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| Learn how to draft and read contracts and memoranda of agreements successfully. |
As you collaborate with other groups, employ consultants, or hire organizations to provide services to you or your target population, you will often find it useful to "get it in writing". This section will help you to read, understand, and draft contracts and memorandas of agreement, the two kinds of documents that most organizations require in their relationships with others.
The greatest difference between a contract and a memorandum of agreement is that a contract is a legal document and is enforceable in court, whereas a memorandum of agreement is neither. We'll briefly examine each in turn, and look as well at places where the differences between them blur.
As stated above, a contract is a legal document. In its simplest terms, it is a statement of an agreement between or among two or more parties that involves an "exchange of value." There may be money involved, or there may be an exchange of goods, services, space, or some other commodity. If there's an agreement to provide something in return for something else, it's considered a contract.
In legal terms, a contract isn't enforceable without consideration, i.e. without something being offered in exchange for something else. In addition, the terms of the contract have to be clear enough so that a court can enforce it. If a contract says that one organization will pay another for "collaboration and support " on a program, that may not be specific enough to be enforceable. The court would have to have some proof that both parties knew exactly what "collaboration and support " actually referred to in order to enforce the terms of the contract.
A contract may or may not be written, although a written contract is both clearer and much more easily enforceable than a verbal one, since a written document makes it easier to prove that a contract agreement exists. It doesn't have to be labeled a contract, if it's clear that both parties intend it to be a formal document, and there's consideration involved. It can be extremely simple, as long as the intent is clear. (For the sum of $500.00, Fred Smith will paint the outside of John Jones 's barn, including all trim, window sashes, doors, and window and door frames and surrounds, with two coats of red paint.)
In health, human service, and community work, subcontracts are common. A subcontract is a contract used when an organization or individual that already has a contract to provide services or goods hires another to do some of the work under that contract. An organization that has a contract to conduct a comprehensive employment training program, for instance, might subcontract with an adult literacy program to provide basic skills to participants, or with a vocational school to provide certain kinds of job training.
A memorandum of agreement is not a legal document, and is not enforceable in court. In most cases, by calling a document a memorandum of agreement, the signers are showing that they don't intend to try to enforce its terms.
In health and community work, memoranda of agreement are usually used to clarify and/or specify the terms of a cooperative or collaborative arrangement involving two or more organizations. They may have to do, for example, with sharing space, with working together toward common goals, with each organization contributing something toward a common effort, or with agreements to serve on one another's boards.
The purpose of a memorandum of agreement might be to indicate good will on the part of both parties, or to help them keep track of what they've agreed on. The agreement may help to clarify the relationship between two organizations, and to make clear which services in the community each is responsible for.
Sometimes funders, in trying to promote collaboration, require memoranda of agreement with particular agencies or organizations to be submitted with funding proposals . These agreements, typically, state the commitment of the signer to work with the organization applying for funding in a specific way - referring participants, taking referrals, or serving on an advisory board, for example.
Although these definitions seem reasonably clear, there are a number of situations where the picture gets murky. If a memorandum of agreement involves an exchange for a sum of money, for instance, it will nearly always be considered a contract under the law. In addition, there are two other legal conditions under which a memorandum of agreement, or no formal agreement at all, can be treated as a contract.
Two organizations might sign a memorandum of agreement to collaborate on a program . One of them, on the basis of their agreement, spends grant money to set up the program, and then the other - without whose participation the program can't be run - backs out. The first organization may then be required to pay back the grant money, because it was spent on a program that never took place. In that case, even though there was no contract or exchange involved in the original agreement, the second organization might be forced by law to pay the first organization back. or it might not. It would depend on circumstances and the judge's opinion - that's why it's a gray area.
A participant has been cleaning the offices of a nonprofit health clinic every month for over a year, and getting paid a regular amount - let's say $100.00 each time - for doing so. Then, out of the blue, one month he cleans the office, and the clinic director refuses to pay, saying she didn't ask him to clean. Under the law, he could probably argue that the clinic had created a custom of paying him for this service, and that a contract was implied by this custom. If the judge agreed, the clinic would have to pay him the $100.00 for the cleaning he had already done. (They wouldn't have to continue with his services, but they'd have to let him know that they didn't want him to clean anymore.)
