Q&A: Vendors Only Policy

I currently run my family’s construction business and have been doing so since I left management business over four years ago. Recently, I was asked to renovate an apartment for a client in a luxurious East Side apartment building. The building is a cooperative and the renovation entailed the complete remodeling of a bathroom and a kitchen. Upon receiving the alteration agreement from the resident we prepared all of the required paperwork, i.e. permits, licenses and insurance. We were advised to bring our paperwork to a meeting in the management office where a board member—a member of the management team and a representative from the building staff—would be there to review the paperwork and go over the plans and discuss the project with us.

After presenting our package of information we were informed that the resident would have to use one of two building approved electricians and plumbers. When I asked where the policy was written we were informed that it was something the board had voted on. We were told that there were no options and that if we did not use their “approved vendors” the alteration agreement would be declined. I’m pretty sure that this board’s policy is illegal.

The board member in attendance at the meeting indicated that the building had had some problems in the past and the board decided to enact a policy that would require all shareholders to utilize one of two electricians and one of two plumbers. When I advised the board member that the policy closely resembled the definition of restraint of trade, the board member became offended. I asked the board member how they would deal with the costs and she said the board had been very pleased with the costs presented by the trades and that we would be happy as well. When I asked what would happen if the cost for using their vendors were more than ours, we were told that the board would speak to the vendor about the matter, and that the matter would be resolved amicably. I told her that this proposition sounded like bid rigging, but she said it was not because there were no kickbacks. I chose not to work in the building because I felt it was a corrupt environment.

After making inquiries I have learned that many buildings have variations of this policy and have no idea that the policy is somewhat questionable. Is this policy illegal? An advice you offer would be greatly appreciated.

—New York Construction Manager

A According to Bruce A. Cholst, Esq., a partner at the Manhattan-based law firm of Rosen & Livingston, “the board’s policy of designating specific plumbing and electrical contractors for apartment renovations within a building may very well be lawful.

“Cooperative proprietary leases typically permit the board to reasonably withhold its consent to any proposed apartment alteration. This provision means that the board may condition its approval of any given renovation upon the shareholder’s compliance with restrictions that are rationally based as opposed to being arbitrary and capricious. Electrical and plumbing work is both highly technical in nature, and negligent performance of this aspect of a renovation often has widespread adverse consequences for the entire building. Thus, to the extent that the board has encountered problems with these particular types of vendors in the past and has identified a cadre of professional craftsmen with whom no such mishaps have occurred, the policy hardly seems arbitrary and capricious.

“Moreover, having this kind of technical work performed by contractors who are highly familiar with a building’s structural idiosyncrasies (i.e. the location of its risers and gas lines) by virtue of having done numerous jobs there minimizes the risk of mishap which may adversely impact the entire community. Since the board has a legitimate interest in seeing that this type of work is properly performed, and the designation of competent contractors with widespread experience in the building facilitates this objective, the policy is rationally based, and its restriction appears reasonable. (Of course, if the designated contractors were friends or relatives of a board member or there were kickbacks or the selection process was otherwise infected with self dealing that would be another story). Restraint of trade is not an issue here because the contractors themselves did not collude with each other to preclude competition.”

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