“Vendor Contracts, Decoded” – Attorney John Bickley reviews the essential components of a vendor contract, what predatory clauses to look out for, and why it’s so important for condominium, townhome and homeowner associations to seek legal counsel before signing on the dotted line. (16 min).
The KSN Podcast examines various aspects of association law, landlord/tenant issues, property tax appeals, and more. In each episode, KSN attorneys share their experience and knowledge as they discuss legal updates, best practices, industry trends, and more. KSN Podcast episodes are available at www.ksnlaw.com/podcast.
Since 1983, KSN has been a legal resource for condominium, homeowner, and townhome associations. Additionally, we represent clients in real estate transactions, collections, landlord/tenant issues, and property tax appeals. We represent thousands of clients and community associations throughout the US with offices in several states including Florida, Illinois, Indiana, and Wisconsin.
For more info about our law firm and legal services, please visit www.ksnlaw.com
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Since 1983, KSN has been a legal resource for condominium, homeowner, and townhome associations. Additionally, we represent clients in real estate transactions, collections, landlord/tenant issues, and property tax appeals. We represent thousands of clients and community associations throughout the US with offices in several states including Florida, Illinois, Indiana, and Wisconsin.
For more info about our law firm and legal services, please visit www.ksnlaw.com.
Episode Transcription
Kathrine: You’re listening to the KSN podcast and today we’re talking about the essentials that associations should look for in vendor contracts. Welcome to the KSN podcast where you’ll hear from Kovitz Shifrin Nesbit attorneys as they share their experience and insight on legal issues surrounding community associations, collections, property tax appeals, and landlord tenant law. I’m Katherine and today we’re joined by KSN attorney John Bickley. John is a highly accomplished attorney practicing condominium, townhome, and homeowner association law in Chicago and the surrounding suburb since 1978. That’s just over 40 years. He’s a principal at Kovitz Shifrin Nesbit, former Illinois assistant attorney general and former chief defense counsel and chief trial counsel for the US Marine Corps. Hi, John, welcome to the podcast.
John: Hi, it’s great to be here.
Kathrine: Our topic today is vendor contracts and the essentials these contracts should contain to keep condominium, townhome and homeowner associations and their board members out of trouble and hopefully out of court. John, you’ve been advising associations for years. Can you even count the number of vendor contracts that come across your desk?
John: I’m sure it’s been literally thousands of them.
Kathrine: So what is the big concern about vendor contracts and associations?
John: Well, there are many concerns. For instance, all too often associations enter into contracts that are no more than a one or two page document. The deficiencies in these contracts often only come to light when there is a problem.
Kathrine: So, John, do you have a solution to that problem?
John: Yes. To start with, I would say that virtually all vendor contracts presented to associations are skewed in favor of the vendor and against the association. Associations can be proactive in addressing basic issues with vendor contracts. The first step is to actually verify that the contractor is duly licensed and authorized to do business. It is amazing how often we find that the vendor has let their status as a corporation dissolve, for instance. Board members can look up the business and corporation status with the state. It’s a fairly simple check. Of course we do it as a matter of routine, but I will say that the most straightforward solution is to work with legal counsel to review any agreements prior to the execution.
Kathrine: Let’s talk about those agreements, John, what should an association be looking for in a contract that’s more than a simple proposal?
John: I would say that the essentials fall into five general categories. The basics of the work is one of them. You need to name the parties to the contract. Frequently, we’ll see a management company, for instance, be named as the customer. Well, the management company may be an agent for the association, but they’re certainly not the customer. You need to describe the work to be done in detail. This is particularly important because disputes frequently come up as to whether a particular item of work is part of the contract amount or whether the vendor is entitled to get paid extra for it. If it’s not described specifically in the contract, problems arise and it’s very important to establish the timeline for the work to be done. You want to establish when the work is going to start and when the work is going to finish. All too often, a vendor will discover that he has an opportunity for a more productive or profitable project someplace and we just want to take a break from your work to go work on that other thing, and then come back later and this can be repeated.
