A memorandum of understanding remains a contract at its coreWhen nonprofits need to put something in writing, they frequently choose to avoid entering into an intimidating legal contract and instead opt for the less threatening MOU.
MOU stands for "memorandum of understanding." Nonprofits tend to view MOUs as a kinder, gentler way to document their intentions. At its core, however, a contract of any type is:
- An offer by one party to do something
- An acceptance by the other party
- The promise to exchange something of value to seal the deal
Under this definition, the MOUs nonprofits create are almost always bare bones legal contracts.
Even if a MOU is an enforceable contract, MOUs rarely include the level of detail required to resolve misunderstandings when they arise. For this reason, I advise clients to enter into contracts that fully document their expectations. A bare bones agreement may feel less intimidating but it leaves quite a bit to argue about if a party's expectation is not fulfilled.
The better practice is to create a nonbinding MOU to memorialize the key terms of the deal for larger, more complex transactions. The parties can then rely on the MOU as a basis to move forward with the negotiation of a more complete agreement.
Another technique to soften nonprofit contracts is to get creative with the titles. For example, to better reflect the less combative nature of nonprofit endeavors, consider titles such as "Collaboration Agreement" or "Affiliation Agreement" in place of "Joint Service Agreement" or "Acquisition Agreement."
To flesh out the terms of a contract, consider the parties' intentions with respect to the following:
- Parties to the contract. Who needs to be included? Is it a traditional two party contract or do additional parties need to be obligated?
- Term. How long will the contract last? Should the term be based on the passage of time or the occurrence of a specific event or milestone? Will it renew automatically unless notice to terminate is provided?
- Scope. Why are the parties entering into a contract? What good or service (or combination of the two) is being provided under the contract?
- Responsibilities of each party. What is expected of each party to the contract? The duties of each party should be separately spelled out in sufficient detail to enforce the obligations.
- Termination. Is the contract terminable at will? Is notice required to terminate the contract and, if so, how much notice is required?
- Confidentiality. Will the parties have access to one another's confidential information? Do the parties want to keep the terms of the contract confidential?
- Publicity. Do the parties need to agree on press releases or timing of announcements?
- Covenants. Do the parties require one another to make additional promises to do or not do something?
- Indemnification. Are the parties promising to indemnify one another if a party to the contract creates liability for the other party?
- Insurance. Are the parties requiring maintenance of certain coverages or endorsements?
- Choice of law, jurisdiction and venue. For parties in different jurisdictions, what law will govern interpretation of the contract? Where will any lawsuits be filed? Should alternative dispute resolution (such as arbitration or mediation) be required?
Nonprofits that use contracts that are clear on the above points will be more likely to avoid disappointment down the road. If the project does go awry, nonprofits with solid contracts will be in a far better position to deal with the other party's failure to hold up their end of the bargain.
For more from Ellis Carter, visit CharityLawyer.