Your contractor talked a big game at first — but then they didn’t follow through, so you cut them loose. Except now they’re back, lawyered up, and after a major portion of your nonprofit’s annual budget.
Whether you’re partnering with your local government or hiring a maintenance person, contracts are an everyday part of running a nonprofit. But what can you do when the other party doesn’t hold up their end of the deal?
Terminating a contract, even altering one, can be tricky to navigate, and it’s easy to make a bad situation even worse. It can even expose your nonprofit to a “breach of contract” lawsuit — a situation where, in most cases, your insurance will not be able to help you.
Although many people mistakenly assume that they will be covered by insurance in the event of a lawsuit alleging breach of contract, most insurance providers — including NIA — do not cover “breach of contract” claims.
Let’s explore a typical “breach of contract” scenario and discuss some steps your nonprofit might consider when it comes to your partnerships to help avoid finding yourself in a similar situation.
The Nonprofit:
A nonprofit operated a bicycle library in a midsized city, with a fleet of approximately 200 bicycles available for a nominal monthly subscription fee.
Looking to expand its service area, the nonprofit entered into a one-year contract with a consultant for the following deliverables:
- Identify potential neighborhoods for expansion
- Survey the residents of those neighborhoods to gauge public support
- Secure donor support for expansion
- Scout possible locations for storage and maintenance facilities in each neighborhood
- List each neighborhood’s “pros and cons,” including potential drawbacks, roadblocks, and opponents
- Prepare dossiers for each neighborhood to present to the nonprofit’s board
The contract called for the consultant to be paid a monthly payment of $9,000, with the understanding that certain key deliverables would be due quarterly.
The Incident:
Six months into the contract, the consultant had not produced most of the agreed-upon deliverables and had missed two quarterly due dates with little significant progress being made.
Citing the lack of progress and deliverables, the nonprofit then activated the termination clause in the contract, paying the contractor and settling all outstanding invoices through the termination date.
The Legal Action:
Several months later, the nonprofit was contacted by an attorney hired by the terminated contractor, demanding the remaining $54,000 of the contract and threatening to sue the nonprofit for breach of contract.
The Coverage:
Contracts are an area of particular risk for nonprofit organizations. Most insurance providers do not offer coverage for damages related to breach of contract, considering it to be an uninsurable risk.
Unfortunately for this nonprofit, their NIA coverage — like that of many other insurers — could not be applied to this situation.
The Result:
The nonprofit retained an attorney who then reviewed the language of the contract, the circumstances around the termination, the work the contractor had (and hadn’t) done, and the nonprofit’s records surrounding all of it.
After their review, the attorney advised the nonprofit that the language in the original contract had been vague and had not clarified the due dates and deliverables sufficiently, leaving the nonprofit’s potential liability in question.
The attorney then worked with the contractor’s attorney toward a resolution.
What Did the Nonprofit Do Right?
The nonprofit made a few good decisions in this situation:
- The nonprofit contacted their broker as soon as the contractor’s attorney issued their demands to check if their insurance policy contained any coverage that could be applied.
- In their agreement with the contractor, the nonprofit had included a termination clause.
- The nonprofit appointed an attorney to assist with negotiating a fair settlement.
What Could the Nonprofit Improve?
When it comes to contracts, language is everything. This is especially true when it comes to terminating a contract that isn’t working out.
When the language is anything less than crystal clear, it can leave the terms of the contract open to interpretation (and misunderstanding) and potentially create loopholes that could be used against your nonprofit in the event of legal action.
In this case, although the nonprofit did include a termination clause in the contract and was able to point to numerous examples of the contractor failing to produce the agreed-upon deliverables in a timely manner, the vague language of the contract proved to be problematic.
During review, the nonprofit’s legal counsel determined that the contract’s language concerning deadlines and deliverables — what specifically was to be delivered and precisely by when — had been unclear enough that taking the contractor to court was considered to be too great a risk and worked with the nonprofit to craft an appropriate resolution.
How Can Your Nonprofit Avoid This?
Whether you’re working with contractors, other nonprofits, businesses, or government agencies, successful partnerships are an essential part of any nonprofit’s operations.
You want these partnerships to be a good experience for everyone involved, so when you enter into a contract, an agreement, or MOU with someone, it’s best to set mutual expectations as clearly as possible from the beginning.
This will help to keep all partners accountable to each other, setting terms that each party agrees to abide by, such as:
- The goods and/or services to be provided
- The cost, frequency, and method of payment
- The length of the contract
- Key deliverables, and when they are due
- Who is responsible for what
- Insurance requirements
- What constitutes success
- Appropriate/reimbursable expenses
- Whether the contract can be renewed
- The circumstances for terminating the contract
- And more
You may be tempted to leave the lawyers out of it and rely on informal, handshake agreements instead of signed documentation — trusting that mutual passion for your mission will drive both sides of the partnership.
But, in practice, that’s often a road that leads to problems and can leave you without options if the relationship doesn’t work out and becomes a legal situation.
While it may be more formal, it’s always a good idea to have a legal professional with experience in contract law help to draft the language of your contracts, agreements, or MOUs — or at least have them review it and provide feedback before you sign it.
Then, once everything is signed, be sure to keep detailed records of throughout the length of the partnership. This should include keeping files of all invoices, expense records, progress reports, and communications (emails, text messages, etc.) between your nonprofit and the other party.
Not only should you do this for your financial reports, but in the event that the partnership doesn’t work out and you end up in court over it, you’ll have an organized and established paper trail as evidence to prove that the other party didn’t hold up their end of the agreement, and that you terminated the contract appropriately.
Conclusion
Contracts and external partnerships come with the territory in the nonprofit sector, and most of the time, it works perfectly fine — the deal is signed, the job gets done, payments are made, and everyone goes on with their lives.
Just because it usually works well, however, doesn’t mean it always does.
Insurance usually won’t be able to help you with breach of contract lawsuits, so it’s up to you to be sure you’re not getting into a potentially bad situation.
Using clear and deliberate language, setting appropriate expectations, and consulting with legal professionals before you sign any contracts, agreements, or MOUs, can help your nonprofit be confident that each party will be accountable to each other throughout the life of the partnership — and that you’ll be prepared in case something goes wrong.
This will ideally lay the foundation for a mutually beneficial partnership that uplifts everyone involved and helps you serve your community better.
For a Deeper Dive
Although Nonprofits Insurance Alliance (NIA) cannot offer coverage for breach of contract scenarios, several resources are available that can help nonprofits better navigate their partnerships and collaboration efforts.
- Managing Collaboration Risks: Partnering with Confidence and Success: This free e-book includes information, sample checklists, and more to help nonprofits better manage their risks when collaborating with other organizations and entities.
- Webinar: How Does the Liability Flow?: This on-demand webinar, available for free to all NIA-insured nonprofits, covers additional insureds, and the importance of reading and understanding certain provisions of your contracts (login required).
