Article by Heather L. DeBlanc and Christopher S. Frederick
Whether coordinating a construction project, collecting tuition payments or dealing with third-party vendors, independent schools risk revenue loss due to any number of legal claims that can arise. To a large degree, a school’s success in minimizing potential losses depends on the language in the written contracts governing its business relationships. Spend the time and money up front to carefully draft or review every contract.
Here are some proven strategies and best practices, based on representative cases involving independent schools (identifying details have been changed). Readers are advised to consult legal counsel with regard to specific situations and circumstances.
Construction: Building a Lower-Risk Future
A school takes on multiple financial risks during the life of a construction project, from planning through completion and beyond. Properly allocating risk in the contract and double-checking your insurance will help ensure that your school is prepared to deal with problems that could derail a successful project.
Allocate risk properly
Meadow School had been working with an architect for some time on plans to modernize its science building. The school received the final design, hired a contractor and entered into a construction contract. The contract anticipated 430 days to complete the project and specified a summer completion date so the building would be ready for the start of the new school year. The contract stated that time was of the essence.
During the course of construction, the contractor discovered that the plans did not account for certain existing structural conditions. The contractor failed to provide notice to the school as required by the contract, but an administrator on-site told the contractor to go ahead with an alternative plan that resulted in the elimination of required seismic corrections. As a result, the project was delayed and the building was not ready for the start of the new school year. The contractor brought a claim against the school for the extra work required due to the differing site conditions. The case eventually settled.
How did Meadow School’s contract provisions impact these issues?
The school’s construction contract failed to include provisions that would have required the contractor to continue the work during dispute resolution. It also lacked comprehensive provisions regarding change orders and dispute resolution that would have allowed the parties to efficiently resolve the discrepancy between the design and existing field conditions.
Before signing any construction contract, a school should seek review from legal counsel and the project architect, if applicable. (Many contractors will suggest standard “form” contracts that do not protect the school’s best interest.) Additionally, depending on the project delivery method, schools should coordinate the contracts for the contractor, architect and construction manager to avoid overlapping duties, job site confusion and project delays.
The prime contract between a school and its contractor should include the following provisions:
- Change order provisions: Include the procedure for processing change order requests with specific timeframes, and require the contractor to continue work in the event of a dispute. Specify the required approval process in order for the change order to be binding on the school. Do not allow a contractor to implement a proposed change suggested by a school staff member without appropriate approvals. In the case of Meadow School, if the contract had included adequate change order procedures, the field discrepancy would have been resolved in a timely fashion and the contractor would not have proceeded with an unauthorized change.
- Notices: Add language requiring the contractor to provide notice of a delay within a certain number of days after its discovery. The Meadow School contractor never informed the school of its delay until project close-out, preventing the school from addressing the delay when it was in the best position to mitigate and manage the issue.
- Liquidated damages: Liquidated damages are a set amount of damages written into the contract (i.e., $1,000 per day for each day of delay beyond completion). They reflect the parties’ fair estimation of damages, when actual damages are too difficult to ascertain at the time of contracting. Liquidated damages serve two purposes. First, they’re a means for the school to recover damages for project delays caused by the contractor or its subcontractors without having to prove each element of damage. Second, liquidated damages may encourage the contractor to complete the project on time. The Meadow contract did have a liquidated damages provision, giving the school leverage during settlement negotiations.
- Defense/indemnification: Require the contractor to defend and indemnify the school (i.e. protect the school from liability) for any loss or damage that may happen to the project or for any personal injury that occurs during construction.
- Performance/payment bond surety requirement: Require the contractor to post payment and performance bonds in the amount of 100 percent of the amount of the construction contract. A performance bond runs in favor of the school, and the surety ensures the contractor’s faithful performance under the contract. A payment bond, in turn, protects subcontractors from nonpayment by the contractor. Both types of bonds provide an added layer of protection for payment and performance disputes. (The Meadow contract had both a performance and payment bond surety, providing leverage during settlement negotiations. Had a lawsuit been filed, the school would have had the option to name the performance bond surety as a party to the action.)
- Insurance: Include a provision that the contractor and all subcontractors obtain sufficient commercial general liability insurance and fire insurance. This is critical to protect against injury and loss.
