Contract Termination Clauses – How Important Are They? – Article by Beth Grimm, P.L.C.
I am reminded today of the laxity with which many Associations treat contracts. I was reviewing one Association’s communication to owners about a half million dollar assessment for rehabilitation work (about $10,000 per unit) and came across the statement “We were able to get a favorable contract with a no-penalty termination clause.” The reason I was brought in was to write a ballot measure for the special assessment but of course the curious sort that I am lead to some questions. My first question: “So you already signed a contract before the assessment was approved to pay for it?” (Answer: “Yes” but we can pull out anytime if we run out of money.) Now I know that there is no one on the board with business acumin, and I know in this case the manager of the Association would not give legal advice to the Board about the contract, and I know no one asked me as the Association attorney to review the contract, so I wonder if the contract really says there is “no penalty” for terminating it (when all the work seems to be integrated and terminating the contract prematurely would have to cause a disruption in the work of some kind) or if the Board really just does not understand what the termination provisions require (especially if they are based on proving a breach of contract).
Then there is the employer-employee situation: the Board President calls me and says the Board has fired the on-site manager and told her not to come back to work, and has changed the locks. They want to know if that is ok. I ask: “Is there a contract with this employee, or any promises recorded anywhere, or were any promises made?” The President has no idea about any of this. She is newly on the Board and hell-bent on “cleaning things up.”
And last, but not least, there is the Board President who calls and says that they are having a problem with their manager. They gave written notice of termination and the manager came back with a letter saying that under the termination clause of the contract the Board is committed to the contract terms until next August. This is 10 months away. I asked why the Board did not consult the contract before issuing a 60 day termination letter. The answer: we did not have a copy of the contract. When I asked why the Board did not ask the manager for a copy, since the managing agent had all the Association records, the Board President said the Board did not want to “alert” the manager that the Board was looking for a new manager. Well, since the contract termination clauses require the Board to “alert” the manager of any perceived breach of contract and give the company 30 days to cure, this excuse did not carry much weight and would likely fail in court.
So how does one avoid these potentially serious dilemmas? There are many ways but the top of the list is to have someone who can read and interpret contracts (like a lawyer, duh!) tell you what the contract says and perhaps most importantly: how you terminate it if you are not satisfied with what is being provided!
Other ways to avoid potential mishaps like the above:
Do not accept a contract that requires that you show “cause” or “breach” to terminate, especially with regard to management or important ongoing services. Beware of contracts that automatically rollover if “not terminated within [a certain number of days] prior to (or before) the expiration date. In these contracts, if you miss the opportunity to give notice of termination within a particular period of time (sometimes a very limited period each year), you can be committed for another period of time (usually a whole year, but sometimes less or more). Demand a clause in the contract that allows for 60 or less days notice of termination, without cause! An automatic rollover is not bad if there is a way to terminate the contract within 30 or 60 days if you are unhappy with the services. And please keep in mind that when you are handed a contract by a vendor, it is likely the contract is favorable to the vendor, not you, and the terms are negotiable. Of course, you may not be able to get what you want and then the question becomes: “Do I go elsewhere? … Or settle for what I can get.” I know that with regard to management contracts, there are many managers and companies that will accept a 60 day termination clause, without cause. I believe the CACM (California Association of Community Association Managers) model contract allows for reasonable termination without cause.
If you are looking at a contract for construction services, especially extensive and costly services, look for a termination clause that is based on some reasonable measure, such as phases or buildings or a measure of fencing, etc. (“at the end of each [phase, area of fencing, or building]”. A contractor who has any savvy at all (which can be an indication of professionalism in the way you are treated) should offer some reasonable termination provisions. In fact, California contracting laws prevent contractors from collecting “up front” the entire amount of the contract as a measure of protecting the consumer who might be duped into giving a flakey contractor a fistfull of money only to see the dust fly as the truck drives away off into the distance (never to be seen again).
Having to show cause or breach to get out of a contract or suffer extensive losses before you can “jump ship” is not beneficial to you. And forcing parties to continue to work together when the relationship has “gone south” can be very painful and unproductive. Having to “buy out” a contract term can be very expensive. Firing someone or some company and hiring another while still under contract with the first creates two contract disputes to deal with. Don’t make these mistakes. Treat contracts with care and respect. And understand the legal ramifications. In the eyes of the law, you cannot ignore contractual obligations and requirements.
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