So you need to have a deadline and potentially liquidated damages if the vendor breaches and goes past the deadline. Now, depending on the scope of the work, your contractor may be getting issues of code compliance and building permits. Obviously the contract should require that all work is performed in accordance with applicable codes, regulations, and safe work practices. It should also describe who’s responsible for obtaining and paying for necessary permits. Typically, I find that the association will be responsible for paying for the permits, but the board members or even the property manager doesn’t have the necessary expertise to be able to go pull the permits themselves. So this is usually best directed as one of the duties of the vendor.
Kathrine: So John let’s get into payment. What types of provision should be allowed for payment?
John: Well, the contract should describe if there’s a down payment, if there are progress payments, who does the inspection as to whether or not the vendor is entitled to receive a progress payment and the final payment. What’s very important is the contractor must furnish a sworn statement identifying the subcontractors and the material suppliers up front. In Illinois, we have a mechanics lien statute, essentially the 32nd version is that if you pay the contractor and the contractor doesn’t pay his subcontractors and the material suppliers, these entities have the ability to lien the association. In a condominium, each and every unit in the association will be liened according to its own percentage. So obviously it’s in the best interest of the association that we know who the subcontractors are and who the material suppliers are. So that every time you issue a check to that vendor, you do so only contemporaneously with the vendor providing you a waiver of lien from these individuals to prevent the ultimate lien from happening. It’s important that the waivers be exchanged at the same time as payment because waivers provided in anticipation of payments, say in advance or conditional lien are not acceptable. They fail for lack of consideration.
Kathrine: All right, well, John and I are going to take a quick break, but when we get back, we’ll get into more aspects that you should consider before signing a vendor contract.
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Kathrine: And we’re back. I’m here with attorney John Bickley and we’re talking about the essentials of a vendor contract. So John, we talked a lot about the basics in a contract and clauses that help when things are going smoothly, but I assume there are also clauses required for less than ideal situations.
John: Yes. The last two categories are made up of provisions covering things that could go wrong. You definitely want to outline clauses to address how a contract can be changed or terminated. Amendments can happen all the time, stuff comes up and the contract should describe how it can be amended, preferably in writing executed by both parties. In fact, there’s laws out there, case decisions which address what happens if one party tries to retain the ability to amend the contract contrary to the desires of the other side, it usually doesn’t work. A termination provision should be included that provides for termination with clause, if they notice an opportunity to cure or upon agreement of the parties upfront, termination without cause. Finally, you get to the real make or break issues in a contract; insurance, warranty and indemnification. The contractor and subcontractors must demonstrate sufficient insurance coverage prior to commencing work under the contract. This is general liability insurance, as well as workers compensation insurance. The details of the warranty should cover workmanship, materials, starting length of the warranty and the delivery of the warranties to the association. You’ll find that many contracts contain a provision that says that the warranty does not come into play if the contractor hasn’t been paid in full.
So obviously these things have to be balanced during the negotiation part of the contract. The contract should outline the indemnifications of the contractor from the association, if any, and or management, as well as the association’s indemnification of the contractor. Governing law is also increasingly challenging. Say, for example, your contractor is incorporated in Wisconsin, but doing business in Northern Illinois. Under this circumstance, it’s important to indicate which law will apply in the event of a dispute. And in fact, it gets particularly complicated in conflicts of law situations where Illinois or Wisconsin might have different rules or laws as to how you determine which laws apply. Very, very complicated stuff. You absolutely need to bring in your attorney. It’s also good practice to include language for the recovery of attorney’s fees by the prevailing party. If either party institutes legal action, or even if it’s necessary to consult with an attorney to protect rights. I find that virtually all of the vendors contracts that are initially presented to the association have a provision that says that in the event of a dispute, the vendor will be entitled to recover his attorney’s fees, but there’s no provision for the association being able to recover its attorney’s fees should it prevail in that dispute. So the best approach is to level the playing field and allow each party to the extent that they are the prevailing party to be entitled to the recovery of their attorney’s fees.