Not all provisions are treated equally. For example, there are various types of insurance and indemnification provisions. The contractor’s form agreement will likely have standard provisions that skew heavily in the contractor’s favor. Take the time to analyze each provision and understand the potential consequences.
Double-check insurance
Once these contract protections are in place, contact your school’s insurance company or risk manager to ensure that all insurance policies — the school’s and the contractor’s — provide the right coverage types and amounts for the project’s risks and potential liabilities. While the contractor’s and subcontractor’s insurance generally cover property damage, bodily injury and other liabilities that occur on the project, the school is likely the only entity with an insurable interest once the project (or portions of it) is complete.
Be sure coverage extends to these risks and liabilities above and beyond coverage provided by the contractor and its subcontractors:
- Property insurance covering the destruction, damage or loss of use of existing buildings and structures on or near the project site
- Builder’s risk insurance covering new structures and buildings to be constructed or remodeled during the project
- Property insurance covering the completed structures and buildings following completion of a project or a portion of the project
- Liability coverage for bodily injury, property damage and other potential liabilities that third parties may sustain arising out of the project
- Fire insurance coverage, if not included in any of the above policies
In addition, if your school is in an earthquake-prone area, consider obtaining coverage for damage, destruction or loss of use due to earthquakes.
Some contractors might attempt to include contractual requirements that the school maintain various types of insurance coverage naming the contractor as an insured. Consult with your legal counsel and construction team to determine whether these coverages are necessary. If they are not, make every effort to negotiate these requirements out of the contract.
Tuition: Use (in) Tuition to Avoid Unnecessary Risks
Be prepared to minimize the risks inherent with potential tuition disputes. These circumstances may sound familiar:
- A student withdraws prior to the start of the school year and refuses to pay tuition.
- A student moves out of state halfway through the school year, after the deadline to receive tuition reimbursement.
- A student’s divorced parents each refuse to make installment payments.
- A student graduates with an unpaid tuition balance.
- The school must expel a student for continued behavioral issues.
The enrollment contract dictates the details and obligations regarding tuition payments. The clearer the terms of your enrollment contract, the less likely you are to have a dispute down the road.
Key tuition provisions:
- Cancellation/withdrawal policy
- Liquidated damages provision
- Tuition refund insurance
- Signature provisions
Clearly and specifically state your cancellation policy
Consider this language in an enrollment contract:
“The full tuition shall be charged unless written notice of cancellation is received and confirmed by the School before August 1, 2016.”
On August 1, 2016, a student’s parents send a note to the school cancelling their child’s enrollment. Can the school require them to pay the full tuition amount?
The difficulty in knowing for sure lies in the ambiguous contract language. While the parents are technically late in providing notice of cancellation, they might argue that they have until the date listed in the contract. To clarify any potential ambiguities, the language should read “on or before July 31, 2016” or “by 4:00 p.m. on July 31, 2016.”
In addition, the parents might argue that the term “charged” does not mean they owe the tuition under the circumstances. Replace the term “charged” with the term “due and owing.”
Liquidated damages
Consider including a liquidated damages provision to establish the exact amount of damages that the parents or legal guardians will pay if they breach the enrollment contract. Under California law, for instance, liquidated damages provisions are enforceable unless the damages were “unreasonable under the circumstances existing at the time the contract was made” (California Civil Code section 1671[b]). Of course, different states may have their own provisions and case law interpreting liquidated damages, so consult an attorney for help drafting an enforceable clause.
For example, if a parent withdraws a student after the cancellation date but before the start of school or early on in the school year, the parent may argue the school will suffer no damages as it can easily replace the student and receive that student’s tuition payment. However, a liquidated damages provision would provide the school with an argument that the parents or legal guardians agree, at the time of execution, that the school will suffer damages if the parent withdraws a student after the cancellation deadline.
Consider insurance
A tuition refund insurance plan in your enrollment contract is another way to limit your school’s exposure in the event of a tuition dispute. Some schools require parents to enroll in a tuition refund insurance plan; others make enrollment optional. If the plan is optional, include in the enrollment contract a section for parents to affirmatively opt in or out to avoid confusion if a dispute later arises.
