There is a natural inclination in business to work with those whom you know and trust. Relying on relationships that have developed over time is just a common-sense way to ensure a fair deal from a competent vendor who will perform their job with minimal fuss. But, when an individual board member stands to profit in any way from hiring a particular vendor, and fails to disclose that relationship, then you’re talking about a potential conflict of interest, which is decidedly less kosher.
Individual states have assorted rules and regulations designed to prevent self-dealing in co-op, condo and HOA settings, and to ensure that association business stays on the up-and-up for the benefit of every owner or shareholder, rather than specific individuals. In New York, for example, there is the Business Corporation Law (BCL), under which most cooperatives in the state were created. New additions to the BCL went into effect on January 1st of this year, and as such, it’s worth taking another look at the law, similar legislation in other states, and conflict of interest in general.
In New England, where co-ops are a rare commodity, the law tends to be less specific.
“Our Condominium Statute (Chapter 183A) does entitle unit owners to make appointments at the locations at which association records are kept, and to view said records, including any contracts with outside vendors,” says Gary M. Daddario, a partner with the law firm of Winer & Bennett in Tyngsboro, Massachusetts. “That said, the statute does not prohibit self-dealing. Oddly enough, on that subject, it’s not uncommon to see language in an association’s governing documents that specifically allows for self-dealing. In New Hampshire, recent amendments to its Condominium Act (R.S.A. 356-B) at least require certain disclosures to the community in the event that a property manager hired by the association has an interest in a contract that the association enters into with a vendor.
“Self-dealing typically occurs when a board member happens to own or be employed by a company that offers a service or product needed by the association,” Daddario continues. “The instinctive thought process is that the familiarity will result in the association getting the best deal, but the reality is that whether they get the best price or not, the association could end up in a difficult situation. If the project doesn’t go well, or the work isn’t done properly, it will be much more difficult and awkward to address than with a vendor who is at arm’s length. Not to mention that some folks are just naturally inclined to believe that there must have been kickbacks, or other sketchy behavior involved.”