Contract Risk Management for Airport Agreements (2016)

Below is the uncorrected machine-read text of this chapter, intended to provide our own search engines and external engines with highly rich, chapter-representative searchable text of each book. Because it is UNCORRECTED material, please consider the following text as a useful but insufficient proxy for the authoritative book pages.

32 G. Vendor/Purchasing Agreements The primary risk associated with vendor/purchas- ing agreements is ensuring that airports acquire goods and services necessary for the safe and effi- cient operation of the airport. Most acquisition of goods and services is accomplished through bid or proposal processes conducted by purchasing depart- ments. The resulting agreements are often standard- ized and are entered into with a low bidder. Identification of Risk The risks attendant to vendor/purchasing agree- ments are addressed through contractual provi- sions and a variety of insurance instruments. The risks under the majority of these agreements are similar, with the primary ones including perfor- mance, federal security violations, personal injury, and property damage. 1. Performance.—Satisfactory performance of air- port agreements is critical to safe and efficient air- port operations. A vendor’s failure to perform, or the insufficient performance of its duties and obliga- tions under the vendor/purchasing agreement, cre- ates risks for airports that result from necessary goods and services being inadequate or otherwise not available when needed. It is not uncommon for a bidder to submit pricing in connection with an airport solicitation that does not allow the bidder to perform profitably. Underbid- ding may be the result of a misunderstanding of the scope, a mistake in pricing calculations, or a desire to enhance the bidder’s reputation and resume by “buying the job.” An airport must be careful about judging a bid- der’s ability to perform per the pricing submitted. If the bid is dramatically lower than the airport’s own estimate, however, the airport should consider con- sulting the bidder to confirm the bid. To prevent bidders from taking shots at winning contracts with low bids only to withdraw once they decide they cannot perform profitably, the airport could require bid bonds with the solicitation. A bid bond pays the airport its damages if the low bidder refuses to perform at the submitted price. Whether or not a bid bond is required, a perfor- mance bond is highly recommended, so that if the bidder refuses or fails to perform, the airport can require replacement goods and services on an emergency basis at what will almost certainly be a higher price. Example/Sample Provision The following contractual provision is an example of how performance risk may be addressed in a ven- dor/purchasing agreement. 7.03 Security for Performance and Payment. Prior to execu- tion of this Concession Lease, Concessionaire Tenant shall provide City a Performance Bond or Letter of Credit accept- able to the City Attorney’s Office, in an amount equal to the first years MAG [Minimum Annual Guarantee], payable to City. Thereafter, Concessionaire Tenant shall at all times maintain such letter or other security in an amount equal to the amount of the Minimum Annual Guarantee applicable to each Contract Year. Said letter of credit or other security shall be conditioned to ensure the faithful and full perfor- mance by Concessionaire Tenant of all covenants, terms, and conditions of this Concession Lease and to stand as security for payment by Concessionaire Tenant of all valid claims by City against Concessionaire Tenant. Such guar- antee will serve as a surety or security for the full and faith- ful performance of all terms, covenants, and conditions of this Concession Lease including but not limited to the rent- als, fees, and charges to be paid, throughout the entire term of this Concession Lease. The form of all required letters of credit or other security and their surety company must be satisfactory to City Attorney’s Office. See Appendix G-1, Salt Lake City International Airport. Appendix G-1 provides a survey of additional con- tractual provisions used by other airports to address the risk of performance. Methods to Contractually Mitigate Risk The following list provides topics and issues to address when drafting or reviewing a contractual provision related to performance risk: • Prepare a clear scope and specifications. • Require vendors to obtain a performance bond with a third-party surety or provide a letter of cred- it that will secure payment in the event of default. • Consider a bid bond to discourage bidders from underbidding jobs and withdrawing if they decide the job is not profitable. 2. Federal Security Violations.—Airport security is a top priority, and airports must ensure that vendors’ employees who access secure areas of the airport have been properly vetted and are complying with all federal security regulations imposed on the airport and its employees and contractors. Federal regula- tions apply to vendors’ employees the same as any other airport employee. As a result, vendor agree- ments must detail the measures vendors must take to ensure compliance with federal security standards. Vendors must agree to reimburse the airport for any fines imposed on the airport in the event of a security violation by a vendor’s employee or contractor. Example/Sample Provision The following contractual provision is an example of how risks associated with federal security violations may be addressed in a vendor/ purchasing agreement.

