Jonathan Klein
There
are many things that make lawyers cringe, but there is one phrase that makes
them want to pull the covers over their heads: “After I signed the
contract….” That’s like saying, “After I
jumped
in the pond, I realized it was infested with snakes.” There’s not much a lawyer can do for you at
that point, except call an ambulance or an undertaker.
Poorly
drafted contracts, unlike snake bites, aren’t going to be fatal for a condominium
association, but they may contain conditions that could be expensive and harmful. That’s why the association’s lawyer should always
review contracts before you sign them.
(You knew I was going to say that!) It is also why I’m going to
concentrate here on the provisions boards either want to include or want to
avoid in construction contracts and contracts with their vendors.
But
first, this key question: Do you need a contract for small projects or services
that aren’t complicated and don’t involve much money. The answer (unsurprising from a lawyer) is
yes -- because even small projects can create huge liability risks, with the
potential for legal costs and adverse judgments that could far exceed the cost
of the work.
A
maintenance contract won’t have the same level of detail as a construction
contract, but their purpose is the same: To protect the association’s interests
and ensure recourse if the contractor doesn’t deliver the product, service or
performance the association expects and the contractor has agreed to
provide. It is better to have a
contract you don’t need than to need a contract you don’t have.
Contracts
differ in their complexity and their details, but all should deal in some way
with: Insurance, termination, and duration.
Insurance.
Contracts should require a service provider to
have the appropriate type and amount of insurance. In a construction contract, the coverage
should exceed the cost of the project. For most projects costing between
$200,000 and $1 million, this would mean a policy limit of $1 million per
incident and $2 million in aggregate. For larger projects, you would want an
“umbrella” providing excess coverage above the policy limit. You want the vendor to insure not against the
most likely risks but against the worst possible outcomes.
The
contract should also require the contractor to “indemnify” the association
against claims resulting from the project.
This invariably complicated language addresses whose insurer will pay
the litigation costs and damages if something goes wrong. To secure the broadest protection possible
for my clients, I prefer language requiring the contractor to defend and “hold
harmless” the association, the manager, and the trustees from any damages
arising from the project or any breach of the contract.
This
is a bit one-sided, and I will modify the language somewhat if contractors push
back on it. A contract is a negotiation, after all, and the goal is to find
language on which both parties agree.
I
also reject language that seeks to limit a vendor’s potential liability to a
set amount, or to the amount paid by the association under the contract. Under this language, an engineer’s liability
would be limited to his/her fee, even though a claim resulting from a flawed
study could be several times that amount.
In
addition to requiring service providers to have appropriate insurance, the
contract should require them to provide proof that they have the insurance
required. A certificate of insurance isn’t enough. It simply documents the type and amount of
insurance the contractor has. The
contract should require evidence that the service provider’s insurance policy
names the association as an “additional insured.” This endorsement provides, at least in
theory, that in the event of litigation, the provider’s insurer will cover the
association’s defense costs, potentially avoiding the need to tap the
association’s liability policy for that coverage.
Termination
Clauses. No one thinks about terminating a
contract the day they sign it – if you do, you probably should be having second
thoughts. But you can’t predict the
future. Good relationships can go south. Conditions, priorities and needs can
change. A termination clause protects both the association and the vendor from
the unexpected. In a vendor contract, I try to insert language specifying that
either party has the right to terminate “for cause or convenience” by giving 30
days’ notice. Associations don’t often exercise this option, but it provides an
exit for the association if the relationship is beyond saving, but there hasn’t
been a material breach by the vendor.
In
a construction contract, I will typically accept language requiring the
association to pay any costs the contractor has incurred for the project. But I will try to exclude the penalty some contractors
want to add for anticipated profits they lose as a result of the early
termination.
Duration. The
contract should state when the project or service begins and ends, which is usually
fairly straightforward. However, some vendor contracts contain self-renewal
provisions specifying that the contract will renew automatically unless the
association (or the vendor) gives notice of non-renewal before a specified date. These provisions are common in long-term
contracts, like those with laundry service providers, which typically extend
for five years or more.
Here’s
the problem: What are the odds that anyone will remember that a 10-year contract
beginning in January 2020 will renew automatically, and remember to provide the
non-renewal notice by October of 2030?
The manager may keep track, but managers change; so, do board members. And
if they miss this renewal notice date, odds are they will miss the next one,
too. That is why they call these clauses
“evergreen”- because they can lock associations forever into relationships with
vendors they may want to replace.
The
best way to deal with these provisions is to reject them, which I always try to
do. Alternatively, if the vendor insists
and the association likes the vendor, I want the vendor to provide written advance
notice of the renewal date, giving the association ample time to opt out before
the self-renewal provision is triggered.
A
‘right of first refusal’ isn’t exactly the same as ‘self-renewal’ but it has
the same undesirable “flypaper” effect – sticking the association with a vendor
it doesn’t want. Under the most common form of this provision, as
long as the current vendor matches a better price offered by another provider,
the association must renew the contract, even if the vendor has been providing
lousy service and the association has been counting the days until the current contract
ends. If I can’t eliminate this provision, I will try to modify the language to
specify that the association must “consider” the matching price but isn’t
required to accept it.
What
happens if a vendor the association likes insists on undesirable contract
language, and the choices are to accept that language or find another vendor? This is a business decision the board is free
to make as long as it understands and is willing to accept the risks involved.
Automatic
renewal and right of first refusal provisions are traps, and there is no easy
way to escape them. Associations will be
able to terminate the contract only if:
·
The
vendor commits a significant breach of its terms; or
·
The
vendor agrees to waive the ‘flypaper’ provisions, which most vendors either
will not do, or for which they will charge an exorbitant buy-out fee.
The
association can also break the contract and dare the vendor to sue, but many
vendors, especially those with in-house attorneys, will do just that. And vendors that sue will probably win. Even
if the dispute is eventually settled, the association will still incur
substantial litigation costs. Fly-paper provisions may be unpalatable to
associations, but they are usually enforceable.
Few things in life last forever.
A contract shouldn’t be one of them.
An
associate in the Braintree firm of Marcus Errico Emmer & Brooks, PC, Jonathan
has nearly 20 years of experience litigating business, construction, and
personal injury disputes for both plaintiffs and defendants in Massachusetts
State and Federal courts. He focuses his practice on advising clients on
construction related issues, drafting and negotiating construction contracts,
as well as handling a broad range of civil litigation matters. He can be contacted at jklein@meeb.com.
\
