What Exactly Is A Binding Contract?

By David Swedelson, California Condo and HOA Attorney, Senior Partner SwedelsonGottlieb

All too often we are called in to deal with a dispute over a contract that the association entered into with a contractor or vendor. And I am often surprised to learn that the board and management really do not understand what a binding contract is (and what it is not).
What needs to be understood is that the foundation of every legal transaction is the document known as a contract.

The Basic Elements of Contracts

For as long as humans have been on earth, transactions and understandings have been made by agreement. In the old days, a person’s handshake was understood to be as good as if it were written in stone. Today’s agreements are more complex as is the law and while an oral contract can be binding, to ensure that all important terms and conditions are understood and agreed to, a written contract is necessary.

At its core, a contract is simply an agreement between two parties. One party agrees to do something in exchange for the other party doing something. In most instances, this involves one party paying money to the other in exchange for something, a product or service. A classic example would be a roofing or painting contract. The association agrees to pay the roofer or painting company a certain fee a month in exchange for the contractor providing a set of specified services. Obviously, there is more to a painting or roofing contract agreement, but this is the basic idea.

The courts have very particular views about the enforcement of contracts. Simply put, they almost always enforce them. If they did not, the entire business world would be rocked to its foundations. If you cannot count on the other party doing what was agreed to, how can you possibly do business? Imagine if after signing a contract to pay the roofing company, they decide they were not going to perform all of the services that had been agreed upon? The association would be stuck without anyone to complete the roofing project, and this could lead to a multitude of obvious problems (like leaks!).

With a contract, the association can go to court and force the contractor to honor the terms of the contract, or to pay damages for what the association paid to have the roof project completed. But of course, the terms of the contract need to be spelled out.

For contracts to be enforced, they should be in writing so that there can be no dispute as to what the terms of the contract are. With an oral agreement, it is difficult to tell which party is telling the truth about whether there was an agreement and, if so, what the terms were. The courts feel so strongly about this that there is a body of law known as the Statute of Frauds that requires certain contracts be in writing.

A contract is a critical tool for any association that wants to ensure that it is getting what it agreed to pay for. So make sure it is in writing to protect the association and make sure it clearly and unambiguously sets out the terms of the agreement, including the scope of work.

And it is always a good idea to have the contract reviewed BEFORE it is signed and delivered as there may be terms in the contract that you do not want to accept.

David C. Swedelson wants your comments. He can be reached at dcs@sghoalaw.com.