When to Prioritize Legal Review of Your Nonprofit’s Contracts
Contracts are the lifeblood of any nonprofit organization’s day-to-day operations, just as with for-profit businesses. In an ideal world free from budget and time constraints, nonprofits would have every contract reviewed by a reputable attorney with the relevant subject matter expertise. Even the most simple and straightforward contracts can expose your organization to significant and wide-ranging liabilities and operational risks. However, for some organizations legal review is not always feasible.
While I would never advise an organization to forego legal advice to save time and costs, consider the following list of questions that can help you to determine when to make legal review a higher priority.
What are the financial and liability risks? The more money or potential liability involved in a contract, the more risk there is to your organization. This is not just about how much your organization is paying or will be paid under the agreement. Think about whether the organization could be sued for something related to the contract, such as a data breach, personal injury, or intellectual property infringement. An attorney’s review is particularly important for these large or potentially high-risk contracts.
How long is the contract period? If a contract has the potential to lock the organization in for more than a year (including through automatic renewals, burdensome termination provisions, etc.) then an attorney would be helpful to make sure you understand the commitment and explore language that could give your organization additional ways to terminate or modify the contract, if necessary.
Is ownership of intellectual property (or the right to use it) an important issue? Intellectual property (patents, copyrights, trademarks, trade secrets, etc.) involves many traps for the unwary, whether you are attempting to assign ownership or determine the scope of a license. This generally requires careful drafting that a non-attorney may not be qualified to provide or review.
Are there confidentiality requirements? Confidentiality language can be quite complex. Legal review can help you make sure your organization’s information is adequately protected and/or that you understand the steps required by your organization to keep the other party’s information confidential.
Does the contract involve a new type of revenue stream for the organization? Contracts involving a revenue-raising activity that is new for the organization should generally be reviewed by an attorney to make sure no new legal issues are raised, such as unrelated business income tax or compliance with the requirements of the organization’s tax-exempt status, the charitable deduction rules, or applicable state charitable solicitation registration and/or licensing laws.
Does the contract involve a highly regulated subject area? Some examples of highly regulated subject areas include employment, conflicts of interest, real estate, data privacy, environmental regulations, foreign grants, and conflicts of interest (i.e., financial dealings with the organization’s directors, officers, or high-level employees, or their family members or related businesses). These and other contracts raise special issues that often require an attorney’s expertise.
Would the contract modify a previous agreement between the parties? This can be tricky to do without creating confusion about the rights and obligations of the parties.
Is there a lot of boilerplate legalese? The term “boilerplate” refers to the standardized fine print language that typically covers issues such as liability limitations, indemnification, liquidated damages, governing law, non-solicitation, non-competition, force majeure, mediation/arbitration, and representations and warranties. These provisions can be very hard to understand, tend to be skewed in favor of the party who drafted the contract, and can potentially have a lot of impact. In fact, a large portion of my time reviewing contracts for my clients is spent revising and negotiating boilerplate language provided by vendors and other counterparties.
Planning Tip – One step that can control legal costs while providing some protection to the organization is to develop contract templates for the organization’s most common agreements. Try to identify your organization’s most common activities. Then work with an attorney to conceptualize what type of agreement is needed for each activity and draft template agreements that can be relatively easily customized by the organization’s staff or leadership.
The practical reality is that sometimes nonprofits have little choice but to rely on their staff, volunteer Board members, or non-lawyer consultants to review, negotiate, and finalize certain contracts. Before foregoing an attorney’s expert advice and input on a particular contract, organizations should consider the potential risk exposure and whether especially complex issues are raised.
