Changing Times and Contract Hot Spots
No doubt, our recent times have been epochal – significantly affecting individuals, nonprofits, and much more. We’ve seen a pandemic, racial tension, mass shootings, protests, war, incredible social media influence, and increasing division on social issues. We all have been deeply impacted and forced to change in countless ways. As the non-profit sector seeks to continue improving and impacting communities through educational, health, social, religious-based, and other services and activities, nonprofits should newly assess the ways they address agreements with other parties. This article walks through five contract hotspots for focused attention, particularly in light of these major societal changes and beyond standard boiler-plate terminology.
As we journey through these contract writing hot spots, consider the following hypothetical. A well-known speaker, Lois Lane, who is also the president of a large technology organization, is hired to speak at a venue in a midwestern city about her recently published book on global poverty and economics. The venue, The Daily Planet, is operated by a nonprofit, faith-based organization that hosts events for the community to spark healthy and diverse conversation and learning. One month before Lois Lane is set to appear, she begins to be pressured to pull out of the engagement because the Board of The Daily Planet published a controversial view on a certain subject. Tweets fly, objectors protest, and the media gets involved. Lois Lane must consider her reputation, the interests of her organization’s shareholders, and whether it is worth risking whatever the consequences might be to keep her commitment. Meanwhile, The Daily Planet has sold tickets to members in the community, hired an opening speaker and food and beverage vendors, and printed brochures for the event. As the social pressure ramped up, Lois Lane happened to hear that there was a COVID outbreak in The Daily Planet’s city.
While this scenario concerns event contracts, the application principles are characteristic of many contracts as broadly applied to their development, negotiation, renewal, and termination.
1. Cancellation and Termination
Cancellation and termination contract provisions are always important to negotiate well to address unforeseen circumstances that might threaten an event after the contract is drafted. Since 2020, cancellations are more common and happen with less apparent impetus than prior years. For example, parties are more frequently deciding to cancel due to social or political pressure, potential COVID exposure, and even gas prices. May Lois Lane pull out of the engagement with the Daily Planet based on the pressure she’s getting?
Ms. Lane and her attorney will need to assess what the contract says about cancellation. Some contracts include severe penalty provisions for cancellation. Others allow for refunds or rescheduling depending on when the cancellation happens. And still others acknowledge cancellation is a possibility and may set forth available remedies. A clear cancellation provision is one of those necessary “in case of emergency” contract provisions. The details of such provisions depend on the subject matter and the parties’ goals in the contractual relationship. For example, if an organization plans an event for which it has sold tickets, and a speaker backs out, the organization needs to have negotiated a contract that allows it to make things right for its ticketholders, retain a back-up speaker, move to an on-line platform, or mitigate its damages in some other way. When drafting a cancellation clause, the parties should consider future contingencies and bargain for cancellation fees or penalties and/or the waiver of same, timeframes for cancellation, refunds, rescheduling, payment schedules, and online options.
2. Representations & Warranties
Parties’ representations and warranties are a critical contract component. The so-called “Reps and Warranties” set forth assertions of objectively factual statements by one party upon which the other party relies as a condition for entering into the agreement. Correspondingly, the absence of one or more such statements by a party may alert the other party to be on guard, perhaps to check further, or even to not enter the contract.
As an example, a party to a merger might affirmatively represent that it has no unpaid tax liabilities. The other party then relies on that representation as inducement to enter into the agreement. If it turns out that the representing party does have unpaid tax liabilities, the relying party may have a claim for relief from those liabilities from the individuals who made the representation – particularly if the liability then falls on the relying party, as the ultimately responsible party.
In the scenario above, use of certain representations and warranties would likely impact Lois Lane’s rights. For example, the Daily Planet may have negotiated that Ms. Lane agree to represent and warranty that she had been advised of and understood the Daily Planet’s controversial mission, messaging, and position on certain issues. With such representation, Ms. Lane will be less likely to be released from her obligations under the contract based on an argument related to the Daily Planet’s position.
Nonprofits should thus carefully review reps and warranties, especially if they are boilerplate (or missing), and ask (1) what assertions of fact from the other organization does this nonprofit need to rely on as an incentive for entering into the agreement? and (2) how may the nonprofit limit its own assertions of fact as reps and warranties to limit its own future exposure? Small nonprofit entities often have less negotiating power in dealing with larger companies, so certain reps and warranties may not be possible to obtain or avoid. However, even large for-profit companies do have sales goals that might incentivize them to flex some, so a skilled negotiator can find success even where the bargaining power of the parties is seemingly lopsided.