There are times and circumstances when it's appropriate to use a contract, and others when a memorandum of agreement makes more sense.
Whenever money is involved
Even if the amount is small, it's important to have a contract, rather than a memorandum of agreement or no document at all. It's a reasonable guess that more professional partnerships, collaborations, and other organizational and individual relationships are ruined by money issues than by the next ten causes combined. The reason is often either that the parties have different interpretations of what is expected, or that one party simply ignores an understanding between the two that the other thought was cast in stone.
A contract shows:
Some health and community service examples of contracts and subcontracts involving money:
Situations involving a non-money exchange
Even if no money changes hands, it may be important to have a contract when two organizations are working closely together, and the success of their efforts depends on an exchange working smoothly. If each is performing service for the other's participants, for instance, or if one is using space in return for services, a contract can help assure that each organization fulfills its obligations.
In general, if the success of an effort is riding on this type of collaboration, and on each party fulfilling its responsibilities properly, a contract is probably in order. Remember, however, that a contract is only enforceable if it involves a clearly-defined exchange.
To define a relationship between organizations that agree to do something jointly, or to provide something other than goods or services.
Some examples of things organizations might agree to:
To agree to affiliate in a particular way
This may encompass some of the activities described above, but may also entail a more formal agreement to combine some elements of your organizations, or to work together in specific ways.
For example, if one organization, at the request of a funder, agreed to act as the money pass-through for another organization that hadn't yet received its federal tax-exempt classification. The first organization would simply request money from the funder at appropriate intervals and hand it over to the second. In this type of situation, it is wise to draft and sign a memorandum of agreement describing exactly how this arrangement would work.
To agree to share something
This may be space or equipment, or may cover the long-term loan of furniture or equipment.
To agree to work together in specific ways, or to collaborate if the opportunity arises
Service providers might agree to engage in shared training or staff development, for example, or to look for mutual funding opportunities.
For example, a diverse group of organizations, including a women's crisis center, a senior services organization, an adult literacy program, a community-run theater, a family-planning program, and a youth services provider came together to look for funding opportunities that might involve two or more of them. Their purposes were to generate creative programs, and to find new and different sources of funding for all the organizations. They drafted a memorandum of agreement detailing their relationship, and describing how they would search for joint funding and how joint funding might work in different circumstances.
It's at least as likely that your organization will be on the receiving end of a contract, or be asked to sign an already-drafted memorandum of agreement, as that you'll write one. Before we discuss how to draft one of these documents, we'll look at how to read one.
Most of the contracts that nonprofit organizations are asked to sign come from funders. You've probably had no input whatsoever into a funder's contract. If the funder is a branch of government or a public institution, the contract is probably standard, long, in very small print, and full of legal language ("legalese" is the term often used for this lawyers' version of English). You may be intimidated at first, but if you follow a few simple rules, you can make sure that signing a contract won't make you sorry later.
Read every word carefully.
Your parents probably told you never to sign anything without reading it, and they were right. Don't assume it's all just jargon, or that you know what's there because you and the funder have talked about it. Never, ever sign anything that you haven't read and understood completely.
Especially in the kind of long, small-print, standard contract mentioned above, there are often important conditions buried in odd places. Many public funders require that you keep any records having to do with the contract for a certain length of time, usually five years. Under the terms of the contract, they can ask for those records at any time during that period, and if you can't produce them - particularly if you can't prove that you spent the money the way you said you did - you may be required to return the funds! It's important to be sure you understand all the terms of the contract, not just those that apply specifically to the services you'll deliver.
As you read, make sure you understand each point or condition before going on to the next. Take notes on each point in your own words, so you'll have a clear and understandable outline of exactly what you're committing to if you sign.
Don't be frightened or put off by legal language.
It may look like gibberish, but most of it is in fact understandable if you slow down and look at it carefully . Most funders' and large organizations' or institutions' contracts are dense, but the points they make and the conditions they set often aren't that complicated.
Become familiar with standard clauses and phrasing that you're likely to see in a number of contracts.
The person or organization receiving the contract - i.e . you - is usually referred to as the contractor, for instance. That definition may or may not be presented at the beginning of the document. You'll find that certain clauses - those describing how either side can withdraw from the contract with proper notice, for example - come up in many of the contracts you see. All contracts from state agencies may have some of the same clauses in them (that requirement to keep your records for five years, for instance). The more familiar you get with these standard conditions, the easier it gets to read a contract.
