Defined. A contract is "an agreement to do or not to do a certain thing.” (Civ. Code § 1549.) They are legally binding promises between two or more parties to perform or refrain from performing some specified acts in exchange for lawful consideration (something of value, such as money or personal services). There are two broad categories of contracts:
1. Express Contract. An express contract is can be oral or written in which the parties state the contract’s terms and express their intentions in words.
2. Implied Contract. An implied contract is one that arises from the conduct of the parties. For example, a contract is implied when a party knowingly accepts a benefit from another party, where the benefit is clearly not a gift. The party receiving the benefit is obligated to pay fair value for the benefit received.
Types of Contracts. There are broad categories of contracts used in the industry. Each has its advantages and disadvantages.
1. Fixed Fee. The board negotiates fixed fee with the contractor for the successful completion of a clearly defined scope of work. The contract price, once negotiated, does not change unless the board approves change orders. Most associations negotiate fixed fee contracts because it gives them an amount for budgeting purposes or special assessments.
2. Cost-Plus or Time and Materials. This approach pays the contractor for the actual direct materials costs, actual direct labor costs (usually at specified hourly rates), plus an agreed upon markup to cover overhead and profit. Cost-plus contracts are used when it is not possible to accurately estimate the extent or duration of the work or to anticipate costs with any reasonable degree of confidence. The disadvantage of this kind of contract is that it is open-ended and gives the contractor no incentive to economize.
One-Year Limitation. Virtually all CC&Rs have a one-year limitation on contracts entered into by the association. This limitation is required by the Department of Real Estate (Cal. Admin. Code, Title. 10, § 2792.21) to prevent the developer from obligating the association to long-term contracts that may favor the developer but harm the association. Once the developer has turned over control of the association to the membership, the CC&Rs may be amended to eliminate the restriction or to change it to 3 or 5-year contract limitations depending on the type of vendor. This allows the association to negotiate more favorable contracts for elevator maintenance, cable TV service, etc.
Deposit Limitations. The Contractor’s State License Board (“CSLB”) serves as California’s consumer protection agency protecting homeowners from being harmed by contractors. For consumer home improvements, contractors cannot charge a down payment of more than $1,000 or 10% of the contract amount, whichever is less. For more information, see "Contractor State License Board." The 10% down payment limitation does not apply to commercial contracts, i.e., contracts with associations. Associations are commercial entities and can have their own legal counsel review and revise vendor contracts.
Executive Session. Boards of directors are allowed to meet in executive session to consider "matters relating to the formation of contracts with third parties." (Civ. Code § 4935(a).) This includes meeting with consultants to set bid specifications, reviewing and discussing proposals submitted by contractors, discussing the qualifications of the various bidders, and reviewing contract language with HOA legal counsel. If the legislature wanted members to hear all board discussions related to bids, contractor qualifications and experience, and contract provisions, the statute would not have put it in executive session. Their intent to keep the process confidential is further supported by Civil Code § 5200 which allows members to inspect executed contract, not proposals or bids. Although the reasons for allowing bid formation in executive session are not provided in the statute, it allows boards to have frank and candid discussions on the negative aspects (if any) of various contractors without fear of committing business defamation and discussion of their references without fear of disclosing confidential information, In addition, openly discussing aspects of bids may give unfair advantage to some bidders who might immediately modify their bids based on competitor information.
Contract Checklist. There are important contract clauses that should be included in all agreements entered into by the association.
Voting on Contracts. When it comes to approving a contract, the vote itself is part of "contract formation" and can be done in executive session. However, many boards prefer transparency and, even though not obligated to, vote on contracts in open session.
Signing Contracts. A contract signed by any officer, whether authorized or not, will be deemed valid if the vendor reasonably relied on the signature. In addition, an association can be bound by a single signature or no signature if the association partially performed the contract's obligations, accepted the benefits of the contract, or subsequently ratified the contract in its meeting minutes. Vendors can protect themselves from a rogue director signing agreements by requiring two signatures. The Corporations Code calls for two signatures from officers--one signer being the president or vice president and the other one the secretary or treasurer. (Corp. Code § 7214.) In the event the corporation were to challenge the authority of the signers and attempt to void the contract, the signatures of two officers, "provides a conclusive...evidentiary presumption of authority on the part of the specified corporate officers to execute the document in question on behalf of the corporation." (Snukal v. Flightways Manufacturing, Inc. (2000) 23 Cal.4th 754, 783.)
Signature Blocks. To protect officers against the perception they are personally signing a contract on their own behalf (making them personally parties to the contract), the signature block should have the name of the association as the party followed by the name and title of the officer signing on behalf of the association. For example:
The Sunrise Homeowners Association, Inc.
By: __________________________
John Doe, President
This makes it clear the HOA is a party to the contract, not the president. There should be additional language in the opening paragraph of the contract identifying the association, not the officers, as parties.
Disclosure in Minutes. Any matter discussed in executive session must be generally noted in the minutes of the next open meeting of the board.
Member Review of Contracts. Once contracts have been approved by the board, they can be inspected by the membership.
Recommendation: Boards should adopt a bidding policy to minimize unfair bidding practices. All contracts should be reviewed by the association's legal counsel before they are approved and signed by the board. Once contracts have been approved, boards should post them on the association's website in a password-protected area accessible by members.
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