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Look Before You Leap: Termination Provisions In Vendor Contracts

contractterminationIn some ways, good termination provisions in community association vendor contracts resemble pre-nuptial agreements in marriages.   When in the first flush of infatuation with a new vendor’s promises of excellent landscaping or pool services, the Board, like a new bride or groom, understandably does not want to think about what will happen if the vendor’s services don’t live up to expectations.   Unfortunately, though, however rosy a relationship with a particular vendor may start out, there’s a good chance that at some point, there will come a time when one party wants out of the contract.  And when that time comes, a good termination provision, like a pre-nuptial agreement, can alleviate much of the strife that might otherwise result from the split.  

A termination provision in a contract outlines the method and terms by which a party can get out of the contract.  The most favorable termination provision for an Association is a clause that allows either of the parties to terminate the contract, with or without cause, upon providing a certain number of days’ notice (thirty days’ is usually recommended).   In order to terminate by such a clause, the Board would just need to send a written notice, using whatever method of notice and address is specified in the contract, to the vendor.  After the notice period elapses, the contract automatically terminates and the Board is free to contract with another vendor.  This type of provision is relatively easy to follow, quick and provided there is no dispute that the Association sent the notice by the method required in the contract and/or to the right address, there is no chance for dispute as to whether the Association was entitled to terminate.  

With some contracts, such as contracts for specific one-time projects, such as roof repair or other common area maintenance/improvements, a thirty days’ “with or without cause” termination notice provision may not be practicable given the short length of the project or for other reasons. In such cases, the Board should at the least ensure that the contract contains a termination provision that allows the Association, upon the Association’s determination that the vendor has failed to perform properly under the contract, to withhold payment until the vendor’s default is cured, to fire the vendor, and/or to complete the job with a second vendor and hold the first vendor liable for any increased costs.  Note that with this type of termination provision, there is still some potential that the vendor may disagree with the Association’s determination that it failed to perform properly and that the Association was thus entitled to terminate the contract.  For that reason, a termination provision allowing for termination “with or without” cause upon notice is still preferable because such a provision does not require that the Association have any reason to terminate. 

The consequences of failure to include one of the above-referenced termination provisions in a vendor contract can be severe.  In such cases, since the parties do not already have a set agreement as to how the contract may be terminated before its natural expiration, if the Association wants out of the contract early it must convince the vendor to voluntarily release it from the contract.  This often requires that the Association pay the vendor some sort type of agreed upon settlement or early cancellation fee.  Further, there is no guarantee that the vendor will agree to let the Association out early.  If the vendor refuses to do so, the Board is left with a difficult choice.  It must either decide to wait out the contract until it expires on its own terms, or, if it believes that the vendor has breached the contract first by failing to perform as required, to stop payment under the contract and risk possible breach of contract lawsuit by the vendor.  Breach of contract lawsuits frequently depend upon the subjective views of the parties as to whether a breach occurred, and, like divorces, are often long, messy, expensive in terms of legal fees, and the results notoriously unpredictable. 

Taking the above into account, while it’s natural to have high hopes for a new vendor relationship, making sure that your Association’s contract includes a good termination provision at the outset can save the Association much time, money and strife should things with the new vendor not work out as planned.

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