If you have any trouble understanding any part of a contract, ask for clarification or help.
The funder should be able to explain clearly anything you don't understand . If the funder is not helpful, or if you'd rather get a second opinion, find a lawyer, a veteran director of an organization, or someone else with knowledge and experience to go over the contract with you and explain whatever you don't understand. (That 's one reason why many nonprofits and community-based organizations have lawyers on their boards.)
Be sure you agree with, or at least can live with, all the conditions of the contract before you sign it.
As you read a contract, you should continually be asking yourself the following questions:
If you have questions or problems about one or more points, don't be afraid to raise them before you sign.
Most contracts are negotiable, at least to some extent . If there's something that won't work for your organization, or that seems unfair or unnecessarily limiting, suggest an alternative that will work for you. Your organization is being offered the contract because the funder thinks you can do a good job. It 's reasonable to do everything you can to make sure that the funder's right.
A memorandum of agreement generally looks different from a contract. It's probably not full of legalese, it's likely to be shorter, and it usually contains few, if any, conditions that aren't directly related to the agreement itself. As a result, it's often easier to read and understand than a contract.
Another major difference is that you may have input into a memorandum of agreement. It depends on the situation. If a funder asks applicants to include memoranda of agreement with other organizations with a proposal, for instance, the funder may also have a form or actual wording for that memorandum. If, on the other hand, you're entering into a previously-discussed agreement with another organization, you've probably worked out most of the details jointly already.
Although a memorandum of agreement may not be legally enforceable, it is a promise on the part of both parties to collaborate or otherwise work together in some way. It should be taken just as seriously as a contract, regardless of its legal standing. For that reason, just as with a contract, you need to be sure you understand and agree to all its terms before you sign it.
Read every word carefully.
No matter how good your relationship is with the other organization(s) involved, make sure you understand exactly what you're agreeing to.
If you have any trouble understanding any part of the agreement, ask for clarification or help.
As with a contract, ask the other party to explain anything that's not clear to you. If you're still not satisfied that you understand clearly, or if you're suspicious in any way, find a lawyer or other knowledgeable person you trust to help you.
Be sure you agree with, or at least can live with, all the conditions of the memorandum of agreement before you sign it.
As you read the document, you should continually be asking yourself the following questions:
If you disagree with any of the terms of the agreement, or have questions or problems with it, raise them before you sign.
Now's the time to negotiate if there 's anything you want to change.
We've looked at what you need to know about contracts and memoranda of agreement if you're the contractor or if you're signing on. What if you're the funder or employer, or if you're the organization asking others to enter into a memorandum of agreement? In those cases, you'll need to know how to draft the document, and to make sure that it says exactly what you want it to.
What follows applies in general to relatively small organizations that aren't using lawyers to draft contracts. (Larger organizations - educational institutions, state agencies, foundations, etc. - if they require contracts, almost always have a standardized form for them, written by the organization's lawyer or legal department, in legalese, protecting them from anything and everything, including acts of God. If you have the legal help available, you may want to do the same.)
The Tool Box is assuming here that most smaller organizations, whether they're drafting contracts or agreements, will have discussed the terms already with the contractor(s) or signer(s), and that there will be no surprises for anyone in the final document. This type of open, collaborative process makes life easier for everyone, and increases the chances that the terms of the contract or agreement will be fulfilled.
Drafting a contract is essentially a logical, step-by-step process. You don't necessarily need a lawyer, and the contract doesn't have to be written in legal language: it just needs to be absolutely clear. Try to write in plain English, and to be as specific as you can about absolutely everything that you expect.
As a general rule, you won't go wrong by being too detailed. The trick is not to restrict the activity so much that no innovation or flexibility is possible. The contract shouldn't be seen as an opportunity to micromanage, but should at the same time be specific enough so that all parties do what they're supposed to do, and that each side has some recourse if there's a problem.
If you don't think you're logical enough or a good enough writer to draft a contract properly, find someone else in your organization to work with you - a board member who's a lawyer, perhaps, or someone who's had more experience with contracts than you have. It's worth the trouble to come up with a document that says what it means and covers all the possibilities.
