Well, What Does the Contract Say?

Homeowners associations enter contracts many times each year.  Management agreements, landscape agreements, pool service agreements, attorney fee agreements and other contracts are frequently executed without much thought except as to the scope of work and the price.  Scope of work and the price, however, are only small parts of the overall picture.  The other terms of the contract, often presented in legal boilerplate, are just as important.  These overlooked terms may substantially impact the Association’s legal rights, impose hidden costs and fees, and even force the Association to indemnify contractors from their own negligence.

We often see two types of troublesome contracts.  First, there are short, vague contracts with few terms.  These contracts are sometimes offered by unsophisticated vendors, but are sometimes offered by sophisticated vendors for small projects or in situations where they have a strong relationship with the community or management company.  Although such contracts are unlikely to contain harmful, hidden provisions, vague contracts can be difficult to enforce.  If either side accuses the other of not performing an obligation that is not clearly stated in writing, a dispute can quickly degenerate into litigation.  If the contract is unclear, both sides will insist their interpretation is correct.

Arizona law does not favor court involvement in a contract dispute.  But vague or unclear contract terms usually end up before the courts.  In such disputes, judges typically imply a reasonable term.  This will often mean “splitting the baby” and leave both sides displeased.  Also, achieving this result makes it difficult for the association to argue it is the prevailing party and is entitled to fees.  Overly vague contracts can lead to the emotional escalation of otherwise minor disputes, they are costly to litigate, and it may be difficult for either party to recover attorneys’ fees.

At the opposite end of the spectrum, we see long and detailed contracts that were drafted by sophisticated contractors, often with their attorneys’ input.  These contracts are generally written to protect the party offering the contract.  The contracts sometimes impose harsh indemnity and insurance requirements, force disputes to be settled in a foreign jurisdiction or through an expensive alternative dispute resolution process, include hidden fees or charges, and even include punitive liquidated damages clauses.  Entering into such a contract without careful consideration can be devastating to an association.

Although associations often assume that contractors present their proposed contracts on a “take-it-or-leave-it” basis, the down economy has put pressure on vendors.   Hungry for business, vendors are more willing than ever to negotiate the terms of their contracts.  Even if the contractor will not budge from his standard agreement, associations should consider the totality of the contract and give meaning and value to every word.  It may not make sense to choose the low bidder if disputes must be settled through arbitration in Delaware under Michigan law.

It is always better to read and understand the entire agreement before signing it.  Too often, contracts go unread or are not understood until after one party has breached it.  If you have questions about interpreting or negotiating a contract, please contact Mark Holmgren or another attorney in the office.