33 provision related to risks associated with federal security violations: • Require vendors to provide written operating and security procedures for their operations, which should be subject to airport approval. • Require vendors and their officers, contractors, agents, and employees to comply with FAA regula- tions and to maintain authorized security status from TSA. • Require vendors to indemnify the airport for fines and costs arising out of a security violation by a vendor or its employee or contractor. 3. Personal Injury.—Airports must allocate liability between themselves and the vendors utilizing space or performing services in the airport for injuries incurred by third parties or vendor employees. Airports benefit from the broad indemnification obligations of the ven- dor (i.e., vendors indemnify for all liability and risk except where the injury or damage is caused by the airport’s sole negligence) and from limiting their own indemnification obligations. Most important, the air- port should require all vendors to maintain acceptable levels of liability insurance, naming the airport as an additional insured under such policies. Example/Sample Provision The following contractual provision is an example of how personal injury risk may be addressed in a vendor/purchasing agreement. 5.11 Safety. Concessionaire Tenant agrees to take necessary safety precautions within its reasonable control and comply with applicable provisions of federal, state and local safety laws and building codes to prevent accidents or injury to any of its employees, agents, customers or others on, about or adjacent to the Premises or any parking areas. This safety requirement shall not relieve any contractor or con- sultant performing work for Concessionaire Tenant from complying with the safety requirements of its contract or applicable law. City may, but is not obligated to, stop Con- cessionaire Tenant’s operations if safety laws or safe work practices are not being observed. 7.01 Indemnity Provisions. (a) Concessionaire Tenant shall, at its sole cost and expense, indemnify and hold City and its offi- cers, board members, departments, representatives, City authorized representative(s), agents, employees, affiliates, successors and assigns harmless from and against all losses, claims, demands, suits, actions, legal or administrative pro- ceedings, damages, costs, charges and causes of action of every kind or character whatsoever, including, but not limited to, reasonable attorney’s fees and other legal costs such as those for paralegal, investigative, legal support services and the actual costs incurred for expert witness testimony, (col- lectively “Claims”) directly or indirectly arising from, related to or connected with, in whole or in part, Concessionaire Ten- ant’s work under the Agreement, including but not limited to Claims directly or indirectly arising from, related to or con- nected with, in whole or in part: any act, omission, fraud, wrongful or reckless conduct, fault or negligence by Conces- sionaire Tenant or its officers, directors, agents, employees, 14.19. Security. A. Concessionaire’s Security Procedures. Concessionaire shall submit its written operating and secu- rity procedures for its operations hereunder to the City for review at least thirty (30) days prior to the Rent Commence- ment Date, or if Concessionaire Opens for Business earlier than the Required Opening Date, at least seven (7) days prior to the Required Opening Date. Concessionaire shall revise such operating and security procedures as necessary to obtain the City’s approval. B. Compliance. Concessionaire shall cause its officers, con- tractors, agents, and employees to comply with all existing and future security regulations adopted by the City pursuant to Part 107, Federal Air Regulations of the Federal Aviation Administration, as it may be amended from time to time. With respect to Airport security, it is a material requirement of this Agreement that Concessionaire shall comply with all rules, regulations, written policies, and authorized directives from the City and/or the Transportation Security Adminis- tration (“TSA”). Violation by Concessionaire or any of its employees of any rule, regulation, or authorized directive from the City or TSA with respect to Airport Security shall constitute a material breach of this Agreement. Any person who violates such rules may be subject to revocation of his/ her access authorization. Concessionaire will fully reimburse the City for any fines or penalties levied against the City for security violations as a result of any actions on the part of Concessionaire, its agents, contractors, suppliers, guests, cus- tomers, or employees. Concessionaire will also fully reim- burse the City for any attorney fees or related costs paid by the City as a result of any such violation. C. Changes in Security Status. Concessionaire understands and acknowledges that its ability to remain open and sell its authorized items under this Agreement is subject to changes in alert status as determined by TSA, which is sub- ject to change without notice. If the security status of the Airport changes at any time during the Term (or any extended term) of this Agreement, Concessionaire shall take immediate steps to comply and assist its employees, agents, independent contractors, invitees, successors, and assigns in complying with security modifications that occur as a result of the changed status. At any time, Concession- aire may obtain current information from the Airport Secu- rity Office regarding the Airport’s security status in relation to Concessionaire’s operations at the Airport. D. Access Keys and Badges. Concessionaire shall return to the City all access keys or access badges issued to it for any area of the Airport, whether or not restricted once this Agreement expires or terminates or upon the City’s demand. If Concessionaire fails to do so, Concessionaire shall be lia- ble to reimburse the City for all the City’s costs for work required to prevent compromise of the Airport security sys- tem. The City may withhold funds in the amount of such costs from any amounts due and payable to Concessionaire under this Agreement. See Appendix G-2, Denver International Airport. Appendix G-2 provides a survey of additional con- tractual provisions used by other airports to address the risks associated with federal security violations. Methods to Contractually Mitigate Risk The following list provides topics and issues to address when drafting or reviewing a contractual