By Wes Wollenweber, Jachimiak Peterson Kummer, LLC
Construction disputes between associations and contractors often illustrate in hindsight what should be in a vendor contract with a construction professional to protect the community. Nasty disputes with contractors over mechanics’ liens against every unit owner, general contractors who stiffed subcontractors – who then lien the community, and a wide array of other issues, there are truly some contract terms associations should consider inserting into a construction-based contract. While it’s not possible to be bullet proof in a dispute with a contractor, there are ways to limit harm and protect a community. These are the critical clauses that can help prevent certain litigation, make it less expensive, and certainly strengthen the association’s rights under the contract.
• For contracts where the vendor is the general contractor who will use subcontractors and/or suppliers of materials, it is recommended to have a clause that states the general contractor will ensure that it pays all subcontractors and material suppliers promptly upon payment by the association and will fully indemnify the association should any subcontractor or supplier attempt to record a mechanics lien against the association’s property and/or unit owners for nonpayment. While subcontractors who get stiffed by an unethical general contractor who the association has paid can sue under Colorado’s constructive trust statute, associations have no statutory standing to do the same. As such, associations need to protect themselves contractually against the unscrupulous contractor who stiffs his subs and/or suppliers. This suggested clause, requiring indemnity, accomplishes that task.
• A clause that requires the contractor/vendor to identify any agent working on the community’s project who is not an employee; meaning a subcontractor or independent supplier. This lets the association, its community manager and general counsel know who’s out there working on the project and thus have some amount of foresight in identifying issues that may be brewing and help the association in avoiding being blindsided by a disgruntled subcontractor.
• On bigger projects, it is also helpful, if possible, to have a clause that states the association will only pay the contractor’s invoices in tandem with the execution of lien releases. Lien releases create what attorneys call a “condition precedent” in a construction contract and mean that the contractor cannot be paid until it releases any right to a mechanics’ lien for the work on a particular paid invoice. These lien releases can provide powerful protection to a dispute later on where the contractor claims nonpayment and then records a mechanics’ lien. This clause sets up proof of payment and the release of lien rights by that contractor.
• Attorneys’ fee clauses: Fee-shifting clauses (the ol’ familiar “prevailing party shall recover its attorneys’ fees and costs) do not always make sense in construction contracts. However, for associations, it makes sense because if a contractor tries to act on a mechanics’ lien that is not valid, the association can only get attorneys’ fees under the Colorado mechanics’ lien statutes if it proves the lien is overstated. There are other bases by which an association may dispute the contractor’s invoice besides the dollar amount, such as defective work, and having an attorneys’ fee clause helps the association in that instance.
• Delays: For bigger projects, the association truly needs a well written and specific clause that deals with contractor delays. General counsel can help with these clauses and should focus on defining “delay,” the consequences of delay, and consider liquidated damages related to the delay. Delays are specific to the project. Colorado case law supports damages for a contractor’s delays when the damages are hard to predict before the delay that breaches the contract. Setting the liquidated damage clause in the contract creates a real incentive for the contractor to not allow unnecessary and costly delays to occur.
• Workers compensation: With many contracts, it makes sense to have a clause that specifically states the contractor is required to carry requisite workers compensation insurance for its workers and agents and that the association cannot be liable for any such violation. Many contracts have this but be on the look for those that do not and insist that this type of language is inserted.
Addressing these areas will potentially identify other potentially necessary clauses. At a bare minimum, using the above suggested clauses as a check list of what to have in a construction contract will help protect associations when certain conflicts arise that can be costly and lead to ongoing litigation that could have otherwise been prevented or limited.
Wes Wollenweber is Of Counsel at Jachimiak Peterson Kummer, LLC. Wes is a lawyer, mediator, and arbitrator with 26 years of litigation experience in federal and state courts in Colorado. Wes routinely handles HOA disputes, employment civil rights cases, fair housing matters, landlord-tenant cases, construction disputes, among various other areas.
