Contracts are an operational necessity – they are used to document both obtaining and providing services, so an organization may enter them from both directions. Contractual relationships with partners whose actions are not managed by the organization may create additional risk and liability. Understanding the basic components of contracts is crucial to ensure that a given contract serves the organization rather than entrapping it.
Simplistically there are three areas to review: the basics, the agreement, and the extra items.
The Basics: Who and When
The basics include who and when.
- Both parties full legal names should be listed and their locations identified
- The signatories must be identified by title and they must have authority to bind their respective entities
- The dates of the contract should be clearly stated
The Agreement: What, Where and Possibly Why
The agreement includes what, where, and possibly, why; it defines the responsibilities and consideration and may explain the reasons behind the agreement.
- The considerations must be explicit and conditions, if any, clearly identified – there must be a stated give and take for the agreement to be enforceable.
- The responsibilities must be realistic and doable; a contract creates an enforceable legal obligation.
- Evaluate the requirements and conditions and know you can fulfill your obligation before signing
- Never agree to assume liability for actions of another party over whom you hold no control
- Never agree to accept liability for negligent, grossly negligent, or intentional acts of a third party, its employees, or its agents
- Strive for language that specifically makes each party responsible for its own negligence
No matter how badly you want to provide a service or program, it isn’t worth making agreements contrary to the above sub-points – you are risking the viability of your organization and its continued mission.
* If performance standards or product criteria play a role, state them unambiguously, citing an appendix if necessary; e.g., a bus meeting FMVSS 220, 221, 222 or lifeguarding a pool following organization protocols.
The Extras: How
The extra items are how and include required insurance limits and additional insureds; hold harmless, waiver, and indemnification clauses; subrogation, and the like.
- Insurance limits are probably self explanatory but additional insureds may not be – people often ask to be named as an additional insured when what they really need is a certificate of insurance.
- If they want verification that you will be able to pay for damages in case you make a mistake or are negligent then they want a certificate of insurance.
- If they want protection from another party for work that you have performed on their behalf or on property owned or controlled by them then they want to be named as an additional insured.
- Though almost always used together, the following closely related concepts are actually very separate.
- Hold harmless defines how one party agrees to view the actions of another, regardless of the presence of legal liability – it is better to be held than be the one holding; mutual action is good.
- Waiver is an action regarding a party’s rights – e.g., waiving or relinquishing the legal right of compensation for the negligent action of another.
- Indemnification is the repayment of the other party for loss actually incurred because of a defined act, even though the debt may legally be that of the indemnified party, the indemnifying party agrees to reimburse the indemnified party for the loss incurred (generally damages, expenses, and legal fees); it is better to be indemnified than to indemnify; if you are indemnified you may want to make certain the indemnifier can honor the obligation (i.e., require insurance).
- Subrogation is the right to recover the cost of a loss from the party who is determined to be at fault and is granted to the insurer in most insurance policies. When true, you cannot waive those same rights in another contract as they are not yours to waive.
Contracts utilize special and unfamiliar terminology. Your Redwoods risk manager is available to review the risk management and insurance issues of a contract, but you should ALWAYS have your local counsel review any contract before signing it.