on impression. This mostly occurs where contractor performance is not being measured.

Performance data will reveal an objective and unbiased indication of performance. This will be particularly important when asserting breach of contract and exercising termination rights based on the level of performance. A failure to use performance data could lead to wrongful termination of the contract and expose the hotel group to a potential claim for damages.

Contact

Beverley Whittaker, Stevens & Bolton
01483 734281
beverley.whittaker@stevens-bolton.co.uk