vendor contract issues for boards of common interest developments

For General Reference Board Members California Common Interest Developments

Robert P. Hall, Esq. Senior Counsel

Vendor Contract Issues for Boards of Common Interest Developments Repair and Maintenance of Your Buildings

What “legal world” do board members live with?

Why should a Board consider hiring an aCorney for a

proposed vendor contract?

Should an ACorney assist review a vendor contract?

Even when a contractor performs “vendor” services, or simple maintenance work on a project, let alone major repair work, a number of events that may have significant impact on an associaKon can occur without an agreement prepared by associaKon counsel(see road map slides (end of presentaKon below)

And, consider next five “for board members” slides.

Preliminary ConsideraKons/Board’s “legal world”

What is a Fiduciary? !   A fiduciary is someone who stands in a special rela?onship of trust and confidence with respect to his or her obliga?ons to others. A fiduciary may manage the property or financial affairs of someone else, and is held to a high standard of care, similar to a trustee. Board members of boards of directors of common interest developments are fiduciaries.

Preliminary ConsideraKons/ Board’s “legal world”

What Does this Mean in PracKce? !   A fiduciary must:

!   Act in “Good Faith” !  “Good faith” is found when one acts with honesty and faithful discharge of one’s du?es and responsibili?es. Generally, this means, while using the “business judgment” standard, that a board member has acted in “good faith” if the board member has exercised good judgment, in delibera?on with other board members, and aMer consulta?on with the appropriate professionals on maNers concerning the business of the associa?on.


What Does this Mean in PracKce? !   A fiduciary must:

!   Put the interest of the associa?on above the board members’ own interests;

!   Exercise prudent business decisions on the management of the business of the associa?on.


Standard of Care !   Corpora?ons Code §7231 basically states that the Board members’ duty includes a duty of care to act in the good faith and in a manner that the director believes to be in the best interest of the associa?on.


“Safe Harbor” !   Combining these concepts as it applies to Board members who are considering a “nego?a?on” of a contract with an architect or contractors for a major re-‐roof repair (even when considering a guNer maintenance contract), most lawyers recommend the Board consider the advice of a qualified legal expert when the Associa?on’s building components require a repair or a new contract for a maintenance contractor. Otherwise, the board may not be comfortable that it is “safe” in the “harbor” it can create for itself by hiring and relying upon experts for these issues.

Maintenance Repair Contracts Overview

What is a Contract? !   The func?on of any contract is to record the terms of the agreement between the par?es. A vendor contract should define the scope and price of the product and services to be provided and, among other things, allocate the risk inherent to a vendor service between the owner and the contractor.

!   An important func?on of a wriNen contract is to give a level of predictability to the par?es when certain events arise. WriNen contracts help the par?es predict what consequences will flow from par?cular events. Stated another way, from a draMing perspec?ve, the par?es need to ask themselves “what if” a par?cular event occurs.


What is a Contract? !   Examples of “events” the Owner might consider to be covered in the agreement between owner and contractor? !   Vendor contractor cleaning guNers or performing landscape maintenance is injured while performing their work, or causes damage to adjoining areas not a part of contractor’s work;

!   Contractor runs into unknown condi?ons aMer the repair work starts and then contractor requests a change order;

!   Design or scope has problems the contractor brings up to owner; !  How does owner and or architect respond to these issues?

!   A contract can allocate the risks and/or respec?ve responsibili?es between each other when these events occur.

Note this list is not exhausKve, but rather, an illustraKon of events that can occur.


ClassificaKon of Contracts !   The classifica?on issue generally is applicable more with major repair contracts. However, the classifica?on of a contract arises in the vendor contract arena when the extent of a problem or service is not known and must be accounted for by the contractor on a ?me and materials basis.

CLASSIFICATION OF CONTRACTS

Contracts can be classified according to the method of pricing the work.

General approaches include: !   Lump sum contracts: !   Cost-‐plus contracts (or costs plus a fee);

!   Cost-‐plus a guaranteed maximum; and

!   Time/materials.


Lump Sum Contracts !   In a lump sum or fixed price contract, the contractor agrees to complete the contract as described in the contract documents for a fixed price;

!   A fixed price contract may also have a fixed price per unit for each of several items of work that must be done (e.g., for each cubic yard for fill); !   Although the price per unit (or yard) is fixed, the total cost of the job will depend on the amount of work (or yards-‐units that must be done);

!   The units can be spelled out in a document aNached to the contract or the bid customarily called a “schedule of values” or a “schedule of unit costs.”


