Why association boards must read contracts — even the boilerplate

Question: A vendor to our homeowner association handed the board his contract, assuring, “It’s just a formality, everyone signs it.” As they have countless times before, the board directors sign it. Sometimes they pay the association attorney to read a contract, but he invariably says, “Sign it, it’s just boilerplate.” Eventually, the directors learn they should have negotiated better terms but by then it’s too late. What exactly does the term “boilerplate” mean?

Answer: Your association attorney should know better. Little in law is “just a formality,” not “everyone just signs it,” and there is no such thing as “just boilerplate.” Contracts are serious business.

In most contracts, paragraphs or clauses are either business terms or legal substance, though some are both. Business terms include who does what and when, payment specifics and penalties for not performing as required. Legal substance usually is relegated to the end of the contract, sometimes grouped under headings such as “General” or “Miscellaneous.” Dreary clusters of clauses interspersed throughout a contract that folks deride as “legalese” — there to keep lawyers happy — are typically referred to as “boilerplate.”

Contracts should always be scrutinized. In particular, carefully review a contract’s business terms, such as what the vendor is supposed to do, the price, payment and start and completion dates.

Even though the phrase “everyone signs it” is a big red flag, too few boards read, much less think carefully about, boilerplate language because it looks deceivingly similar to what’s in many other contracts they’ve seen or signed. Ponderous paragraphs looking all but identical to those in previous contracts, making it too boring to read, can also lull inattentive lawyers into treating boilerplate clauses far too casually.

Why is giving short shrift to boilerplate a huge mistake? Because many if not most disputes can turn on boilerplate issues. Increased costs of resolution and even success or failure in court, arbitration or mediation are often dictated by the exact meaning of specific boilerplate language: the “gotcha” breeding ground.

Signposts and/or head-notes indicating boilerplate language may or may not exist within the contract. Here are some fairly typical boilerplate examples:

•The “Notice” clause, which limits time to respond to an event or initiate action. Suppose your trash hauling payment is lost in the mail. Weeks pass until suddenly DumpsterCo faxes you a “Notice of Pending Service Cancellation” on Friday night of a long holiday weekend. Per DumpsterCo’s contract you have only three calendar days to pay, meaning that Tuesday is too late to pay. Had the boilerplate “Notice” provision stipulated “three business days,” or had you negotiated “14 days,” payment that next week would have resolved things. Instead the association may have to scramble for a new vendor or a new contract, possibly at higher cost, while the trash continues to build up.

•The “Integration” or “Entire Agreement” clause, which typically says, “This document constitutes the entire Agreement between the Parties; no oral statement or other document is part of or modifies this Agreement’s meaning and intentions.” In other words, you can’t later bring in emails, side agreements or oral assurances claiming they show what the contract “really” meant or intended. This clause can be critically important. For example, litigating over external evidence can be extraordinarily costly, prolong the dispute and yield an unpredictable outcome if the vendor is allowed to introduce questionable evidence.

•The “Forum” clause, which specifies the venue of any lawsuit, mediation or arbitration. If your association is, say, in Los Angeles, but a contract requires dispute resolution in San Diego, the inconvenience of appearing there for hearings is substantial. Obviously, venue in another state makes the burden even worse. This additional overhead leads to higher legal costs including court appearances, scheduling conflicts, no-show witnesses, difficult evidence production and potential loss of what might otherwise have been a successful case had the proceedings been local.

•The “Indemnification” clause, which specifies who, between the association and the contracted vendor, has to defend and pay in case of claims by third parties. Even if the vendor ultimately must pay damages and attorney fees, the question of who has to pay the lawyers during the case is important. A meticulous reading of the contract would reveal this issue as a possible item to negotiate.

Nothing prevents board directors from understanding the meaning of contracts, which are typically provided by vendors such as management companies and plumbers. Each phrase or paragraph was originally included for a reason and has a potential effect providing instructions and answers for future issues, situations or questions. As to each contract topic, think about “what ifs,” reading with the attitude of devil’s advocate in order to avoid wishful thinking and assumptions like “that won’t ever happen.”

Of course, no board is likely to spot everything a lawyer would. For contracts entailing significant cost, duration or potential liability, an independent attorney should be consulted, one experienced in relevant contract law but without any relationship to the vendor.

The contract devil is in the details. Anyone who fails to read carefully and negotiate contract terms had better hope that a devil is not across the contract table.

Michael Krieger, a Los Angeles attorney practicing business contract, technology and intellectual property law, co-wrote this column. Vanitzian is an arbitrator and mediator. Send questions to Donie Vanitzian JD, P.O. Box 10490, Marina del Rey, CA 90295 or noexit@mindspring.com.