Every December thousands of Americans decide it is time to exercise … their civic duty to serve on their community association’s board of directors. No two are in the same condition to serve. Some are fiscally fit. Other’s strength has been developed by training in the corporate world. Still others owe their conditioning to having served on other volunteer boards of directors. Regardless of their level of fitness to serve, every member of a board has the same duties and responsibilities and a common goal – to make decisions that are in the best interest of the members of the association.
Boards of directors must rely on vendors to achieve their goals. Most require the board to sign a contract that creates a financial obligation which can be a load that is more than the association can bear. Most people have heard or learned first hand that health club contracts are weighted in the club’s favor and must be read from start to finish before signing. The same is true for contracts with community association vendors. Such contracts can be as one-sided as the worst health club contract. Surprisingly, most board members commit the association to the contact without reading it. They either rely on other members of the board or delegate their authority to sign contracts to a property manager. If the contractual relationship sours, the details of the contract cause many a board member to pull a muscle stretching to find a way out of the contract.
There are several types of contracts that communities encounter. The most common are: (1) service contracts such as community management, landscape, pool management, lifeguard and cable television; (2) project contracts such as roofing, paving, siding and painting; (3) settlement agreements and payment plans with past-due owners; (4) releases and indemnifications; and (5) facilities agreements.
We review, revise, and modify hundreds of these types of contracts every year. No board members will ever sign a contract that causes a strain on their association if they perform these basic exercises before signing.
1. Confirm Authority to Enter into the Contract. An association’s Bylaws or Articles of Incorporation typically include a provision that gives the Board of Directors an authority to exercise all of the powers and perform all of the duties and obligations necessary to govern the Association, including entering into contracts. Ensure your Board has this authority and then investigate if there are any limits to this authority. Determine if a membership vote is required. Also, check your Declaration and Bylaws to see if they require a contract to contain certain provisions.
2. Investigate the Contractor’s Background. If you are considering using a contractor that you are not familiar with, consider the following: (1) thoroughly investigate the contractor’s background; (2) ask the contractor to supply you with a list of recent references; (3) call the references; (4) go see other work that the contractor has done to satisfy yourself that the quality of the contractor’s work is up to your standards; and (5) contact the Better Business Bureau to see if anyone has made a formal complaint about the contractor’s work. If so, find out how the matter was resolved.
3. Have a Written Contract. This is essential. The terms of the contract will determine the rights and responsibilities of each party if a disagreement with the contractor develops. Having the terms of the contract not only in writing, but also as specific and detailed as possible, will protect the association or manager from (1) a contractor who cannot seem to remember all the details (2) from an unscrupulous contractor who is perfectly aware of the details but does not want to comply.
4. Name the Correct Parties. Failing to state the proper legal names of the parties to a contract can result in an innocent party being inadvertently drawn into a resulting lawsuit. All contracts involving your association should use the full proper legal name of the corporation to ensure that the directors, officers and members are best shielded from legal liability. If the president of an association is signing a contract on behalf of the corporation, the contract should state that the individual is signing as an officer of the corporation rather than as an individual. The word “President” should appear under the signature. Georgia case law has held the failure to show a title under a signature means the person is signing the contract in a personal capacity. If things go wrong with the contract, the contractor can go after the person that signed the contract, personally, not in his or her corporate capacity. Similarly, if a management company is signing a contract on behalf of the association, the contract should clearly state that the manager is entering into the contract as the agent for the association.
Additionally, if the contractor executes the contract in the name of a corporation the association should confirm with the Secretary of State Corporation’s Division that the corporation exists, is in good standing, and is properly named. Trying to locate and litigate against a phantom corporation is a headache you want to avoid.
5. Provide as Detailed a Scope of Work as Possible. All contracts should specify the scope of work to be performed, the time period in which the work is to be done, and a minimum level of performance. For example, compare the following two typical landscape contract provisions.
· “Contractor shall mow all grass areas as needed;” or
· “Contractor shall mow all grass areas as needed, but at least once a week during the months of May through September, and at least once every two weeks from October through April. All grass areas shall be maintained in a neat and attractive appearance.”
Which one would you want to enforce?
It often is helpful to confer with outside professionals to assist in preparing a scope of work. For example, obtain brochures or warranty information from a paint manufacturer to develop the appropriate rates of coverage you can expect from each gallon. For large or complicated projects, it is usually wise to pay an engineer or architect to develop the scope of work.
6. Agree to a Price for all of the Work. The price the association agrees to pay should include all of the work described in the scope of work. The contract should also include a provision that addresses contingencies that may occur and impact the price. For example, a landscape contract’s scope of work may include fertilization of shrubs, maintaining grassy areas and trimming shrubs and trees. But, what happens in the case of pests or tighter watering restrictions that affect the ability to maintain the grassy areas? Although a contract cannot reasonably address all the “what ifs” try to include a price for additional services that might be needed. If the parties cannot determine an exact price of an item when entering into the contract, the contract can provide that the price “will be determined” but will not exceed a certain amount.
7. Confirm the Contract Expressly Identified the Vendor as an Independent Contractor. In nearly all cases, a contract should specify the vendor is an independent contractor. Without that, the vendor or a person injured by the vendor can claim the vendor is an employee of the association and is the responsible party. It can also cause an association to respond to a workers’ compensation claim.
8. Require an Indemnification Provision. Every contractor should agree to indemnify or hold harmless the association and manager from all damages and claims that are caused by the contractor or contractor’s employees. For example, an owner gets sick because of excessive chemicals in the swimming pool and sues the association, if the contract provides that the pool service indemnify the association, the contractor will be responsible for paying the costs of defending the claim against the association and pay any judgment awarded against the association.
