A Five-Step Guide to Help Associations Review Contracts.

Contracts are a way of life. Trade, professional, and philanthropic associations, as well as their affiliated foundations, subsidiaries, and chapters, often must deal on a daily basis with proposed legal contracts from contractors, suppliers, consultants, printers, convention centers, hotels, and others. Many proposed agreements drafted by other parties are very one-sided and written in confusing language. Jeff Glassie, an expert in contract law, suggests a simple guide to help your organization review proposed legal contracts.

Jerald A. Jacobs, ASAE General Counsel

It should be understood from the outset that the terms and conditions of all contracts are negotiable. Contracts with large multinational corporations such as IBM or Microsoft are typically filled with boilerplate language that allows little room for discussion; yet price, delivery, and other terms often have some degree of flexibility. Virtually all agreements can be negotiated to some extent to make provisions mutual, to delete extremely harsh or unfair provisions, or to increase the legal protections and minimize potential liability to the nonprofit organization.

Agreements, contracts, memoranda of understanding, and other similar documents will generally be binding if signed by both parties--whether they appear in the form of an official legal document or in simple, handwritten, signed exchanges indicating mutual commitment.

While it can be intimidating to review pages of complex legal language, you can often determine the general acceptability of proposed contracts by paying special attention to five particular elements during contract review. They are: warranty, intellectual property, payment, indemnification, and termination. You can easily remember these elements by using their acronym: WIPIT.

* Warranty. A contract should specify the exact nature of the product or service to be provided and by what date. The supplier should warrant that the product or service will meet acceptable criteria for performance, safety, and quality standards (ideally those established by a third party) and that it will meet the expectations of your organization.

Warranty terms should be stated as precisely as possible, making it clear to both parties exactly what is required and, therefore, what would constitute a failure of performance or breach of contract. When contracting for a service, for example, the contract should state at a minimum that the service will be provided in a professional, competent, timely, and lawful manner.

* Intellectual property. An organization's intellectual, or intangible, property is often its most valuable asset. Provisions relating to such intellectual property in the form of copyrights, trademarks, or trade secrets (such as mailing lists) have taken on increased importance in the Internet Age. When intellectual property is to be used or created by either party, terms of ownership should be stipulated. For example, if the provider is to create intellectual property that is subject to copyright ownership, including scholarly articles or computer software, it is essential that the provider assign copyright to the purchasing nonprofit organization. It is ironic that without such a formal written assignment the organization would not own the work it paid to have created. When the provider does retain ownership and the organization receives only use of the copyrighted material, a broad license should be granted that outlines the scope and terms of use.

As a trademark owner and licensor, a nonprofit organization is required by law to protect the style, quality, and use of its trademarks (e.g., name, acronym, and logo) or risk abandoning rights to the marks. Use by a vendor or contractor of this type of intellectual property--such as in affinity programs-- should be clearly covered by a license specifying permitted uses and subjecting all uses to advance review and approval by the organization. These provisions also define the characterization of the revenues derived from intellectual property and affect their tax treatment. Specifically, payments received in connection with the passive licensing of intellectual property are considered royalties, which are exempt from unrelated business income tax.

* Payment. Contract payment terms are crucial and should state a definite payment schedule (reserving a significant portion of the payment until final performance can be assessed), a maximum amount of payment (with excess charges conditioned on the organization's advance approval), and any interest assessment for late payment. In hotel contracts, related terms, such as attrition clauses, should be carefully scrutinized. In certain other contracts, such as those for affinity programs, payments may continue after the agreement terminates and such terms must be clearly specified.

Again, to minimize tax liability, the proper characterization of payments received by tax-exempt organizations is of critical importance.

* Indemnification. A well-drafted indemnification provision is a key ingredient to adequately protecting the nonprofit organization and its officers, directors, volunteers, and staff. If a provider's negligence might cause loss or damage to the organization, it is only reasonable that the provider agree to fully indemnify and hold harmless the organization (that is, pay those losses or damages on behalf of the organization). Mutual or reciprocal indemnification provisions are common and appropriate. With certain types of contracts, specific liquidated damages provisions may be included, such as attrition clauses in hotel agreements. These may be acceptable if they are clear and appropriate (that is, providing only for net revenue loss).

* Termination. Certain situations may cause the organization to wish to terminate a contract before the specified termination date. Therefore, it is important that the term or duration of the contract, as well as the means for terminating it earlier, be specified. Usually, a shorter term is preferable to a longer term, although a contract can always be terminated for breach. Here are some other options:

1. An automatically renewing or evergreen contract avoids renegotiating terms periodically.

2. A contract that the organization may terminate at any time--subject to written notice in advance--may be beneficial in certain circumstances.

3. A contract that does not allow the provider to terminate the agreement without cause ensures that the product or services being provided will remain available unless there is a breach (which would likely only be for nonpayment).

For all contracts, it is crucial that the contract state whether it is terminable only for breach (with cause) or without any breach (without cause). Termination provisions are often mutual, so consider in advance any potential ramifications that might result.

These are only general guidelines to assist in the review of contracts by nonprofit organizations. The WIPIT approach covers only some of the most important elements; others may warrant special scrutiny. The specific factual situation, nature of the circumstances, and intentions of the parties will mandate attention to relevant details and may argue for particular recommendations or courses of conduct. Legal review and advice, therefore, are recommended in most circumstances.

Jefferson C. Glassie and Jerald A. Jacobs are partners at the law firm of Shaw Pittman in Washington, D.C. Jacobs edits this column and is general counsel to ASAE.