How To Utilize”Executive Session” Board Meetings for Issues Relating to Contract Formation

It is common for state statutes and homeowners’ association governing documents to contain provisions that provide for the conducting of specified items of business in executive session board meetings that are not open to the association’s non-director members. Typically, one of the specified types of business that is permitted to be conducted in executive session is business relating to the formation of HOA contracts with third-parties.

State statutes and an association’s governing documents do not generally specify the reasons that business relating to the formation of HOA contracts with third-parties should be conducted in executive sessions or provide specifics on the extent of the contract making process that is to be conducted in the executive session board meetings. This lack of specificity in the language pertaining to the extent of the business relating to contract formation that should be covered in the executive session meetings can result in confusion on the part of an association’s directors as to how far they should go relative to the formation of a contract in the executive session meeting. Should the actual vote on the approval of the contract take place in executive session or in an open session of the directors’ meetings? What if there is dissatisfaction with a particular contract and a desire to terminate the contract—should discussion among the directors about the termination of a contract be conducted in executive session or in an open session meeting of the directors?

The business relating to the formation of contracts that should be conducted by an association’s directors in executive session typically includes such things as reviewing and discussing the qualifications of the prospective contractors under consideration and their proposals, discussing the qualifications of the contractors under consideration, discussing contract terms and obtaining input from legal counsel for the association on the contract. By discussing these items in executive session the association’s directors can openly discuss their feelings about the proposed contract and the various companies and their personnel under consideration, and express both positive and negative feelings concerning the matter without fear of disclosing confidential information or concerns about the ramifications of not supporting a particular person or company. Perhaps more important, confining discussions about differing bids to executive session meetings also reduces the likelihood that the other potential parties under consideration will have access to information given by a person who preceded them in a presentation to the association’s directors and be in a position to obtain an unfair advantage by making modifications to their bid based on the information they were able to obtain about the competition.

After an association’s directors have completed their discussions concerning the various contracts under consideration, the actual vote by the directors on whether or not to approve the contract and authorize a particular officer to enter into the contract on behalf of the association should be conducted in open session and properly documented in the minutes of the open session meeting. The items pertaining to the contract that were discussed in the preceding executive session meeting should not be detailed in the minutes, but only generally noted along with the other matters that were discussed in the executive session meeting.

After the contract has been approved and entered into by the association, unless its disclosure is protected by a particular legal privilege, the contract is subject to inspection and review by all of the association’s members. The types of contracts that are privileged are specified by state laws, case decisions, and association governing documents. A review of an association’s governing documents pertaining to the scope of documents that are subject to inspection and copying by association members will generally specify the types of contracts that are privileged and not subject to inspection by members.

Discussions amongst directors concerning the termination of a contract that was previously entered into are also generally conducted in executive session meetings of the association’s directors. Although the provisions in state statutes and an association’s governing documents relative to the subject matter of business conducted in executive session meetings do not typically specify the “termination” of contracts, such discussions arguably fall within broader category of “contract formation” as discussions about terminating a contract are tantamount to discussions about entering into the contract in the first place. Similar to the process for approving the contract, the actual vote relative to the termination of a contract should be taken in an open meeting of the association’s directors.

Irrespective of the fact that the association’s directors make the final decision on the contracts that the association enters into, all contracts that have can have a significant impact on the association (usually determined by placing a dollar value on the exposure to the association) should be reviewed by the association’s legal counsel prior to the final approval by the directors and the directing of a particular officer to sign the contract on behalf of the association. In virtually all situations where a contact is being considered by an association’s board of directors, the contract document under consideration was provided by the prospective vendor or service provider. Such contracts are generally undesirable because they are either woefully inadequate (do not contain enough information), or are drafted in a manner that is in favor of the vendor or service provider to the detriment of the homeowners association. Thus, while the review by legal counsel results in additional expenses to the association that directors would like to avoid, the benefits of making sure the association is properly protected by the addition or deletion of certain language in the contract document is well worth the cost of the legal services.