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. There are broad categories of contracts used in the industry. 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.
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. It 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 legal counsel review and revise vendor contracts.
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 proposals submitted by contractors, discussing the qualifications of the various bidders, and reviewing contract language with HOA legal counsel. 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.
Once the board has approved a bid, the contract should be reviewed by legal counsel. After legal review, it can be signed--at that point, members have a right to inspect the contract. Boards should consider adopting a policy related to bidding. Following is a sample:
Management shall obtain three bids for all work over $_______. Contracts will not necessarily be awarded to the lowest bidder--contracts 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 unwilling to bid on the project.
Voting on Contracts. When approving a contract, the vote itself is part of "contract formation" and can be done in an 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 being 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 were signing a contract on their own behalf (making them 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 signature block makes it clear that the HOA, not the president, is a party to the contract. In addition, the opening paragraph of the contract should contain language 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.
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 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 must provide proof of insurance and, where applicable, name the association as 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. Make sure the contract does not violate any limitations 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, not 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 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 behalf of the corporation.
- Scope of Work. The scope of work must be clearly defined. An ambiguous or incomplete description of the project can lead to disagreements and make 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 upfront since it exposes the association to a 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. This provision causes a contract to automatically renew for a specified period of time unless the board gives written notice to the vendor 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 keep litigation costs to a minimum and to speed the resolution of any disputes.
- Attorneys' Fees. Without an attorney's fee provision, typically each side bears their 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 available to parties and compensates them for damage they suffered when the contract was breached. This is different from a breach of CC&Rs (which is 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).
Member Review of Contracts
Once contracts have been approved by the board, they can be inspected by the membership. The Davis-Stirling Act states that associations shall make records available for inspection and copying. (Civ. Code § 5205(a).) Those records include executed contracts that are not otherwise privileged under law. Members can inspect executed contracts, not proposals or bids. Once the board has approved contracts, they can be reviewed by the membership. (Civ. Code § 5200(a)(4).)
Law Firm Fee Agreements. There is a conflict in the law regarding law firm fee agreements. The Davis-Stirling Act has a general statement that “Privileged contracts shall not include contracts for maintenance, management, or legal services.” (Civ Code § 5215(a)(5)(D).) This is contrary to section 6149 of the Business and Professions Code, which provides, "A written fee contract shall be deemed to be a confidential communication within the meaning of subdivision (e) of Section 6068 [Bus & Prof Code] and of Section 952 of the Evidence Code." A “confidential communication between client and lawyer” under Evidence Code § 952 is protected from disclosure by the attorney-client privilege. Boards should consult with legal counsel on how best to resolve this conflict.
Labor Union Contracts. Contracts with labor unions are not privileged. Accordingly, association members have the right to review and copy labor agreements. Even if the union contract had a confidentiality provision, it does not trump the membership's right to review the agreement. (Corp. Code § 8313.)
Employment Agreements. There is a split of opinion when it comes to employment contracts.
Additional Information
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