HOA Contracts: Can One Board Member Contractually Bind Your Homeowners Association?
This is part of an ongoing series in which we'll take your questions from the HOAleader.com discussion forum and get you the answers you need from experts who specialize in association management. If you have a question you need answered, post it on the message board.
Most boards know that it's never a good idea to have more than one person handling contract negotiations. So they smartly appoint one board member to be the point person on negotiations with a particular vendor or service provider.
However, readers on the HOAleader.com discussion board have asked how they can be sure there's no misunderstanding between the negotiator and the potential contractor about what's been agreed to before the board gets a chance to review a contract for approval? In other words, can one board member, without the board's knowledge, bind the association to a contract? The short answer is yes. However, our experts have suggested practices you can implement to prevent it from happening at your association.
Apparent Versus Actual Authority
A single board member can sign a contract on the association's behalf without the board's knowledge in one of two ways. The board member can do it maliciously, knowing fully well he doesn't have the board's consent to enter into an agreement. Or he can do it inadvertently, by making promises the vendor reasonably believes can be relied on, but that he has no authority to make.
"I've seen this come up in various iterations," says Matthew A. Drewes, a partner at Thomsen & Nybeck PA in Edina, Minn., who represents associations. "Sometimes it's intentional, and sometimes it isn't. Associations have been pursued under contracts signed by a single member of the board and sometimes by the property manager, and other members of the board weren't aware of the contract, or the board had preliminarily given that individual the authority to pursue the matter but not to bind the association to the deal."
However it comes up, the question isn't whether the person actually had the authority to bind the association. It's whether the vender reasonably believed that person had that authority. If so, the contract is binding.
"It boils down to the law of actual versus apparent authority," explains Bob Tankel, principal at Robert L. Tankel PA in Dunedin, Fla., a law firm that advises associations. "Under Florida law, the president of a corporation—and in Florida all condo associations and most homeowners associations have to be incorporated—the common law of corporations is that the president has apparent authority to sign a contract." Most states follow that common law rule, but check with an attorney in your state to know your specific law.
Tankel explains what that means in lay terms. "When Bill Gates was running Microsoft, if he'd have called me up and said, 'Bob, I want you to do some work for Microsoft,' I could have reasonably assumed he had the authority to bind his company," he says. "Third parties don't have to look any further when a president of a corporation contacts them. They have the right to rely on the apparent authority of that president and can hold the association's feet to the fire."
That doesn't mean the president is off the hook. "If the president didn't have the authority to bind the corporation," explains Tankel, "the president runs the risk of a breach of fiduciary duty action."
What if the board's point person isn't the association's president? "Third parties who rely on anyone else do so at their danger," says Tankel. "There's specific language in Florida law that says owners have no right to act on behalf of the association simply by virtue of being owners. As a matter of corporate law, it's my position that a simple director who's not the association's president has no apparent authority, and no third party has a right to rely on any representation from other directors."
Preventing the Problem
"There are ways to protect the association from this happening," says Mark Makower, a partner at Dickinson Wright PLLC, who specializes in association law in Bloomfield Hills, Mich. "Can you stop a rogue board member from doing what a rogue does? No. But you can reduce the association's potential liability." Here are 6 ways to do that.
1) Educate board members. "Pass a resolution that says no one has the authority to bind the corporation without a board vote recorded in the minutes that authorizes entry into that contract," suggest Tankel. "That takes away any doubt. The president knows at that point that she lacks the actual authority to sign anything on her own. Then you just have the potential problem of the rogue president."
2) Define a scope of work. "Specify a scope of work that's agreed on by all board members before you give one person the authority to negotiate," suggests Brian Lincks, vice president of City Property Management Co. in Phoenix, which oversees 260 associations. "Then pass a resolution expressly stating what that person's authority is. It might state that this person has the authority to get bids, meet vendors, show vendors the property, but that he has no authority to bind the association before any contract is voted on. That way, everybody's agreeing that this is the scope of work that's going to be bid on."
Later, if you enter into a contract with a vendor, make sure that scope of work you've developed is part of the contract. "The scope should be attached to the contract, and it should be the controlling body of the contract," says Lincks. "Too many times, contractors have you using their contract. That's fine, but it should specify that the scope of work the association has developed controls in any dispute. I've see contractors bid to a scope of work, and then their contract steps all over the scope."
3) If you want to grant authority, do it expressly. If you ask one person to negotiate on behalf of your board and allow that person to enter into a contract without board approval, expressly specify the person's authority. "At a meeting, you can have the board authorize a single representative to negotiate within certain parameters," explains James Donnelly, president and CEO of Castle Group, a property management company in Plantation, Fla., that manages 55,000 association units. "The board might say, 'Joe, please handle this, and as long as it's under $5,000, we authorize you to contract and sign.' Then, that's not an unauthorized action."
4) Create a form letter to send to all potential vendors. Draft a simple, one-paragraph letter on association letterhead explaining very briefly how the association contracting process works, and mail it to all vendors with whom you're negotiating. You could say something as simple as: "Thanks for agreeing to provide an estimate for services to XYZ Association. Please note that at this stage, the association is simply gathering information to disseminate to other board members. Also note that while you may be working with one board member to streamline this information-gathering process, no single board member has the authority to bind the association to a contract. All contracts must be submitted to the association's board for approval."
"Also include that paragraph in any requests for bids that are sent out in a formal bid process," advises Drewes. "That's a situation the full board is most likely able to control. A bigger problem is when you've got a smaller, one-time project or something that's not subject to the more thorough bidding process. That's where you're going to have to really work the hardest to control and have confidence in the individuals in charge of that role by communicating to them that there's a limit to their authority. Explain when they're able to bind the association and to what extent, and explain if they're not allowed to bind the association."
5) Don't let too many cooks in the kitchen. Be sure that all board members know who the point person will be on any contract, and expressly state that no other board members should contact the potential vendor during the negotiation. Also do the flip. Expressly state that your negotiator should deal with only one person at the vendor's company. The more people you have negotiating with the more people at any single vendor, the more likely the vendor may become confused about your association's contracting process.
"A letter helps," says Makower. "Dealing with only one individual on behalf of a vendor helps, too. That way, you can make sure the person you're dealing with at the vendor's company is aware of the letter you've provided, and it reduces the chance of that person going outside your chain of command."
6) Consider a pledge. "I have some associations that have board members sign pledges to abide by the board's policies and procedures," says Makower. "That won't persuade someone with no moral compass to act appropriately. But it does remind others what your board expects."
· HOA Governance: How to Negotiate--and Save Money