Contract Negotiation and Administration 101

By Jasmine F. Hale, Esq.

Awarding contracts is part of a board’s daily diet in terms of its duties. They can range from the standard approval of yet another plumbing repair bid for $700 in an owner’s unit to complex multi-phase post-construction defect agreements spanning years, millions of dollars, and everything in between. This article covers best practices, important provisions, and tips for managers to navigate the sometimes unexpectedly choppy waters associated with contracts.

Contracting Best Practices

I conduct a fair amount of board training orientations (upwards of 50 a year.) In these meetings, when the discussion turns to contract best practices, I explain that boards should always have the agreement –regardless of monetary size – reviewed by legal counsel. Following gasps, I then explain that I’m not saying it to drum up business! A tenet of contract law is that the parties are bound by the four corners of what is (and is not) stated in the agreement.

Of course, both parties at the start of a contractual relationship assume it will all turn out well, and most of the time, it does… until it doesn’t. I have seen more negative issues from the simple $700 plumbing bid that causes $150,000 of flooding damage to several units than I have from a million-dollar asphalt contract. Boards often mistakenly think that the dollar value of the agreement represents the association’s risk. The risk of the agreement is the amount of damage the contractor’s work can cause that the association may have to pay for.

I also recommend managers run the agreement’s insurance provisions by the association’s insurance broker and insist on receipt of insurance certificates and additional insured endorsements prior to commencing the relationship. An agreement that requires the vendor to have general liability insurance but doesn’t ensure the policy covers claims arising from a common interest development or name the association as an additional insured is of little benefit if a claim arises but isn’t covered. Contractors that have the right amounts and types of insurance are more likely to cover a claim and its resultant damages.

Another best practice pertains to the vendor that performs frequent services (typically small repairs, plumbing, etc.) based on a two-page “bid” that includes a scope of work and not much else. In these cases, the association should insist on a master “shell” agreement that includes important provisions (more on those below) and integrates the ongoing proposals into the master agreement. If a board signs a bid that either does not include indemnification, insurance, and important terms or, worse, has an absurdly low liability limit, they may find that they are footing the bill for losses that should have been borne by the vendor.

Two of the most essential terms of an agreement go hand in hand: the vendor’s insurance and indemnification obligations. In addition to the above recommendations concerning insurance, I also recommend most vendor agreements include the contractor’s unilateral duty to indemnify, defend, and hold the association harmless. Indemnification is a legal concept where Party A protects Party B from costs and claims that arise due to Party A’s actions, which is partly why having the right insurance requirements is so critical. Except in limited circumstances, such as management or agent agreements, associations should not indemnify the vendor.

Lastly are “boilerplate” provisions that, while not sexy, surprise me when I see them missing from agreements. Boilerplate provisions, typically found at the end of agreements, include topics such as waivers (whether a party’s prior failure to insist on compliance excuses a future failure – unless you have the provision, there’s an argument you have waived enforcement), assignment (whether a party can assign their rights to another party regardless of whether the other party wants it or not), integration (whether all those glowing promises made during the sales presentation are included), and so on. Boilerplate provisions are often not needed… until they are. If the agreement does not have them, it can impact rights, defenses, and options when things go sideways.

Best Practices Checklist

So, what is a manager to do? The reality is that many boards, shortsighted though it may be, will not authorize the expense of having legal counsel review their agreements. The following are not intended to replace the value legal counsel’s review can bring to an agreement but can at least assist a community manager to help ensure the contractual relationship is a bit more level between the parties:

• Make sure the association’s full legal name – not management’s – is listed as the party to the agreement.

• Have the association’s insurance broker review the agreement for amounts and types.

• Insurance provisions should require the policy to cover claims arising from a common interest development and name the association as an additional insured. Verify this by requiring an insurance certificate and additional insured endorsement from the vendor’s carrier.

• Remove provisions that cap the contractor’s liability exposure to the value of the contract or other artificially low amounts. If that is not possible, tie the liability limitation to the amount of insurance coverage carried by the contractor.

• Make sure boards review apples-to-apples bids, which requires clear and consistent scopes of work.

• Beware of terms (i.e., duration) that automatically renew. After an initial term, the agreement should allow either party the right to terminate the agreement for any reason.

• Review the association’s bylaws to confirm the board has the authority to approve the agreement. Bylaws often place limitations on a board’s ability to enter into agreements.

Jasmine Hale, Esq., is a community association law attorney with Berding & Weil, LLP’s Walnut Creek office. She has 16 years of experience.