Kathrine: All right, John, so we’ve talked about the types of clauses that should be included. Are there items that shouldn’t be included in a contract?
John: I see a lot of predatory clauses. We call them weasel clauses, if you will. They fall into a couple of categories such as automatic renewals, hidden fees, unfair dispute clauses. So for instance, let me describe the automatic renewals. Many, many vendors who do business with say condominium associations insert these automatic renewal clauses. An example of one would be that the term of the contractors for 10 years, it automatically renews at the option of the vendor for another 10 year term. And then after that, it automatically renews for another 10 terms unless either the vendor or the association express the intent to terminate the contract. But this has to be done in a very narrow window frequently, no less than 365 days, no more than 410 days before the automatic renewal. Well, in the real world of condominium law, you’re now 30 years into it, the original board members who executed this contract and quite frankly, might just be the only ones who know that it exists are gone and the vendor counts on the fact that someone’s going to drop the ball and not send that certified letter, no less than 365 nor more than 410 days so they get an extra 10 years. So that is a predatory clause.
Now, Illinois law addresses these issues. We have an automatic contract renewal act, which if your contract was entered into after January of 2005, two things have to occur in order for the contract renewal to be upheld. Number one, the contract renewal provision must be conspicuous, typically bold print, underlined, italics, something of that effect. But most importantly, the vendor is required 60 days before this window, decades from now, they have to send a certified letter to the association advising them that this thing is about to automatically renew and this is what you have to do to stop it. Now, the advantage of this contract renewal clause is that if the contract was entered into after January of 2005, the failure to do either of these things make it conspicuous or send the reminder, constitutes a deceptive practice under the Illinois consumer fraud and deceptive business practice act and potential double damages and attorney’s fees may also be awarded. And there is a good argument to provide that all monies paid to the vendor as a result of the automatic renewal are recoverable by the association. So it’s important to know the existence of this when you get into a dispute regarding these types of issues. Once again, you need to contact your attorney because it’s very, very complex.
Kathrine: All right, John, you’ve touched on quite a range of items and given us a lot to think about. What do you recommend for association board members or property managers who are looking for more guidance on vendor contracts?
John: Associations or more importantly the association’s attorney must be provided with every contract. Don’t leave anything to chance. It’s Murphy’s law. If it could happen, your contract should have a provision to address it. An experienced attorney can help an association review the contract before execution and help an association get out of unpleasant contracts. While every contract is different and therefore needs specific review attorneys are constantly reviewing them. Patterns emerge, and we can help even in tough situations.
Kathrine: That was KSN principal attorney John Bickley. John has been practicing condominium, townhome and homeowner association law in Chicago and the surrounding suburbs for over 40 years. Kovitz Shifrin Nesbit is an experienced legal resource ready to provide you with quality advice and exceptional service. We look forward to demonstrating how we have earned the trust of thousands of clients over the past 35 years. If you’d like to reach John or any of KSN experienced attorneys, please call 855-537-0500. You can also visit ksnlaw.com and complete the contact form to send us a message. Thanks for listening.
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Please note the material contained on the KSN Podcast is for informational purposes only and does not constitute legal advice. No attorney-client relationship is established by your review or receipt of the information contained on the KSN Podcast. You should not act on the information discussed on the KSN Podcast without first obtaining legal advice from an attorney duly licensed to practice law in your State. While KSN has made every effort to include up-to-date information on The KSN podcast, the law can change quickly. Accordingly, please understand that information discussed on the podcast may not yet reflect the most recent legal developments. Material is not guaranteed to be correct, complete, or up to date. KSN reserves the right to revise or update the information and statements of law discussed on the podcast at any time, without notice, and disclaims any liability for your use of information or statements of law discussed on the podcast, or the performance of the podcast generally. The KSN Podcast may be considered advertising in some jurisdictions under applicable law/s and/or ethical rules/regulations. © 2020 Kovitz Shifrin Nesbit, A Professional Corporation.