There are essential clauses that should be part of every contract between a homeowners association and its vendors. These key terms give the association substantial legal benefits in the event of a dispute, mediation, arbitration or lawsuit concerning non payment or a failure to properly perform contractual duties. These protections will only be assured by using a properly drafted association form of agreement supplied by the association, or negotiating with the vendor to include them in the form of a contract provided by the vendor. Sadly, many associations routinely sign the vendor’s agreement placing themselves at a strategic disadvantage.
CACM offers classes to assist its members in identifying key contractual provisions that should be considered, if not included, in vendor service contracts. While managers are not expected to be attorneys, nor keep up with cases interpreting the contracts, management understanding of important contractual provisions can be of great service to community associations and their directors.
Key Contract Provisions
1. A Type I Indemnity.
Indemnity is the concept of shifting an economic loss or responsibility from one party to another. There are many forms of indemnity. One common form is referred to as “Type 1″. A Type 1 indemnity protects the association and manager from liability against any claim, liability, lawsuit, loss, damage, or expense, including attorney’s fees, arising out of the contract, including personal injury, death or economic loss. The key aspect of a Type 1 indemnity is that the legal protection extends whether or not the association or manager is alleged to have contributed to the damages. It excludes only damages or injury caused by the sole negligence or willful misconduct of the indemnitee. In conjunction with the vendor’s insurance, it shifts the risk of a lawsuit to the vendor.
Vendors should be required to maintain proper levels of workers compensation insurance and comprehensive general liability insurance. The contract must require that the Association be named as an additional insured on the policy and that evidence of such insurance be provided during the performance of the agreement. As liability insurance companies are prohibiting contractors from performing work for common interest developments without a special endorsement, it is important for the contract to require, and for the association to verify, that the insurance is applicable for the planned work. The endorsements under which the association is named on the contractor’s policy vary in language. The association should consult with its insurance professional or attorney to assure that the association’s rights under the contractor’s insurance are maximized. A mere certificate of insurance is insufficient. 3. Licensure.
Work on a project for which the combined value of labor, materials and all other costs on one or more contracts is more than Five Hundred Dollars ($500) is required to be performed by a licensed contractor. Business & Professions Code Section 7030.5. The contract should state the contractors license number of the vendor and the license categories held. It is easy to verify that the contractor has the appropriate category of license and that the license is current and active at the website maintained by the Contractors State License Board, which is www.cslb.ca.gov.
The association is deemed to be the employer of an unlicensed contractor for purposes of workers compensation liability and certain tax filing responsibilities. The hiring of an unlicensed contractor may in some circumstances be below the standard of care required of community association directors and therefore could give rise to a claim by the corporation against the directors for any damages that result. The potential risk here is enormous. CACM managers should work very hard to encourage directors to engage licensed contractors for any project costing more than $500.
4. Entity Status.
The true legal name of the contracting vendor must be inserted in the contract, so that, in the event of litigation, the legally responsible party is properly identified. Also, a routine check should be made to ascertain whether the vendor is in good standing with the California Secretary of State. Corporations or limited liability companies that are suspended cannot legally enter into contracts. Both issues can be researched quickly at the website of the Secretary of State which is http://kepler.ss.ca.gov
5. Scope of Work.
Far too many contracts have only a cursory description of the labor and materials that will be provided under the agreement. The contract should include a detailed specification of the services and materials being purchased so that the performance of the contract can be measured. In construction contracts of any significant magnitude, plans and specifications should be prepared by an architect, engineer, or in some circumstances, the construction manager. Clarifying the scope of work is a good way of confirming the parties expectations about exactly what their respective duties and rights are under the contract.
The specific terms of all labor and material warranties must be included in the contract. The agreement must state the duration and scope of the warranty. For example, the roofing contractor’s warranty can protect against defective workmanship, and also for the cost of repair of damages from leaks to the building and residence interiors.
Construction contracts should provide that the progress payments to the contractor are subject to a retention, typically ten percent (10%) of the amount due. The retention is held until a defined date after completion of the contract, as security for the contractor’s obligation to assure that all subcontractors and material suppliers have been paid. Without such payment, these “strangers” can record and enforce mechanics liens against association controlled property even if the association had no specific agreement with these subcontractors or suppliers.
The contract should contain a start and completion date. Consideration should be given to a liquidated damages clause, establishing a daily penalty for late completion. In the absence of a completion date, the law imposes only a requirement of completion within a reasonable time.
9. Labor Code Section 2810.
Labor Code Section 2810 requires that construction contracts between property owners and contractors include certain disclosures which intended to protect the employees of the contractor. The information is required to be supplemented if there is material change to the agreement, and the owner and contractor are required to keep the written contract for four (4) years. Among the information mandated for inclusion are the employer identification number of the contractor, worker’s compensation information, specification of vehicles to be used by the contractor, the number of workers to be employed, and the number of independent contractors who will be used and their license numbers. The association can incur material financial liabilities if this Section 2810 is violated.
An association ordinarily may terminate a contract only if the contract permits that, or if the vendor materially breaches the agreement. Proving a material breach of the contract is often difficult. Therefore, to protect the association’s right to terminate a contractor at any time, it is necessary to include a clause permitting termination at any time without the necessity of proving cause (a provision sometimes called termination for “owner convenience”). There are contracts where the association does not want the contractor to have the right to terminate without cause, however, so careful consideration is necessary with regard to a reciprocal right of termination. Further, even if the association has the right to terminate without cause, it may still be held responsible for payment of some portion of the contract, including “profit”.
11. Attorney’s Fees.
Under California law, the party to a contract must bear its own attorney’s fees unless there is a special statute providing for the recovery, or a provision in the contract providing for the recovery of attorney’s fees. Generally, the association will be the party enforcing a contract, so an attorney’s fees clause should always be considered in a vendor contract. By law, attorney’s fees clauses are always reciprocal, so the board should consider whether the clause may be used against it. The association may be able to improve its right to recover all litigation expenses if it includes in this clause the right to recover not only attorney’s fees and costs but also the fees and expenses of expert witnesses, whether or not those experts’ fees are otherwise recoverable by statute.
A checklist of key vendor contract terms will assist boards in negotiating better contracts. Legal review of vendor contracts is prudent to assure that the agreement is complete and to customize the agreement to the association’s advantage based on the particular materials and services being provided.
The author acknowledges other credit to Ann Rankin, Esq. for her article Reconstruction Nightmares and How to Protect Yourself At Home, Law Journal (2003) and David Feingold, Esq. The Top 10 Things a Community Association Manager Should Know About the Regulation of Building Contractors, Law Journal (Summer, 2001) and Wayne S. Guralnick, Esq. Shifting Risk of Liability to Vendors/Contractors, Law Journal (Summer, 2003).