Murphy’s Law says, “Whatever can go wrong, will,” and as we all know, stuff happens. When it does, no matter what the specifics of a situation might be, we generally don’t want to end up in court; it’s time consuming, expensive, and has a way of leading to a lot of acrimony and bad feelings on both sides of a given dispute.
So, what do we do when our community association or HOA board is faced with a conflict with a contractor or other vendor and we don’t want to have our day in court? According to Andrew Batshaw, executive director of the high-rise division of national community management firm FirstService Residential, the most important thing a manager can do is “Make sure that there’s a clear set of expectations prior to work beginning.”
“A lot of times when there’s a dispute between a vendor and a board it’s because the expectation level wasn’t clearly set in the beginning,” Batshaw explains. “Expectations can be properly set by doing a defined contract containing a strong RFP process, and making sure that all parties come together for a pre-construction meeting. It’s about having an understanding, setting those expectations before the work begins, so that everyone is on the same page and there is clarity as to what needs to be done. That resolves a lot of issues that can occur at the back end.”
When it comes to keeping any given project on track – and intervening in the event there is a problem – the managing agent is the first line of defense. “When things do go wrong,” says Batshaw, “addressing those things at the time they happen, rather than waiting for a project to finish, is the way to proceed. If you find that a vendor is supposed to provide material ‘A’, but instead provides ‘B’, don’t wait till they’re done with the work to point it out. Make sure you address the discrepancy tight off the bat. For community managers, that means contractors won’t always do what you expect, but rather what you inspect. The association manager needs to get out of the office and inspect what’s going on, even if they’re using a project manager. Get out there and see what work has been done. Being proactive is important. Deal with problems in the moment.”
The flip side of boards and managers not being engaged and present during a project is an administrative team that micromanages – and that can cause a whole different set of problems. If a detached, uninvolved board or manager is bad, one that hovers and is constantly meddling in every tiny aspect of a construction or renovation project may be worse. The former may overlook important issues, but the latter will likely cause a great deal of bad blood and acrimony with any vendor or contractor who crosses their threshold. “There has to be a level of reasonableness,” Batshaw advises. “When you lose that reasonableness, that’s when things can get out of control very quickly, and you wind up in costly litigation. The only people who win in court are attorneys.”
When the Lawyers Arrive
What happens when the lawyers do arrive? Much depends on the contract you signed with the contractor. John Randy Sawyer, an attorney specializing in association law with Stark & Stark, a law firm that has offices in New Jersey, New York, and Pennsylvania, explains that one approach to avoiding having to appear before a judge is alternative dispute resolution, or ADR. “If you don’t have it written into your contract, ADR is basically a voluntary procedure,” he says. “If you get to the point where a project with a contractor goes south and the board didn’t put a contract in place with some protections and some ADR requirements, it’s tough because at that point the contractor would have to agree to ADR voluntarily.” At that point in a job, ADR might not be in his or her interest. In some cases, if the conflict is very involved, it may even pay for him or her to simply walk off the job.
“The ADR process does have some costs attached to it,” cautions Sawyer. “It may not pay for the contractor. If he says no, you’ve got a problem. But, if you owe the contractor money which you’re withholding, perhaps under a retainage provided in the contract that gives you a little leverage to get the contractor to agree to the ADR process which wasn’t contractually required. [For that reason], you should always have it in your contract.”
Interestingly, most contractors want to include ADR in their contracts. It’s even in the standard American Institute of Architects (AIA) form that many use, though that form naturally favors architects and others who use it. The main reason they want it is that it protects their liability coverage and premiums. In New Jersey, for instance, ADR is mandated for disputes between community organizations (including HOAs and community associations) and their residents, but not for disputes between associations and vendors.
What Should a Contract Cover?
