Vendor Contracts That Protect You: An Attorney's Three Simple Steps

License and Bonded

Because unlicensed vendors rarely have bonding or workers' compensation insurance, they can pose a severe financial risk to co-ops and condos in the event of property damage or injury. A co-op or condo that hires an unlicensed or uninsured vendor also subjects itself to potential liability for unpaid wage or worker's compensation claims brought by the vendor's employees. Accordingly, as fiduciaries, the board must be diligent in ensuring that a potential vendor is properly licensed, bonded and insured.

"Independent Contractor" or "Employee"

The "independent contractor" versus the "employee" status of a vendor significantly impacts the board's obligations and liabilities in hiring the vendor. In addition to avoiding such issues as paying payroll taxes, workers' compensation insurance and IRS reporting requirements, when a vendor is deemed to be an independent contractor, the board better shields the co-op / condo from potential liability for damage caused by the vendor's negligence during the course of the vendor's work. You should thus include provisions in vendor contracts explicitly designating the vendor as an independent contractor. If, however, you do such things as train the vendor, establish the vendor's working hours or provide the vendor with tools and equipment, your risk a shift in the employment status of the vendor to an employee. Additional factors used to evaluate a vendor's employment status can be found in IRS Publication 1179.

Contracts Reviewed by Legal Counsel

A written vendor contract, reviewed by legal counsel, is a necessity in every circumstance — regardless of the size and scope of the service / job. This may seem like a "no-brainer" to some co-op / condo boards and managers, especially those badly burned by vendors in the past. However, we are constantly surprised on how the smallest jobs can turn into the largest problems where boards shortcut the process by not having a written vendor contract, or by executing a vendor contract without first having it reviewed by legal counsel.

In general, a written vendor contract is paramount to establishing:

(1) the scope of the work to be performed by the vendor

(2) the timeline with which the work must be performed

(3) the price to be paid for the work

(4) how the contract may be terminated and by whom

(5) the methods of payment

(6) how breaches of the contract will be addressed

(7) any warranties concerning the work to be performed

(8) the employment status of the vendor and

(9) indemnification of the cooperative / condominium associations for any damages brought about by the vendor during the course of work.

Situations where buildings suffer financial loss by not having vendor contracts reviewed by legal counsel are often the result of exculpatory clauses contained in the contracts (e.g. indemnification and/or "hold harmless" provisions) as well as the enforcement of exclusivity, term-renewal and arbitration provisions. Legal review of vendor contracts also ensures that the building's governing documents grant the board of directors the authority to enter into the desired contract and to bind the co-op / condo to its terms.
Despite how simple the process may seem to select and hire a vendor, boards and managers should recognize your potential exposure to liability should a problem arise. Appropriate steps must be taken to ensure that the interests of the co-op / condo and its members are protected.

At a minimum, these steps include (1) verification that vendors are properly licensed / bonded / insured, (2) obtaining written vendor contracts, and (3) ensuring that such contracts are reviewed by the board's legal counsel prior to execution.

Attorney Steven J. Tinnelly is a shareholder of Tinnelly Law Group. He serves on committees of local chapters of the Community Associations Institute (CAI) and is a member of the California Association of Community Managers (CACM). This was adapted from his article on his film's blog.

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