It is almost summer and contracts are in the air. Some associations may be considering a new management company while others may be considering embarking on a construction/restoration project. Others may be considering alternative landscapers while a select few may be getting a head start on hurricane preparedness contracts. Regardless of the type of contract, it is strongly recommended that every contract (large or small) be reviewed by the association’s counsel prior to the association executing same. Why is that important? Simply put, many of the contracts presented to associations are one-sided giving all the benefits and the protections to the vendor, leaving the association potentially exposed. The below is meant to be an introduction only and does not encompass all the potential contractual conundrums that an association may encounter.
First, any time goods or services are being offered in exchange for something of value, it is strongly recommended that a contract be in place. But what are some of the essential terms of that contract? The most obvious is compensation. It is important that compensation (like all terms in the contract) be clear and unambiguous.
Many times, compensation is based upon the scope of work. Thus, the scope of work also needs to be clear. This is not to say that the scope of work cannot later be enlarged (that’s what addendums and change orders are for) but each side needs to clearly understand their responsibilities.
Duration is also important. How long will the project take? What is the term of the contract? If a multi-year contract, does the compensation increase in subsequent years and if so, how much? What if either party wants to cancel before the end date of the contract? Each of these items needs to be clear and unambiguous.
While the examples above are fairly obvious, many contracts contain other provisions that require additional review. For example, what about indemnification? Indemnification shifts the financial risk of harm or loss from one party to another. In some instances, vendor contracts contain indemnification language that is structured in such a way that the association agrees to indemnify the vendor but there is no obligation for the vendor to indemnify the association. Some contracts even (attempt to) require the association to indemnify the vendor for the vendor’s own negligence. Other provisions that generally go along with indemnification are hold harmless and duty to defend.
The number of factors involved in ensuring that a contract is fair to both parties are numerous. Some vendors will allow their standard contracts to be modified while others may not. Whether to enter into a contract with the vendor is a business decision for the Board. Again, the above and below items are not meant to be an exhaustive list, but are mere suggestions of some items that associations should be aware of and should discuss with their counsel when reviewing contracts:
- Who – who is responsible for completing the work? Are subcontractors allowed? Is the entity/person licensed/bonded/insured? Will the association be named as an additional insured?
- What – what is being contracted for? What is the scope of work? What are the respective parties’ responsibilities? What happens if a party does not meet their objective?
- When – when is the project supposed to begin? When is the project supposed to end? What is the duration of the contract? Is there an automatic renewal clause?
- Default – what are the terms of default? Are there prevailing party attorneys’ fees if there is a default?
- Termination – can the contract be terminated before it is completed? If so, on what terms? If there is a breach of the contract, must the vendor be given an opportunity to cure before the contract may be terminated or can termination be “with or without” cause?
- Indemnification – is it reciprocal?
Having the contract reviewed by legal counsel prior to execution can save associations time, money and frustration in those instances where a project or agreement does not go as planned.
