Types of Contracts

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:

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.

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.

Categories. The industry uses broad categories of contracts. Each has its advantages and disadvantages.

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.

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.

Contract Limitations

One-Year Limitation. Virtually all CC&Rs limit contracts entered into by the association to one year. 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. It allows the association to negotiate more favorable contracts for elevator maintenance, cable TV service, and other services.

Deposit Limitations. The Contractor’s State License Board (“CSLB”) serves as California’s consumer protection agency and protects homeowners from contractor harm. For consumer home improvements, contractors cannot charge a down payment of more than $1,000 or 10% of the contract amount, whichever is less. (Bus & Prof Code § 7159.5) 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 legal counsel review and revise vendor contracts. See Home Improvement Contracts. 

Retention Limitations. Beginning January 1, 2026, the law changed the percentage of retention allowed for private construction contracts. It used to be 10%. Now the law allows only 5% retention, with very limited exceptions. The statute makes an exception if a residential project is not mixed-use and does not exceed four stories. (Civ. Code § 8811)

Contract Formation
 

Boards can review and discuss bids in executive session meetings 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 contractor proposals, evaluating bidders' qualifications, and reviewing contract language with HOA legal counsel. Although the statute does not state why bid formation may be held in executive session, it allows boards to have frank and candid discussions about the negative aspects (if any) of various contractors without fear of committing business defamation and to discuss their references without fear of disclosing confidential information. In addition, openly discussing bid details may give some bidders an unfair advantage, as they might immediately modify their bids based on competitor information.

Once the board approves a bid, legal counsel should review the contract to ensure compliance with applicable laws and regulations. After legal review, the contract can be signed; at that point, members have the right to inspect it. Boards should consider adopting a bidding policy. Following is a sample:

Management shall obtain three bids for all work over $_______. Contracts will not necessarily be awarded to the lowest bidder; instead, they will be awarded to the best bidder, as determined by the board. The requirement for three bids may be waived depending on the circumstances, i.e., whether the work is an emergency, the association has a long-standing relationship with a particular vendor who is especially knowledgeable about the building, changing vendors would disrupt existing warranties, and/or other vendors are unwilling to bid on the project.

Voting on Contracts. When approving a contract, the vote itself is part of "contract formation" and can be conducted in an executive session. However, many boards prefer transparency, and even though they are not obligated to do so, they can 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 it partially performed the contract’s obligations, accepted the contract’s benefits, or subsequently ratified the contract in its meeting minutes. Vendors can protect themselves from a rogue director signing agreements by requiring two signatures on all agreements. The Corporations Code requires two officer signatures — one signer must be the president or vice president, and the other 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 “provide 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 from the perception that they were signing a contract on their own behalf (making them parties to the contract), the signature block should list the association as the party, followed by the name and title of the officer signing on the association’s behalf. For example:

The Sunrise Homeowners Association, Inc.

By: __________________________
      John Doe, President

This signature block clearly indicates that the HOA, not the president, is a party to the contract. Also, the opening paragraph of the contract should identify the association, not its officers, as the parties.

Disclosure in Minutes. Any matter discussed in executive session must be generally noted in the minutes of the board's next open meeting.

Contract Checklist

Before entering into a contract with a vendor, boards should make sure legal counsel has reviewed the agreement. 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 they will perform and that the license is current. Associations can verify licenses 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 must provide proof of insurance and, where applicable, name the association as an additional insured. Work with your association's insurance broker on these issues and ensure the contractor’s insurance does not contain a multi-family or condo exclusion.

Governing Documents. Ensure the contract does not violate any limitations outlined in the association’s governing documents.

Problem Provisions. Signing the vendor’s contract or work order is generally poor business practice. The agreement/work order is usually written to favor the vendor rather than the association. Associations should have their legal counsel review all contracts before the board signs them, and either modify the vendor’s contract or draft a new 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 resulting from any alleged breach of the contract. The contracting party is the corporation, which the directors sign on its behalf.
   
• Scope of Work. The scope of work must be clearly defined. An ambiguous or incomplete project description can lead to disagreements and make it difficult to hold the vendor accountable.
   
• Payment Schedule. Define the payment schedule. Generally, phase payments so funds are paid to the contractor as work progresses. As a rule, do not make full payment up front, as it exposes the association to significant risk of loss if the contractor does not perform. Depending on the work, it is not unusual to pay a percentage of the contract 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 the minimum limits the vendor must carry, and whether the association is named as an additional insured on the policy.
   
• Indemnity. Vendor agrees to indemnify the association if the association is sued for any 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, pull permits when 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 product defects (not necessary for service providers).
   
• Mechanic’s Liens. Mechanic’s lien provisions should protect the association if the vendor fails to pay its subcontractors or material suppliers.
   
• Termination Clause. If the work is not performed satisfactorily, include a provision to terminate the agreement.
   
• Evergreen Clause. This provision automatically renews a contract for a specified period unless the board gives the vendor written notice that the association will 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 to minimize litigation costs and speed the resolution of disputes.
   
• Attorneys’ Fees. Without an attorney’s fee provision, each side typically bears its own fees and costs.

Breach of Contract

When an association enters into a contract with a vendor for services (landscaping, plumbing, painting, roofing, etc.), there are two primary remedies when the contract is breached:

• Money Damages. An award of monetary damages is the most common remedy and compensates parties for the damage they suffered when the contract was breached. This differs from a breach of CC&Rs (a breach of equitable servitudes), where monetary damages are not an adequate remedy and injunctive relief is the common remedy.
   
• Specific Performance. “Specific performance” forces a party to perform as promised under the contract. This remedy is available only when the aggrieved party cannot be adequately compensated for the breach by an award of money.

Statute of Limitations. The statute of limitations for breach of contract is 4 years (Code Civ. Proc. § 337).

ASSISTANCE: Associations needing legal assistance can contact us. To stay current with community association issues, subscribe to the Davis-Stirling Newsletter.