Batshaw includes the following clauses and items as critical to a good contract. “Any contract should have the manufacturer’s name and the model number for any equipment (say a boiler), any purchases, a list of equipment and materials, and an insurance clause showing that the vendor has adequate coverage. For larger projects, the association should consider a bond. The other very important clause is what’s called a retainage clause. (Retainage is a portion of the agreed-upon contract price deliberately withheld until the work is substantially complete. It assures that contractor will satisfy his/her obligations and complete the project to spec. -Ed.)You want at least 10 percent retainage. It is very important to have progress payments, especially on larger projects. Also, a third-party owner’s advocate should be engaged in the process, like a project manager to inspect the work and approve the draws.”
Sawyer concurs. “At a minimum I want an AIA contract as a starting point, though there are some shorter ones that will work too. I try to get those protections; retainage, phased payments, third-party inspections. Contractors must agree to address any deficiencies found before receiving their payment. If you have that process [in place], you protect yourself.”
Alternative Dispute Resolution
As mentioned above, if problems can’t be worked out on a friendly, direct basis, alternative dispute resolution, commonly known as ADR, is often a viable alternative to the expense and acrimony of litigation. “The ADR process is intended to avoid the cost of litigation,” says Sawyer. “And while there is some cost, it is still cheaper – usually less than 10 percent of the cost of a lawsuit.”
The ADR process isn’t identical across every case, but it generally works as follows: Arbitration is conducted by one or more neutral third parties (the arbitrators) and is similar to a court procedure in that the parties present evidence and provide testimony to the arbitrator(s), just as they would in a trial. While arbitration may be non-binding, it is more often a legally binding process in which the arbitrators’ conclusion is final. Alternatively, mediation is a non-binding, less formal process. Mediation is generally conducted with a single mediator who does not judge the case but instead helps to facilitate discussion between the disagreeing parties, and eventual resolution of the dispute. The format also provides for much more limited discovery than a lawsuit, and there is not as much documentation introduced. Costs and timeline for dispute resolution are also very situation-specific. It all depends on the type of dispute, the amount of evidence/testimony, and the willingness of the parties to reach a resolution swiftly.
Both arbitration and mediation are effective alternatives to traditional litigation, although their effectiveness often depends on who the mediators are, and the spirit in which the disputing parties come to the table. “Some [mediators] are very talented – and sometimes it’s a waste of money,” says Sawyer, so like any professional your board or management seeks to hire, it’s important to do some due diligence, check references, and make sure the mediator/s you ultimately engage are thoroughly vetted for competence, experience, and credentials.
Batshaw cautions boards not to try to “do-it-yourself.” Both he and Sawyer report a large number of boards who are penny-wise and dollar foolish in their attempts to save money on legal fees. “The corporation or association counsel has a role right from the beginning of the ADR process by building it into the contract,” he says. “It’s important to consult the association’s or corporation’s attorney if you are going into mediation or arbitration as well. They have the experience of solving these issues and can help guide a board and management.”
Sawyer describes one situation that became a nightmare for a community association in Jersey City, New Jersey. “The property was a high-rise, a conversion of an old commercial building into condos. A problem was discovered with the concrete slab that was the floor of the terrace above another unit. It was in a state of imminent collapse. The consulting expert advised the people in the apartment to move out immediately as it was unsafe, but the board took a long time to move on the repairs.
“Eventually, an engineer came up with a plan,” Sawyer continues. They bid it out, the engineer reviewed the bids and negotiated and then picked a contractor. The association hired them. A few months passed and our firm received, as the building’s counsel, an email from the unit owners asking the status of the repairs. The contractor said he was awaiting permits. Months later they claimed the city lost their application.
“More than six months later, the contractor has disappeared. Jersey City says they’ve never heard of the contractor or the permit application. The condo association and the unit owners are very upset. We asked for the contract. They sent us the bid proposal which they signed, thinking it was a contract – which it wasn’t. There was no time of the essence clause, no date, no deadlines, no phasing. There was nothing to sue on. The end result was that even with threats, they were ignored. We advised them not to bother to sue, since they didn’t have a real contract.” That’s why counsel should be involved from the first step.
In the end, hopefully, smart planning and good business practices will win out, and litigation and ADR can be avoided. But in the meantime, condo association and HOA boards should protect themselves and that starts with the right contract, legal review and diligent management.