Explain who the parties to the contract are, and the time period that the contract covers.
Use the legal names of the organizations, businesses, or individuals involved.
Example:
"In this document, the Portersburgh Youth Development Initiative contracts with the Portersburgh Youth Center, Inc. to provide the following services in the period July 1, 2001 to June 30, 2002 (Fiscal Year 2002). "
Make sure to include everyone and every organization with whom you're contracting directly. If you know that a contractor is going to subcontract all or part of its work, that doesn't go here. It's between the contractor and subcontractor. (You might make an exception if you specifically want the contractor itself to do the work, or are only willing to accept certain subcontractors.)
Explain the arrangement as specifically as possible on both sides.
Include what the scope of services, products, or other exchange is, who is to be involved, how it is to be accomplished, when it is to be done (the time frame for the contract), and where it will take place, if that is relevant. Set out exactly what the contractor is expected to do . If there's a service involved, for instance, the description of services should include, where appropriate:
For example:
"Provision of leadership development training for no fewer than 30 at-risk youths ages 14-20 per calendar year. This training will include, but not be limited to, early -evening courses (using attached curricula) in problem-solving, conflict resolution and mediation, and interpersonal communication. Each course will be limited to no more than ten (10) participants per instructor, and will encompass at least six (6 ) two (2)-hour periods of instruction, discussion, and practical application (12 hours altogether). In addition, training will include, for each trainee, a minimum fifteen (15) hour supervised practicum, in one of the course areas of the trainee's choice, after completion of all coursework."
Other areas might be included if they're important to you, or some of those included could be left out if they're up to the contractor. Recruitment strategies are left out of the example in the box above, for instance, on the assumption that the contractor will find 30 participants in its own way. If the times of the courses were dependent on when participants were available, you wouldn't write specific times into the contract, but you might include that times would depend upon participants' schedules.
If there's money involved, explain the details of payment.
These details will probably include:
Explain any other obligations of each party.
There may be any number of other obligations that you or the contractor care about.
Some common contract obligations include:
Explain how the contractor's performance will be evaluated.
The standard for success might be the number of people served, specific results (none of the youth served in trouble with the police while enrolled in the program), delivering the promised goods on time and undamaged, etc. If evaluation is important, it should be written into the contract, along with who will perform it. (Will you pay for an outside evaluator? Is a self-evaluation acceptable?)
Explain the consequences if either party fails to deliver on what it has agreed to.
In general, unsatisfactory performance in itself, assuming that the contractor put in a good faith effort to fulfill the terms of the contract, is not a failure to deliver. You may choose not to fund that person or organization again, but if it did the work, you probably won't refuse to pay.
But what if it didn't do the work, or didn't do the work in the agreed-upon time frame? What if it spent the money on something else, or simply failed to follow through on some or all of the program it promised? By the same token, what if it did the work, and then you didn't have the money to pay?
Contracts have to be clear about what happens in these kinds of situations.That way, everyone knows beforehand what the consequences are, and - if the worst happens, and you end up in court - the law will be clear as well.
For example:
"If the contractor fails to conduct the program, or spends the money in ways not agreed upon, it may be required to return any money paid to it for this service, or to return that portion of the funds spent in unapproved ways."
(The "may" in the sentence above is intentional. It gives the funder some leeway in deciding whether to force the return of the money, or to negotiate some other option with the contractor.)
Explain the conditions under which the contract can be ended ("terminated" is the official term) by either side.
Most contracts contain a clause explaining that either side can decide to terminate the contract without specific cause with a certain amount of notice, usually 30 days. In addition, there are often conditions under which one side or the other can terminate the contract immediately, or almost immediately, for specific reasons. These usually include non-performance of the terms of the contract, misspending the money, inability or failure to pay on the part of the funder, and similar circumstances that would prevent the fulfillment of the agreement.
Termination clauses also may include an explanation of what happens to any remaining money if the contract is cut short early. Depending upon the circumstances, the funder might ask that all money be returned (if the money seems to have been misspent, for instance), or that only the unspent portion of the money be returned.
Explain the conditions under which the contract can be changed ("amended" is the technical term in this case).
