Before entering into a contract with a vendor, boards should make sure the agreement has been reviewed by legal counsel. The association's attorney will be looking for issues such as the following:
License. Associations must verify that the contractor/vendor has the appropriate license for the work he will perform and that the license is current. Licenses can be verified through the Contractor License Board. Associations should be aware that using unlicensed contractors can be costly.
Insurance. Make sure the contractor carries workers' compensation insurance and other insurance appropriate to the task being performed for the association. The contractor needs to provide proof of insurance and, where applicable, names the association as additional insured. Work with your association's insurance broker on these issues and make sure the contractor's insurance does not contain a multi-family or condo exclusion.
Governing Documents. Make sure the contract does not violate any limitations in the association's governing documents.
Problem Provisions. Signing the vendor's contract or the vendor's work order is generally poor business practice. The agreement/work order is usually written to favor the vendor, not the association. Associations should have their legal counsel review all contracts before they are signed by the board and either modify the vendor's contract or draft one that protects the association. Following are some issues and clauses that need to be reviewed in all agreements:
- Parties. The opening paragraph of a contract typically names the parties to the agreement. The contract should NOT name the directors as parties. Instead, the party to the agreement should be the association itself. If directors are listed as parties to the agreement, they could be named personally in any litigation that might result because of any alleged breach of the contract. The contracting party is the corporation which the directors sign on behalf of the corporation.
- Scope of Work. The scope of work must be clearly defined. An ambiguous or incomplete description of the project gives rise to disagreements and makes it difficult to hold the vendor accountable for his work.
- Payment Schedule. Define the payment schedule. Generally, payments should be phased so that monies are paid to the contractor as work is completed. As a rule, full payment should not be paid up front, since it exposes the association to significant risk of loss if the contractor does not perform. Depending on the work, it is not unusual for a percentage of the contract to be paid up-front so the contractor can purchase materials. At the conclusion of the work, it is common for the association to retain a percentage of the contract amount until everything is inspected and signed-off.
- Insurance. Define the types of insurance and minimum limits the vendor must carry and whether the association is named as additionally insured on the policy.
- Indemnity. Vendor agrees to indemnify the association if the association is sued because of some act or omission of the vendor.
- Time for Performance. If performance dates and times are important, put them in the contract.
- Permits and Licenses. Vendors must be licensed and pull permits whenever appropriate and provide the association with copies of both.
- Warranties. If the vendor promises to stand behind his/her work, be sure to put it in the contract. You should also have the manufacturer's warranty against defects in the products (not necessary for service providers).
- Mechanics Liens. Mechanics lien provisions should protect the association in the event the vendor fails to pay his subcontractors or material suppliers.
- Termination Clause. If work is not performed satisfactorily, there should be a provision for terminating the agreement.
- Evergreen Clause. The contract automatically renews if notice is not given to the vendor of the association's intention to not renew the agreement.
- Escalator Clause. The association's payments to the vendor automatically increase each year. The increases may be predetermined or may be linked to the CPI.
- Alternative Dispute Resolution. An ADR provision is often included in contracts so as to keep litigation costs to a minimum and to speed resolution of any disputes.
- Attorneys' Fees. Without an attorneys' fee provision, typically each side bears their own fees and costs.
Recommendation: All contracts should be reviewed by the association's legal counsel before they are approved and signed by the board.
ASSISTANCE: Associations needing legal assistance can contact us. To stay current with issues affecting community associations, subscribe to the Davis-Stirling Newsletter.