Cost Plus Contract !   A cost plus contract provides that the contractor is reimbursed (usually on a monthly basis) by the owner for all cost of construc?on, plus an amount to compensate the contractor for its overhead and another amount to cons?tute its fee or profit. The fee may be a percentage of the contract price or a fixed amount paid in monthly increments. The advantage of a cost plus contract to the owner is that the owner pays only costs actually incurred in the prosecu?on of the work. One disadvantage to the owner is that neither the contractor nor subcontractors have a strong mo?ve to economize.


Cost plus a guaranteed maximum price: !   A contractor may be mo?vated to economize by a guaranteed maximum contract price so that the owner reimburses the contractor for costs, overhead and fees as in a cost plus contract, but stops paying when the guaranteed maximum contract price is reached.


Time and materials: !   Here a contractor is paid based on the exact amount of its ?me spent for each of its laborers, plus the costs of materials. The idea is that the labor price per hour counts for profit and overhead although this can be billed separately as a general condi?ons item.

!   Contractors usually will ask here in response to this type of pricing proposal that they be paid profit/overhead, but; !   A “T & M” arrangement can work related to pricing of change orders

Use of Standard Forms

One of the first issues the property owner will have to deal with will be the use of the contractor’s standard form as opposed to an agreement the owner could have prepared through its aCorney or thirdly, the use of industry forms. “Form” agreements contain “boilerplate,” and have “blanks” where project specific informaKon can be filled in later following negoKaKon. The “boilerplate” can be modified as well.


There is no easy answer that could be given or that could be applied across all vendor contracts or repair contracts on this issue.


One recommendaKon that most aCorneys represenKng associaKons provide is: If a contractor has its own form of agreement, and the form is not similar to industry forms, the owner would be well advised to retain an aCorney to review the document in order to tailor it to the parKcular scope of work and allocate risk properly.

General comment: Be careful with contractors who propose a simple one page agreement


Another approach would be to uKlize what are known as industry forms prepared by such organizaKons as

!   The American InsKtute of Architects(AIA), Associated General Contractors (AGC), or contracts from other industry organiza?ons.

A third approach is to retain an aCorney and uKlize his/her own form which would be negoKated with the contractor.

A fourth approach might be a combinaKon of two or more of the formats noted above. Stated another way, the owner could consider use of an industry form that is modified by the aCorney to fit the parKcular owner’s needs.


From the owner’s perspecKve, consideraKon should be given to the fact that the industry form agreements are prepared by architects and contractors.

The “industry” documents or what are known as standard form contracts, do have some advantages.

They are easier and cheaper to prepare than those that are dra[ed individually.


Standard form contracts are also easier to understand and interpret. They usually are wriCen in relaKvely simple and easily understood language. In addiKon, because they are used and interpreted repeatedly, their terms have over the years generally accepted and understood meanings to such readers as courts and aCorneys. Thus, it is generally much easier to read and analyze a standard form contract, even with an addendum or supplement, than a lengthy typewriCen contract specially prepared for a parKcular project.


The Owner should also consider many significant provisions in “industry forms” have most likely been interpreted by an appellate court in a reported decision.

!   This aNribute of a form agreement gives the owner a level of predictability that owners should strongly consider when an “industry form” agreement is under review by an owner as opposed to a “form” an aNorney proposes that no court has ever seen before in an appellate proceeding.

SecKon of a Contract

Contracts generally consist of several different parts commonly referred to by such names as “agreement,” “general condiKons,” “special condiKons,” “drawings,” and “specificaKons.”

SecKon of a Contract

The general condiKons are a printed standard form containing contract provisions of general applicaKon, usually of a legal nature.

The special condiKons are prepared specially for the project in quesKon.

!   Usually, the architect or design professional prepares the special provisions or condi?ons since they usually focus upon technical construc?on or design maNers.

!   The drawings and specifica?ons are usually prepared by the architect and are a separate contract document.

Significant Contract Issues

ParKes !   Make sure you have the correct party you are contrac?ng with who is also the party who is licensed. This is an owner due diligence issue;

!   An unlicensed contractor who performs work on your project may under certain circumstances, be considered an “employee” of the owner, with significant legal consequences.


DescripKon of the work !   Important to list this in a detailed fashion. Consider a performance criteria if applicable;

!   Consider mee?ng the contractor at the site to discuss the scope of work before entering into the agreement, and to ensure the contractor and owner understand the scope.

Contractors pre-‐job invesKgaKon !   Get the contractor to visit the site to become familiar with condi?ons that should be included in the bid.


Time for start and compleKon/monthly services !   Iden?fy when the contractor will perform its work if necessary, such as for instance dates when maintenance work will be done each month;

!   Who is going to regularly check the contractor’s work to insure comple?on? The contract can spell out a procedure the associa?on wants included ensuring contractor performance on a monthly basis before payment is required.


