In these last few months, we’ve done our best to help our clients understand the impacts of COVID-19 to their nonprofit organizations, and more importantly, the steps they can take to protect their future in this time of unprecedented uncertainty. Underpinning our explanation of things like Force Majeure, business interruption insurance, and small business loans under the CARES Act, is a fundamental legal concept that deserves more explanation: the contract. Nonprofit leaders are tasked with negotiating, drafting, and reviewing contracts spanning from simple releases to complex financing arrangements.
What is a contract and why does it matter?
Quite simply, a contract is an agreement between two parties that can be enforced by a court. It involves an offer by one party to provide something of value to another party, followed by the other party’s acceptance of the offer and exchanging money or something else of value in consideration for the services or goods that are to be provided. An employment agreement is one example; a company offers a position and salary to a prospective employee. The employee accepts the offer and agrees to provide their services in exchange for the position and associated compensation from the company. Purchase orders, bills of sale, insurance policies, rental agreements, and mortgages are all some version of a contract.
Well-drafted contracts are undoubtedly critical when a disagreement, or even litigation, ensues. But they also play an important role in helping parties avoid the pitfalls of miscommunication and poor planning in a business relationship. While a written contract may not be required in every circumstance (contracts can be verbal, too), writing down the specifics of your agreement helps you to think critically about your plan and avoid misunderstandings. Likewise, details can become fuzzy or morph into something entirely different over time; writing down the critical aspects of your agreement gives you a firm fallback in the event of future confusion or disagreement and is key to avoiding costly litigation. A good contract is in many ways like a roadmap to your project destination. Take care to plan your route and refer to your contractual roadmap often to avoid costly detours.
Key Contract Terms and Provisions
Long (think mortgage loan), short (signing up to buy girl scout cookies), and everything in-between, each contract will be different, incorporating elements that are most critical for the specific circumstance. It’s important to tailor your contract to the specific needs of your situation. You don’t need a 30-page contract to make sure you get those Thinmints you paid for and you certainly don’t want the details of $300,000 home purchase boiled down to a single page. Still, there are key terms and provisions that most every contract should include.
The proper parties. You’ll want to make sure you include the proper parties in your contract; in other words, who is the contract between? If the contract is between businesses, the full legal business name should be included when describing the parties to the contract. Likewise, the signatories to the contract should have the authority to sign the contract on behalf of the entity they are signing for. Nonprofits should consult their bylaws to determine what types of contracts an officer is allowed to negotiate and sign and when they need board approval. The signatories’ positions and company names should also be included in the signature block to make clear that the signatory is signing in their capacity as a representative of the business and not in their personal capacity.
Purpose and qualifications. What is the purpose of your agreement and how are the parties qualified to carry out this purpose? If you are hiring a carpenter to remodel your office, you would state the need for your office to be remodeled, a brief description of how the carpenter is experienced and qualified to do this, and that the two parties are entering into the agreement to achieve the purpose of remodeling the office.
Scope of services. The devil is in the details, they say. That’s why it’s important to get specific about the W’s and H’s; Who, What, When, Where, Why, and How will this agreement be carried out. More specifically, what will be delivered, who is responsible for doing what, and who decides if the work is satisfactory? Is there a specific location where the work must be carried out and if special equipment or licensing is required, who will provide it? The list can be more or less exhaustive depending on what the contract is for. Make sure you have the most important details hammered out and then try to keep it as simple as possible.
Consideration. What compensation will be paid in exchange for the product or service? Is it a fixed amount or an incremental fee, or perhaps even an exchange for another service. And don’t forget to cover how payment is to be received (cash, credit, installments), who is paying for expenses and what type of documentation is required, and when a payment is considered late and the associated fees.
Contract Term. How long is your contract in effect? Does it renew automatically and if so, for how long? Can the parties terminate the contract early and what steps do they need to take to do so? Finally, what happens when the contract is terminated; what is the effective date (i.e., 30 days after notice of termination), does the property need to be returned, must confidential information be returned or destroyed, and what happens to intellectual property.
Additional Terms and Warranties. Aside from covering the above basics, you may also want to include additional terms in your contract, such as:
- Representations and warranties
- Intellectual property rights (if new intellectual property is being created)
- Restrictive covenants (i.e. confidentiality, non-competes, non-solicitation, etc.)
- Liability protection
- Dispute resolution (i.e. will you require mandatory arbitration or mediation and what is the jurisdiction in which you agree to file a dispute).
In our next article, we’ll cover some of the most common contract mistakes we see with our clients and how to avoid them.
Ellis Carter is a nonprofit lawyer with Caritas Law Group, P.C. licensed to practice in Washington and Arizona. Ellis advises nonprofit and socially responsible businesses on corporate, tax, and fundraising regulations nationwide. Ellis also advises donors with regard to major gifts. To schedule a consultation with Ellis, call 602-456-0071 or email us through our contact form.