Contracts affect virtually every part of an organization. As a nonprofit leader, you have a contract (whether written or not) with every single vendor, service provider, donor, and client-related to your organization. Before we talk more about contracts, let's define them.
The venerable Black's Law Dictionary says that a contract is:
An enforceable contract must be based on consideration. That doesn't mean being polite: It's a lawyer word for something given in exchange for goods or services. Consideration is most often money, but it can be personal property, real estate, a counter-promise to perform or really, any benefit conferred upon the other party to the contract.
Let's explain more about contracts with an example. Suppose Joe Donor owns two adjacent lots. One of them is vacant. The other used to be a gas station, but it went out of business. The building and pumps are in good shape, but Mr. Donor is done negotiating leases. He wants to donate both lots to a nonprofit. The nonprofit is interested.
Fortunately and unfortunately, there can be a lot more to contracts than just a formal or even informal agreement, but that's what we're here to explain!
While a written contract may not be required in every circumstance (contracts can be verbal, too), jotting down the specifics of the agreement is vital as it helps you to think openly and critically about your plan of action in order to avoid future confusion or misunderstandings. A well-written contract is in many ways like a guide to your end goal or project destination. Always remember to take caution to plan your next steps as a nonprofit and remember to refer to your contractual roadmap often to avoid costly detours.
WHY A CONTRACT?
Well-drafted contracts are critical when a disagreement, or litigation, happens. They play an important role in helping parties avoid pitfalls that come with miscommunication and poor planning in a transactional relationship. It is common when working with multiple parties or even one other party that details become fuzzy or form into something entirely different after spending some time operating your nonprofit. This is why it's important to write down the critical aspects of your agreement so that it gives you a solid fallback in the event of future confusion or disagreement and is key to avoiding costly litigation.
Here are some of the issues the nonprofit should consider and include in the final contract:
Contracts are important to all organizations, including nonprofits. The types of contracts a nonprofit can expect to encounter include:
- Employment contracts
- Contracts for independent contractors
- Leases for physical facilities
- Construction contracts
- Contracts regarding intellectual property, such as trademarks
- Internet contracts, for websites and emails
- Social media contracts
- Grants, which are contracts to use money to particular projects or in specified ways
- Agreements for the donation of goods and services to nonprofits
Let's explain more about contracts with an example. Suppose Joe Donor owns two adjacent lots. One of them is vacant. The other used to be a gas station, but it went out of business. The building and pumps are in good shape, but Mr. Donor is done with negotiating leases. He wants to donate both lots to a nonprofit. The nonprofit is interested. Here are some of the issues the nonprofit should consider and include in the final contract
A Bare-Bones Contract
This part is easy enough. Mr. Donor is giving the nonprofit the lots. In exchange, the nonprofit will accept the lots. It will also give Mr. Donor a receipt showing the value of the transaction so that Mr. Donor can write off the donation when he files his income tax returns.
Fleshing Out Contracts
This contract, although sufficient under the law, should contain additional provisions so that the contract is clear to both parties and expectations are aligned. Here are some questions to ask and provisions to consider:
- Does Mr. Donor represent that he owns the lots free and clear? If not, he should state the debt on them. In particular, are taxes current? Are there are liens or mortgages on the property?
- Who will pay for closing expenses such as title insurance, surveys, and attorney's fees?
- Should the nonprofit require, as a condition to the contract, third-party valuation of the lots? The nonprofit must make sure that it is accurately representing the fair market value of the lots to Mr. Donor - and to the IRS.
- Should there be a professional evaluation of environmental concerns? One of the lots used to be a gas station. Residual pollution might affect its value and use.
- What happens if the nonprofit, after environmental testing, decides it doesn't want the gas station lot. Will the contract then apply to the other lot, or is it a package deal?
- Should there be conditions subsequent to the contract? Suppose the expert who says the gas station passes environmental muster is wrong. The nonprofit doesn't want to be saddled with that property. Owning the lot could expose the nonprofit to liability. If there are environmental problems in the future, can the nonprofit require Mr. Donor to take the property back?
As you can see, there are many things to consider when drafting contracts. And this example discusses just one of the many areas in which nonprofits need contacts. It's also equally as important to be aware of some common terms.
Common Contract Terms You Might See:
The proper parties. Who is the contract between? You'll want to make sure you include the proper parties in your contract. For example, if the contract is between businesses, the full legal business name should be included when describing the parties to the contract. Likewise, the people physically signing the contract should have the authority to sign the contract on behalf of the entity they are signing for.
Scope, the overall scope of services. It's all in the details. This is where it's most important to get specific about the details. Who, What, When, Where, Why, and How will this agreement be carried out. More specifically, who is responsible for doing what, what will be delivered, and who decides if the work is up to the correct standard? Is there a specific location where the work must be carried out and if special equipment or licensing is required, who will provide it, where will it be located? The list can be more or less comprehensive depending on WHAT the contract is for.
Consideration aka compensation. 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.
Purpose and qualifications. What is the purpose of your agreement and how are the parties qualified to carry out this purpose? For example you are hiring a painter to paint your office, you would state the need for your office to be painted, a brief description of how the painter is experienced and qualified to do this, and that the two parties are entering into the agreement to achieve the purpose of painting the office.
Contract Term or length. 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.
Things to watch out for:
Additional Terms and Warranties. Aside from covering the basics, it is also recommended to include additional terms in your contract, such as:
- 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).
Every lawyer may have different services offered when it comes to contracts, it's important to ask or review those services before choosing what works best for your nonprofit. For a list of our services, visit this page.
Mission Counsel's law practice is based on our desire to help nonprofits. If you need help negotiating, drafting, or reviewing a contract, we would like to help you. We provide accessible, affordable, and knowledgeable legal counsel to nonprofit organizations, large or small.
Mission Counsel is committed to serving nonprofit organizations in Kansas and Missouri.
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