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 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.
Reasons for Executive Session. 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.
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.
Termination of Contracts. The termination of contracts is not listed as one of the allowable topics for executive session. However, some move it to executive session so the board can hold a frank and candid discussion of the negative legal ramifications of a termination. If that is the basis for moving it into executive session, the termination of contracts could properly take place in executive session.
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 reviewed by the membership. (Civ. Code §5200(a)(4).) This includes all non-privileged contracts. Privileged contracts do not include contracts for maintenance, management, or legal services. (Civ. Code §5215(a)(5)(D).) Contracts with labor unions are also not considered privileged. Employment contracts, on the other hand, could be private.
NOTE: The statute states that executed contracts must be produced. (Civ. Code §5200(a)(4).) The Civil Code also defines an executed contract as one where "the object of which is fully performed. All others are executory.” (Civ. Code §1661.) That means members cannot review contracts until the contracted work has been fully completed. It is more likely the legislature intended executed contracts to mean "signed." This is the generally accepted view in the HOA industry and the safer approach to follow.
Member Review of Bids. Bids submitted by contractors are not covered by Civil Code §5200. Accordingly, members do not have a legal right to review bids. The Board should carefully weigh the pros and cons of disclosing unaccepted contractor bids to the membership.
Third-Party Formation. The statute refers to "the formation of contracts with third parties." The term third party is generally understood to mean anyone who is not a party to a contract. Vendors bidding on a contact are not yet parties to a contact. Once the board approves a vendor's proposal and enters into an agreement with that vendor, the vendor ceases being a third party and becomes a second party to the contract, with the association being the first party. When that happens, the membership has a right to know the vendor's identity and can review the contract.
Recommendation: Boards should adopt a bidding policy so as 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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