Crucial Contract Provisions to Protect an Association
By: Maris S. Davies, Esq.
Associations enter into contracts on a regular basis. Contracts are used to procure landscape services, snow removal services, major roofing or repair services, and everything in between. The dollar amounts at issue may range anywhere from a few hundred dollars to millions, depending on the repair and/or improvement being done. Contracts are a part of association life; a necessary evil. In the course of negotiating for work in a community, associations may find that contractors come armed with pre-printed form contracts (typically prepared for them at some point in the past by their legal counsel).
These contracts are very one-sided. An association does not have to accept these contracts at face value. Almost every contract is negotiable, and if the contractor refuses to negotiate, this in and of itself, irrespective of the actual terms of the contract, should be a red flag for the association. Knowing that almost all contracts are negotiable, a board should take the necessary steps to review (either through legal counsel or board review) any and all contracts and to provide feedback and revisions to the contractor.
Given the number of contracts a board member will come across during his or her tenure on the board, it is good to have a baseline standard as to what should and should not be included to protect the association. Listed below are provision to be aware of and which should be included in any association contract.
- Scope of Work: Make sure the parties are clear on what exactly is going to be completed by the contractor. This provision should be detailed and should outline the various steps or phases of the work, if any, and provide a comprehensive outline of the work to be completed. Do no rely on handshake deals or oral discussions. If it is not included in the written, executed agreement, it will be difficult to enforce.
- Compensation: All compensation to a contractor should be outlined in the contract with a clear payment schedule which details when and how a contractor is paid and what initials steps must be taken by the contractor to secure payment. An association should include an additional contract provision which allows the association to withhold payments if the work is not being performed in a timely or workmanlike manner. This provision gives the association leverage, should a dispute arise, by withholding payments.
- Indemnification: Every contract should include a provision which requires the contractor to indemnify the association in the event a third party (member, owner, resident, or guest, etc.) is injured as a result of a negligent, willful or wanton act of the contractor or the contractor’s employees. This protects the association from a potential lawsuit from an owner if, for example, an owner is injured by a roofing company due to falling roof debris.
- Insurance: All contractors working for an association should be licensed and insured. Every contract should include a provision which requires the contractor to carry general liability and workers compensation insurance. If the contractor is uninsured or underinsured an association could face major losses and/or a judgment proof debtor, even if the association prevails in litigation.
- Termination: Every association contract should include a termination provision which, at a minimum, allows the association to terminate for cause, and the best case scenario allows the association to terminate without cause. Every termination provision should include a clear process for termination, i.e. 30 days’ notice in writing mailed to the address in the contract, to avoid any dispute as to whether or not the termination was effective. The termination provision should also include a cure mechanism for the contractor, i.e. 10 days to cure before termination is effective. Please note some contracts may include automatic renewal provisions which lock the association into another year (or more) if not terminated properly. An association should carefully consider whether or not the automatic renewal provision is appropriate for its community.
- Attorney Fees: Should the association end up in litigation over a contract, it will want to have a prevailing party attorney fees clause in the contract. This clause will entitle the prevailing party (hopefully the association) to recover its attorney fees from the losing party. Irrespective of the validity of a potential claim an association may have against a contractor, if there is no attorney fees provision, an association, depending on the amount in dispute, may spend more to litigate the dispute than it stands to recover. This dilemma may easily be avoided with an attorney fees provision in the contract.
- Governing Law and Venue: While this issue does not arise when dealing with individually owned local businesses, if an association finds itself dealing with a national company it should thoroughly review the governing law and venue provisions. Governing law deals with the body of law which governs the dispute, i.e. Colorado law. Venue deals with the location in which a lawsuit must be filed. Some contracts provide, for example, New York as the governing law and venue. If an association does not review and negotiate this provision, and if a dispute arises, an association could find itself faced with either litigating in New York or simply letting its claim go, neither of which is an ideal situation.
No matter how charming, knowledgeable, friendly, or upstanding a contractor may appear to be, an association should take the time to carefully review and negotiate any and all contracts it is contemplating executing.
If the association skips this initial step due to time constraints, a prior relationship with the contractor, to save money (if contemplating a legal review), or because the contractor is “good guy”, and the relationship deteriorates, the only protections an association will have will be found in the contract. If these protections are minimal or nonexistent, the association could stand to lose substantial sums of money, large amounts of time, and/or could sustain other damages for which it is not protected. Taking time on the front end of a deal, before executing any proposed contract, could save an association substantial time, money, and frustration on the back end.
For more information on contract review, please contact a HindmanSanchez attorney at 303.432.9999.