Importance of Contract Review
Some time ago we posted an article by Tyler LaMarr with a checklist of essential terms for HOA contracts.
A recent Utah Supreme Court ruling involving an HOA underscores how important contracts can be to protecting an HOA from liability and exposure to damages. The case is called Mounter Enterprises, Inc., v. Homeowners Association for the Colony at White Pine Canyon, 2018 UT 23.
The Mounteer case shows how Utah law strongly favors the enforcement of specific clauses contained within a contract. As a disclaimer, I have strong feelings on this case as I was personally named as a defendant by Mounteer Enterprises when the case was filed for engaging in an alleged civil conspiracy. I was immediately dismissed from the case in a summary judgment proceeding because there were no facts supporting the civil conspiracy nor was there any legal basis for bringing such a claim against me.
The facts of the case are pretty straight forward. Mounteer and the Colony entered a contract for snow removal services. The contract required that Mounteer maintain $7 million in aggregate insurance coverage. The contract provided that if Mounteer failed to purchase the necessary insurance the HOA could immediately terminate the contract, withhold payments until Mounteer cured the default, or purchase the required insurance and deduct the premiums from payments due to Mounteer. The contract also contained an anti-waiver provision. That provision stated that “[f]ailure of the [HOA] to demand such certificate or other evidence of full compliance with these insurance requirements or failure of the [HOA] to identify a deficiency in the form that is provided shall not be construed as a waiver of Mounteer’s obligation to maintain such insurance.”
During the four-year period of the initial contract Mounteer only had insurance in an aggregate of $5 million. However, despite the failure to comply with the express terms of the contract the Colony paid Mounteer for all services rendered. The Colony then entered a new four year contract with substantially similar terms. Three months into the new contract a conflict arose and the Colony, after providing Mounteer with multiple opportunities to comply with the insurance requirement, terminated the contract for failure to maintain adequate insurance.
Mounteer sued for breach of contract and breach of the implied covenant of good faith and fair dealing. It asserted that the HOA had implicitly waived its right to require strict compliance with the insurance provision when the HOA approved the certificates of insurance and paid Mounteer every billing cycle. And it claimed that this conduct was enough to overcome the existence of the anti-waiver provision.
The jury found the HOA liable for breach of contract and awarded Mounteer $578,000 in damages. The district court then awarded Mounteer attorney fees and costs as the prevailing party.
The jury verdict was appealed by the Colony and the Utah Supreme Court examined the express language of the contract to determine whether the Colony had waived their right to require that Mounteer strictly comply with the terms of the contract.
The Utah Supreme Court looked at the question of what a party must show to establish waiver of both the underlying provision and the anti-waiver clause. It is settled law that an express waiver of a contractual right is sufficient to waive both provisions. Calhoun v. Universal Credit Co., 146 P.2d 284, 285–86 (Utah 1944). The Utah Supreme Court concluded that the mere failure to insist on performance of an underlying contract provision is insufficient to establish the intentional relinquishment of a party’s rights under the antiwaiver provision. The Court determined that because the failure to insist on performance after breach is entirely consistent with the rights set out in the anti-waiver provision—rights of flexibility that often benefit the otherwise-breaching party. And a finding of waiver in such circumstances would thus render the antiwaiver provision meaningless.
When Mounteer failed to acquire sufficient insurance it ran the risk that the HOA would discover the deficiency and terminate the contract. And the HOA was thus within its rights in terminating Mounteer for its failure to secure the liability insurance required by the contract. The Court reversed on this basis.
Because the Utah Supreme Court reversed the trial court and found the Colony to be the prevailing party, they were awarded all of their attorney fees and costs and Mounteer was not entitled to any damages. Both the anti-waiver provision and the termination for failure to provide insurance may have appeared to be minor or boilerplate clauses contained in a multi-page contract. However, literally millions of dollars turned on the outcome of those two clauses.
It is a sound business practice to consult with its legal counsel prior to entering any contract and doing so affords an HOA the protections of the Business Judgment Rule. An effective review of your service contracts will ensure that the necessary clauses are included in your contracts. Remember that An Ounce of Prevention is Worth a Pound of Cure particularly when it comes to avoiding costly litigation.