Note that tuition refund insurance plans that charge interest/other fees and/or provide for more than four installment payments may be subject to the Truth in Lending Act (TILA) disclosure requirements, which include the following:
- A statement of the total amount of the tuition obligation when all payments are made
- The total number, amount and timing of payments
- Rules regarding late payments and non-sufficient funds charges, including amounts
- Identity of all persons the school must pay for administrative or insurance fees on the student’s behalf
TILA disclosures should be a separate attachment or addendum to the enrollment contract unless the school creates a completely separate tuition refund insurance contract.
Get signatures from all responsible parties
Simply put, it often proves more difficult to collect tuition payments from parents who are separated or divorced. The easiest way to protect your school from getting caught in the middle of the situation is to require both parents/legal guardians to sign and agree to the terms of enrollment. If one parent refuses or loses the ability to pay tuition, the school can look to the other parent. This also binds each party to any consent, waivers, releases or indemnification provisions in the enrollment contract.
If only one parent signs the agreement, and the parents try to cancel the agreement, the other parent may attempt to argue that he or she did not agree to enrollment contract terms. This issue arose with a dispute regarding the independent school enrollment of one couple’s son and daughter. The parents were in the midst of contentious divorce proceedings, and only one parent had signed the enrollment agreement for their children for the school year in question. The second parent claimed that since he did not sign the agreement, he was no longer obligated to pay tuition when he advised the school that his children might be relocated out of state. Since this happened in a community property state, in which all debts incurred during a marriage apply to both spouses, the second parent was still held responsible.
The outcome would have been different if the parents had officially divorced prior to signing the agreement. In that case, if the only spouse who signed could or would not pay the tuition, the school would have had no recourse to collect the amount owed under the enrollment agreement.
Vendor Contracts: Mind the Details
Your school enters into numerous contracts with third-party vendors, including purchase agreements (copy machines, buses, tablet computers), service agreements (catering, entertainment, tutoring) and lease agreements (e.g. for facilities — camps, events, etc.). As with construction contractors, vendors typically have “standard agreements” that they present as form contracts. Should your school sign?
The answer should be maybe, maybe not. Simply signing the contract as is leaves the school with no leverage to negotiate a reasonable agreement. Here’s what could happen.
It was time for a school’s annual fundraiser, and leaders wanted to hire someone prominent to entertain at the gala, anticipating that a celebrity presence would make a successful event. The school entered into an agreement for services with a celebrity, signing his standard agreement without negotiating any revisions. The school had also entered into vendor agreements including venue rental, catering, equipment rentals and florists. It spent valuable resources on marketing and promoting the gala.
Two days before the event, the performer canceled. Nobody at the school had noticed a provision in the contract allowing him to back out of the event with 24 hours’ notice. With no recourse under the contract, the school had to move forward without the performer. Gala attendees were disappointed, and the incident negatively impacted future fundraising as well.
Carefully consider all vendor contracts to avoid problems and protect against potential revenue loss and liability. Read every vendor contract carefully, and then be sure you can answer yes to the following questions before signing:
- Are the vendor’s obligations clear?
- Are the school’s obligations clear?
- Are the payment terms clear?
- Is the length or term clear? Generally, avoid automatic renewal.
- Is the insurance adequate? Generally, the school should be named as an additional insured on the vendor’s insurance policies.
- Are termination provisions reasonable? Be careful of provisions that require termination for cause in longer term contracts.
- Are there dispute resolution provisions?
- Is the vendor required to abide by all applicable federal and state laws and regulations?
In addition, if there is an indemnification provision, note that it may run in favor of or against your school. The vendor should protect (defend and indemnify) the school if a third party sues the school. Also:
- Avoid limitation of liability provisions, as these limit the vendor’s liability to a certain amount.
- Carefully review any ability to modify the contract.
As always, if you have concerns about any provisions in a vendor agreement, seek legal review. Even if your school is not willing to negotiate contract terms, you should know your risks when entering into an agreement. If the risks are too high, the school may not want to do business with the vendor. However, the school may be willing to accept the risks associated with contracting with a particular vendor.