9. Be Wary of Having to Indemnify the Contractor. Contracts drafted by a contractor’s attorney often include a provision that requires the association or manager to indemnify the contractor. Most cable television contracts require its association or manager to indemnify the cable company for damage to the cable television equipment placed on the property. This indemnification provision would likely be so broad as to apply to damage done by tenants or others over which the association has no reasonable means of control. Contractors can purchase insurance to pay for damage to its equipment. Associations should rarely agree to indemnify a contractor. Almost every management company contract contains an indemnification provision. If you must accept an obligation to indemnify a management company, the association’s exposure should be limited to the amount of the association’s insurance that covers the claim that invokes the indemnification obligation.
10. Require That the Contractor Maintain Adequate Liability Insurance. Every contractor should be required under the contract to have liability insurance in effect to cover claims for personal injury and property damage. Liability insurance is the source of funds a contractor will use to pay the obligation to indemnify the association. The contractor should be required under the contract to furnish the association with a Certificate of Insurance showing insurance coverage is in place prior to the commencement of work. Additionally, the contract should require that the liability insurance policy be kept current during the entire term of the contract and name the association as an additional insured.
11. Require that the Contractor Carry Worker’s Compensation Insurance. In addition to liability insurance, a contract also should require that the contractor carry worker’s compensation insurance. When a contractor has obtained worker’s compensation insurance, it is often the best evidence that the person performing the work is an independent contractor and not the association’s or manager’s employee. This greatly reduces the risk of suits against the association and manager for on-the-job injuries or injury sustained by third parties.
12. Clearly State the Starting and Completion Dates. If it is important to complete a project by a specific date (such as painting the buildings before the cold winter weather starts), then the contract should clearly state the starting and completion dates and that time is of the essence. Fixed dates are generally accompanied by a provision that obligates a contractor to pay a daily monetary penalty. If a contract is a service contract, it is important that a beginning date, termination date, and any renewals of a contract are clearly stated. We recommend you not enter into a contract that automatically renews if not terminated by a certain date, as it is easy to miss the time frame to terminate.
13. Include a Termination Provision in the Contract that is Fair to Both Parties. Termination provisions are extremely important in contracts for both ongoing services and projects. Service contracts should be subject to termination without cause with a short notice period (such as 30 days). Without cause means the association or its manager does not need to state any reasons for ending the contract. With that provision, the contract can be terminated if the association finds a better price.
Project contracts also should have a termination provision that gives the association or its manager several options if the contractor is not performing properly. These options may include: the ability to withhold payment, fire the contractor, or complete the job with another contractor and then hold the first contractor liable for any increased costs.
14. Require that the Contractor Provide and Update a Schedule and Checklist of Work Performed. A contract should specify a schedule for the work to be performed. The contract also should require that the contractor furnish a checklist of the work actually performed each month, week or day, as appropriate. The use of a checklist gives the association board or its manager a greater ability to confirm that the work is being performed properly and on schedule. The checklist also helps reduce an association’s and its manager’s exposure to liability. For example, a swimming pool service contractor’s checklist becomes important to the association or its manager in the event that a swimmer is injured in or around the pool. The checklist may be the only evidence that the association or its manager has to show that it carried out its maintenance responsibility for the pool in a reasonable manner.
15. The Work Should Always be Performed Before Payments are Made. This is a simple, but often overlooked concept. The person who has the money controls the work. If the contractor has performed more work than money received, then the association or its manager has leverage over the contractor to ensure the quality of and completion of the work. Where possible, a contract should specify that the contractor will only be paid after the work has been completed, inspected and approved. Payments in advance of performance should be avoided when possible. Additionally, if a down payment is required in order for the contractor to acquire materials, the contract should list the materials that will be acquired. Once the work begins, the association should confirm the materials that were to be purchased with the advance payment have in fact been purchased. The contract should provide that title to the materials transfers to the association upon purchase.
16. Make Sure to Obtain Proper Lien Waivers from the Contractor. A contract should specifically require the contractor, at the time of final payment, to furnish an affidavit stating that all laborers, subcontractors and suppliers have been paid in full and relinquishing all lien rights against the association. This is known as a lien waiver. The failure to obtain a lien waiver gives a subcontractor or supplier of materials who has not been paid by the contractor the right to pursue a claim for payment directly against the association.
17. Get Warranties in Writing. Any warranty or guaranty provided by the contractor should be expressly stated in the contract or in a separate document that is issued at the completion of the work. Most contractors performing projects such as roofing or painting are willing to guaranty their work in some way, usually a year or two for faulty workmanship. Warranties should be against defects in both labor and materials. If there is a warranty for materials it should be from the manufacturer. If it was issued to the contractor, it should expressly provide that it can be transferred to the association upon completion of the work.
18. Consider the Need for a Performance Bond with a Large Contract. If the contract is for a large project that will take a considerable time to complete, you should consider requiring the contractor purchase a completion bond. A performance bond guarantees that funds will be available to complete a job if for some reason the contractor is unable to do so. A performance bond is expensive to obtain and significantly increases the cost of a contract.
19. Require Fidelity Bonds for Workers Handling Money. Any person handling funds of the association should be required to purchase a fidelity bond to cover any loss to the association in the event the person handling the funds misappropriates or absconds with the association’s money.
20. Follow the Contract When a Problem Develops. When a problem develops with the performance of a contract, there is sometimes a tendency to take quick action without considering the obligations that the contract might impose upon the parties. Avoid rash moves. The contract should be strictly followed to ensure that notice requirements and dispute resolution procedures are adhered to.
Open communications with the contractor are important. A good relationship with the contractor can help smooth over and resolve unexpected problems and delays.