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Vendor Contract Issues for Boards of Common Interest Developments


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Why should a Board consider hiring an attorney for a proposed 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 association can occur without an agreement prepared by association counsel(see road map slides.

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Vendor Contract Issues for Boards of Common Interest Developments

  1. 1. 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
  2. 2. What  “legal  world”  do  board  members  live  with?   Why  should  a  Board  consider   hiring  an  aCorney  for  a   proposed  vendor  contract?  
  3. 3. 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.  
  4. 4. 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.  
  5. 5. 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.  
  6. 6. Preliminary  ConsideraKons/  Board’s  “legal  world”   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.    
  7. 7. Preliminary  ConsideraKons/  Board’s  “legal  world”   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.      
  8. 8. Preliminary  ConsideraKons/  Board’s  “legal  world”   “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.  
  9. 9. 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.  
  10. 10. Maintenance  Repair  Contracts  Overview   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.  
  11. 11. Maintenance  Repair  Contracts  Overview   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.  
  12. 12. 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.  
  13. 13. CLASSIFICATION  OF  CONTRACTS   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.”  
  14. 14. CLASSIFICATION  OF  CONTRACTS   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.  
  15. 15. CLASSIFICATION  OF  CONTRACTS   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.    
  16. 16. CLASSIFICATION  OF  CONTRACTS   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  
  17. 17. 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.  
  18. 18. Use  of  Standard  Forms   There  is  no  easy  answer  that  could  be  given  or  that   could  be  applied  across  all  vendor  contracts  or  repair   contracts  on  this  issue.  
  19. 19. Use  of  Standard  Forms   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  
  20. 20. Use  of  Standard  Forms   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.  
  21. 21. Use  of  Standard  Forms   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.      
  22. 22. Use  of  Standard  Forms   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.  
  23. 23. Use  of  Standard  Forms   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.  
  24. 24. 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.”  
  25. 25. 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.      
  26. 26. 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.  
  27. 27. Significant  Contract  Issues   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.    
  28. 28. Significant  Contract  Issues   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.  
  29. 29. Significant  Contract  Issues   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?  
  30. 30. Significant  Contract  Issues   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?  
  31. 31. Significant  Contract  Issues   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.  
  32. 32. Significant  Contract  Issues   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.  
  33. 33. Significant  Contract  Issues   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.  
  34. 34. Significant  Contract  Issues   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?  
  35. 35. Significant  Contract  Issues   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  
  36. 36. Significant  Contract  Issues   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  
  37. 37. Significant  Contract  Issues   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.  
  38. 38. Significant  Contract  Issues   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.  
  39. 39. Significant  Contract  Issues   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.    
  40. 40. 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  
  41. 41. Right  to  final  payment   Umbrella  “agreement  binding   all  other  contract  documents   (general  condiKons  and  plans)   General  provisions   InstrucKons  to  bidders   Twists  and  turns  on  “road”  to  maintenance  or  repair  “success”   Name  of  contractor  
  42. 42. Owner   AdmnistraKon  of  the  contract   ConstrucKon  by  Owner  or   separate  contractors   Twists  and  turns  on  “road”  to  maintenance  or  repair  “success”   Contractor   Subcontractors  
  43. 43. Changes  in  the  work   Payments  and  compleKon   ProtecKon  of  persons  &   property   Twists  and  turns  on  “road”  to  maintenance  or  repair  “success”   Time  
  44. 44. Insurance  and  bonds   Miscellaneous  provisions   TerminaKon  or  suspension   of  the  contract   Twists  and  turns  on  “road”  to  maintenance  or  repair  “success”   Uncovering  and   correcKon  of  work  
  45. 45. 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 The information contained herein is not intended to and does not constitute legal advice, create any attorney-client relationship with anyone viewing it, or serve as a substitute for legal advice to a client by a lawyer on a particular matter. Accordingly, the general information contained herein should be considered an advertisement. You should not act or rely on any information contained herein without seeking the advice of a competent attorney licensed in your jurisdiction for your particular problem. Any information contained herein concerning the law firm and its lawyers, as well as any past cases, is also intended to provide only general information about the firm and its attorneys. Nothing herein is or should be construed as a guarantee, warranty or prediction regarding the result of any representation. Nor does any endorsement or testimonial contained herein constitute, nor should it be construed as, a guarantee, warranty, or prediction regarding the outcome of your legal matter or any particular matter.