Wednesday, May 18, 2011

The Supreme Court of Virginia's Decision in Condominium Services v. First Owners' Association

It's been raining cats and dogs in Charlottesville this week, but the law library remains dry and cozy. 

So put away your umbrella, grab a cup of hot cocoa, and enjoy the Supreme Court of Virginia's recent opinion in Condominium Services, Inc. v. First Owners' Association (April 21, 2011).  You can read Justice Goodwyn's opinion here


Among other issues, Condominium Services examines the tricky phenomenon of contracts referring to other contracts (and other contracts, and other contracts).

This phenomenon can lead to a maze-like inquiry into the way in which the various documents and agreements are intended to relate to each other.  For instance, if Contract A makes a reference to Contract B, but certain provisions of Contracts A and B are contradictory, which document governs the parties' rights?


In Condominium Services, a dispute arose between a condo owners' association and the management company that the association had hired to collect assessments and maintain the property.  The association and management company entered into a contract that provided for termination by the association upon 30 days notice to the management company.

The contract included a statement that "the documents governing this relationship consist of" (1) the contract itself, (2) the Virginia Condominium Act, and (3) the association's bylaws and the condominium declaration.

The association's bylaws contained the  following provisions:
"The Owners’ Association shall not change Management Agents or undertake self-management, without the prior affirmative vote of members representing three-fourths (3/4ths) of the votes of the Residential and Commercial Unit owners present at any meeting of the members duly called for such purpose."
Alas, the relationship between the association and management company did not work out, and the association sent a notice of termination for cause, alleging that the management company failed to provide the association with correct financial records or to file tax returns on its behalf. Notwithstanding the termination, the company continued to collect assessments and to pay itself from the association's bank account.


The company argued in Alexandria Circuit Court (and later at the Supreme Court) that the association's termination of the management contract was ineffective because the association never convened a meeting of the owners or obtained the 3/4 vote required under the bylaws. Since the bylaws were mentioned in the management contract, argued the company, the association needed to comply with the 3/4 vote requirement in order to effectively terminate the contract.


The Supreme Court rejected the company's argument. The Court's reasoning provides (limited) guidance into the way in which Virginia law interprets agreements that reference other agreements.

Under these facts, said the Supreme Court, the management contract merely referred to the bylaws -- it did not incorporate them by reference.  Justice Goodwyn writes, "the indicated purpose of the reference to the bylaws ... was to identify documents that [the management company] needed to be aware of and comply with in performing its duties and responsibilities under the Management Agreement."

In other words, the reference to the bylaws was not intended to compel the parties to actually abide by their requirements in carrying out the management agreement.  The Supreme Court states that interpreting the two documents this way "harmonizes" the reference to the bylaws with the express terms of the management contract (in particular the ability of the association to terminate for cause upon 30 days notice).


A shortcoming of the Court's opinion in Condominium Services is its lack of clarity (or a "bright line rule") as to how the bylaws could have been "incorporated by reference" into the management contract, if that had been the parties' intention. 

To-wit: if the parties had included the phrase "the condominium bylaws are incorporated by reference" (rather than the phrase "the documents governing this relationship consist of"), would this different language have altered the Court's decision?  If so, then doesn't the Court's opinion elevate form over substance?


Notwithstanding the unanswered questions, Condominium Services clearly stands for the proposition that if Contract A's reference to Contract B is intended to actually incorporate the substantive requirements and provisions of Contract B, then the parties should be doubly clear as to that intention.

Are your documents harmonized?