Delay !   Owner will aNempt to limit delays for such items as weather and or material problems outside of the control of the contractor and contractor will want extensions of contract ?me to account for these issues. Point is; contract clause should cover this issue.

Permits !   Contract should spell out who pays for permits and who is required to “pull them” or obtain them?


Requirements for payment of labor and material !   Must be specially nego?ated with HOAs who only meet once a month;

!   Consider use of joint checks to protect owner in case the vendor the HOA contracts with does not pay their subcontractors;

!   Who is going to check that work is done before an agreement for payment is made? A contract condi?on could be added here to protect associa?on !   Board commiNee or construc?on manager?


Contract requirements for payment of labor and material !   Include the requirement that at the ?me each applica?on for

payment is made during the progress of the job, mechanic’s lien releases are provided on statutory form for that por?on of the work associated with each payment applica?on.

!   Someone represen?ng the Owner (i.e., Board of Directors, Construc?on CommiNee, Construc?on Manager and/or aNorney) should be advised to track lien releases from those sub-‐contractors and suppliers who had provided the required 20-‐day preliminary no?ce. This is the only way the owner can make sure at the end of the job that all required lien releases from sub-‐contractors and material suppliers are provided.


Extra Work/Changes and DeleKons !   Contract clause should not allow contractor to perform extra work without owner’s wriNen authoriza?on in advance;

!   Allowances—Note: contractors use “allowances” to charge the owner for something the contractor is not willing to offer a fixed price on. Owners should carefully consider these before an agreement to same. On some projects allowances cannot be avoided;

!   Dele?ons/Modifica?ons-‐should not be agreed upon unless in wri?ng. If aNorney is hired, aNorney should review.


Insurance requirements !   Contract clause – requirement in the contract to provide no?fica?on to the owner when contractor’s insurance lapses or license status changes;

!   Owner should consider having its insurance broker review all insurance provisions;

!   Find out what type of insurance the contractor is offering-‐All risk insurance versus specific perils versus claims made.


Insurance requirements !   Who pays for deduc?bles? !   Cer?ficate of insurance provided to owner appears now to be a standard provision;

!   Owner should be made addi?onal insured on contractor policy – and on subcontractor’s policy-‐it appears in today’s marketplace that all these are standard requirements;

!   Insurance amount; !   Issue to consider: should it cover poten?al risks, or just the contract price?


Contract clauses dealing with correcKng defecKve work

!   Provisions should not only provide that the contractor warrants his work, but spells out what steps the contractor will take to deal with problems in his work as they arise.

!   Industry “form” contract language does not go far enough on this issue


Indemnity Given associa?on budget limita?ons, owner should obtain contract requirement that shiMs responsibility for claims made arising from the contractors work to the contractor when the claim is submiNed to the owner

ArbitraKon !   Pros and cons of arbitra?on versus li?ga?on/aNorney should explain/contract clause iden?fies owner choice


ACorney’s fees should be included in every contract.

Lien Issues that should be spelled out in the contract !   Require the contractor to use “best efforts” to prevent “others” from filing of any liens;

!   Contract provision allowing owner to withhold payment in the amount of liens actually recorded;

!   Contract provision allowing use of two-‐party checks when lien issues arise;

!   Contract provision requiring lien releases at progress and final payment points before owner’s payment obliga?ons arise.


TerminaKon !   Terminate for convenience

!   Meaning: no reason needed;

!   How is contractor compensa?on measured – owner should ?e this down;

!   Terminate for default !   Reasons: Non-‐performance – Bankruptcy – No?ce

!  Owner’s rights

!   Related issues: liquidated damages – cost to cure.


TerminaKon !   The owner should ask its aNorney to nego?ate with the contractor provisions which would allow the owner to terminate the contract without cause. Many associa?ons would like to have flexibility in being able to “get out of” the contract for whatever reason.

DescripKon of scope of work

CommunicaKon protocol & compleKon dates

Contract sum & payment terms

Twists and turns on “road” to maintenance or repair “success”

Contract documents

Right to final payment

Umbrella “agreement binding all other contract documents (general condiKons and plans)

General provisions InstrucKons to bidders


Name of contractor

Owner

AdmnistraKon of the contract

ConstrucKon by Owner or separate contractors


Contractor Subcontractors

Changes in the work

Payments and compleKon

ProtecKon of persons & property


Time

Insurance and bonds

Miscellaneous provisions

TerminaKon or suspension of the contract


Uncovering and correcKon of work

For General Reference Only Board Members

Robert P. Hall, Esq. Senior Counsel

Vendor Contract Issues for Boards of Common Interest Developments Repair and Maintenance of Your Buildings

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vendor contract issues for boards of common interest developments

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