3. Force Majeure/COVID-19
Force majeure provisions relieve both parties to a contract from performance and any resulting liability if a major event that is unanticipated and outside of the parties’ control strikes. Such provisions are difficult to enforce if they include generic reference to events, like “acts of God.” Instead, force majeure provisions must be specific (earthquake, hurricane, war, landslide etc.). When the COVID-19 pandemic hit, many contracts did not include pandemics among the acts listed in a force majeure provision, making these provisions hard to enforce due to COVID. Now that COVID is not an “unanticipated” event, force majeure clauses need to be very specifically drafted to provide any relief of obligations for the parties. For example, the parties may want to include a specific provision about COVID-19 outbreak affecting more than a certain percentage of attendees, government regulations related to COVID-19, rescheduling requirements, references to other as-of-yet unknown strains of the virus, or other debilitating viruses as well.
In our hypothetical, if Lois Lane and The Daily Planet negotiated specific COVID-19 provisions in their contract, then each party might have various types of relief available to them. For example, the parties might negotiate that Lois Lane would have another avenue available to her in light of the outbreak in The Daily Planet’s city. Similarly, if the Daily Planet included such a provision in its contracts with those that bought tickets to Lois Lane’s presentation, it may have the ability to cancel or reschedule the event without incurring damages.
Often referred to as “hold harmless” provisions (or in addition thereto, as a closely related concept), indemnification provisions are designed to allocate the risk and costs associated with a breach, misconduct, or even the performance of obligations by the parties to the contract. For example, if one party fails to honor the terms of the agreement and causes harm to a third party, an indemnification provision shifts ultimate liability for those costs and expenses to the nonbreaching party.
What if Lois Lane cancels her appearance at The Daily Planet the day before? The Daily Planet has sold 2,000 tickets, hired several vendors to sell food and beverages at the event, and retained an opening speaker for the event. Lois Lane’s breach of contract at the last minute would mean that The Daily Planet was out an amount equal to the ticket sales, the costs for the food and beverage vendors, and the opening speaker’s fee. If third parties, like the attendees and vendors sue The Daily Planet, the indemnification provision would require Lois Lane to reimburse The Daily Planet for its losses related to damages from such third-party lawsuits.
Indemnification clauses should be drafted with appropriate carve outs. Again using our example, what if a few days before the event, The Daily Planet’s marketing staff posted false and defamatory information about Lois Lane’s political and social views on Twitter? If such posts cause her to receive threats, Ms. Lane might not be required to indemnify The Daily Planet for its losses resulting from Ms. Lane’s decision to not speak.
5. Dispute Resolution
Inevitably, some agreements end in disputes, even between two well meaning nonprofits. Given the increasing polarization of our time, there is now, perhaps more than ever, reason to consider alternatives to rushing to court. Such matters may be quite beneficial to consider upfront and then to include them in contracts.
What alternative dispute resolution options exist for nonprofits? If two nonprofit entities share the same faith background, the parties may agree to resolve their differences in accordance with the conflict resolution principles of that shared religious belief. Additionally, a contract may include good faith language to work through differences on a one-on-one basis if a dispute arises. Parties may further agree to use more traditional alternative methods like mediation or arbitration, with litigation being permitted only as a last resort.
In a world that has become particularly litigious and divisive, a nonprofit might decide that it does not want to handle disputes in the traditional way of issuing a demand letter followed by litigation. While alternative dispute resolution methods can involve some expense, especially if private mediators are involved or if the alternative mechanism fails and the matter winds up in court anyway, they can at least provide some attractive options worth considering. In particular, mediation offers opportunities for creative solutions, relationship restoration, flexibility, and other avenues not available through binary win/lose results that are typical in litigation or arbitration. Consequently, if alternative dispute resolution are included in the contract, then the parties may be able to navigate a dispute less divisively.
In our factual scenario, The Daily Planet may object to the circumstances of Lois Lane’s cancellation. But respecting her decision, and especially as a faith-based organization, it should want to honor its contracts and handle such matters consistently with its beliefs and religious principles. Each party may well benefit from a mediation or other dispute resolution approach short of litigation.
Cutting and pasting old boilerplate provisions into a new contract can be very tempting, especially when it comes to provisions that seem obscure or seldom relevant – like indemnification, dispute resolution, force majeure, and cancellation. But these contract hot spots are critical to revisit and think through in light of our society’s current state and related expectations and behaviors. To maximally safeguard a nonprofit organization’s important mission, taking the time to carefully review and modify such provisions as warranted is well worth the effort!