This may be as small an issue as changing a budget item (which you may already have a procedure for in the contract - see above), or as large as changing the whole substance of the activity the contract covers. In general, such changes should require the agreement of both parties, and some negotiation should probably be built in.
Some changes can be built into the contract. If you trust the contractor as an expert in the area in which it works, you might specify that it can determine the best course of action to complete the terms of the contract, and that it can change that course if it sees some reason that its original plan isn't likely to succeed . You might allow a contractor to spend money in whatever way it sees fit, as long as the money is dedicated to the activity of the contract.
In general, however, any major changes in the contract need to be discussed and approved by both parties, and the contract needs to be rewritten to reflect those changes. Otherwise, you might end up with something far different from what you wanted and expected when you first drafted the document.
When you've finished, show the contract to others to ensure its accuracy.
It's particularly important to include those who were involved in initial discussions with the contractor - to see if it says what you intend it to, and if it covers clearly all the specifics that you want to address.
Give the contract to the contractor, and be prepared to negotiate some parts of it.
Negotiations aren't negative: they're meant to assure that all parties are satisfied with the contract that they eventually sign, and that the contract activity will take place the way they all want it to. Remember also that, even after the contract is signed, it can be changed if both parties agree.
Since it's not a legal document, and usually doesn't involve money or another exchange, a memorandum of agreement allows a bit more leeway than a contract. On the other hand, the more specific you can be, the better, for a number of reasons:
Drafting a memorandum of agreement, then, is much like drafting a contract, with the exception that the terms of the agreement will probably have been discussed by all the parties beforehand. Most memoranda of agreement are no more than attempts to state clearly in writing what the parties have already worked out and agreed to in meetings. Where that's not the case, the parties will usually discuss the already -drafted memorandum and work out any differences before it's signed.
A memorandum of agreement, as explained earlier, isn't a legal document and won't stand up in court. You can't use it - except morally - to hold another organization to what it's promised. But you can use it as a guide, a reminder, a spur to action.
The Tool Box recommends that you approach drafting it in just the same way you approach drafting a contract. This reduces misunderstanding or unintended breach of the agreement, and makes everyone feel secure that they haven't promised anything that will harm their organization, or that will subject them to expectations they haven't previously known about.
When you need to "get it in writing," the options are usually a contract or a memorandum of agreement.
A contract is a legal document, enforceable in court, that governs a relationship involving "consideration" - an exchange of money or some other commodity for goods, services, or something else of value. A subcontract is a contract between a contractor (an organization or individual directly paid or funded to perform a service or deliver a product) and another organization or individual the contractor pays to provide part of the service or product in question.
A memorandum of agreement is not legally enforceable, but describes the terms of an agreement between or among two or more parties to cooperate or collaborate in some way. These agreements don't involve an exchange - if they did, they'd be contracts .
A contract or subcontract should be used in any relationship involving an exchange, particularly one involving money. A memorandum of agreement is more appropriate in situations relating to organizations collaborating on a service, agreeing to refer participants to one another, offering mutual support, or engaging in an activity together.
In reading a contract, try to follow these guidelines:
The guidelines for reading a memorandum of agreement are essentially the same. These are usually not written in legal language, and may be quite simple, so reading and understanding them may be much easier. Even though it's not a legal document, a memorandum of agreement is a promise, and should be treated by signers in the same way as a contract: you should consider yourself bound by it, and, if you sign it, you should make every effort to carry out its terms.
The touchstone for drafting a good contract or memorandum of agreement is absolute clarity about everything the document covers. In the case of a contract, that means describing exactly the who, what, how, when, and where of the exchange, as well as:
If the contract is to stand up in court, its expectations have to be clear enough to be enforced. (It's a good idea to work out the contract details with the contractor, if that's possible. That way, it's much more likely that the contract terms will be both feasible and acceptable, and the chances that the result will be exactly what's desired are much higher.)
Drafting a memorandum, as with reading one, is usually a lot simpler than drafting a contract. The Tool Box recommends, however, that you approach the process in the same way, aiming for as much clarity and specificity as possible. That way, there will be no misunderstandings or bad feeling about what the agreement includes. This result is even more probable if you and other parties to the agreement draft it together.
If you can follow these guidelines, your contracts or memoranda of agreement - whether you're the one who's writing them or the one signing on - have an excellent chance of achieving the results you hope for.
