Substance over Form

There are many forms of business agreements each having their own intention and legal consequences; however, these titles are often used incorrectly, and users do not realize this until it becomes a problem. Take note the following information is general where jurisdictional nuances may apply; with this I encourage readers to seek legal counsel on what applies to them and their situation.

When dealing with government or other nonprofit entities, you will normally be funded through either a Service Contract, or Contribution Agreement including Grants, Loans, and Subsidies. Take caution in although there is a great deal of literature regarding the differentiation between the terms which also varies by jurisdiction, you will find situations where an arrangement is called one thing where according to literature you have read, it more closely resembles another. 

 Throughout your nonprofit and public service careers, you will also find other nomenclature such as Memorandum of Agreement, Letter of Agreement, Funding Letter, and others. My advice is to focus on the terms and conditions spelled out in the agreement versus the title but suggest if you have concerns to discuss them with local experts given jurisdictional differences.

 An important distinction between Contracts versus Contribution Agreements is the former pertain to where the direct recipient of the goods or services is the funder themselves, where the later are goods or services aimed at a third party such as the public, or members in the case of clubs or professional associations. In other words, the funder is not purchasing a good or service for themselves; rather, they are purchasing them for someone else as part of furthering a particular agenda. A further differentiation is a Contract is for specified deliverables such as $175 per 45-minute counselling session, where a Contribution Agreement would be for example $1,000,000 to hire and provide program space for ten counsellors who will strive to deliver 9,600 sessions during a 52 week period. While we are at it, a Grant would be funding to purchase the building we will use for facilitating the counselling sessions.

 To explain further, a Service Contract is used when the funder is the recipient of the service such as but not limited to legal counsel, information technology support, accounting or human resource management, and janitorial services. To emphasize, the organization itself receives the service versus a third party such as a client or a club member. However, I have seen the term Service Contract where the recipient is a third party, and this can lead to confusion. A case in point is a nonprofit society being awarded a Contract from a government agency for delivering counselling services to members of the public versus members of the government, which one would think should be a Contribution Agreement versus a Contract; another being the Correctional Services entering a Service Contract to deliver dental services to inmates. Perhaps a way to look at it is the service is actually the responsibility of the payer where you the payee are performing it on their behalf. If it was an initiative of the government to provide these services, it should be a Contribution Agreement as these instruments are aimed at third parties and are used to further government agendas versus Contracts which are used to provide the government themselves a service. In this example, the government employees are not receiving the counselling or dental services, members of the public are therefore a Contribution Agreement versus a Service Contract would seem more appropriate. Remember to also consider if the agreement is specific such as a given rate per unit of service delivery, or a budget with a goal of providing a certain number of units.

 Another agreement form worthy of discussion is a Memorandum of Understanding (MOU). An MOU is not a financial agreement rather it is an arrangement to work together toward a common goal. For example, if you have a client who requires service X which you do not provide, then you will refer the client to the organization who do provide this service and you have the MOU with, and/or, the other organization will do the same should they have a client who needs a service which they do not provide but you do. With this, there should not be financial terms in MOU such as commissions; if you do have a financial agreement, it should not be an MOU as it should be titled a Contract.

 In the end, I am not here to debate the use of terminology rather to advise you of the various agreement instruments you will encounter and the fact there will be confusion on which form is being used versus which we think it should be. Once again, my advice to readers is to focus on the terms and conditions not the title of agreement; that being said, if you choose to use a particular title believing it will protect you, courts may look at what is called ‘substance over form’ and make the determination of what your agreement really is versus what you called it in the title. I cannot emphasize enough, consult local professionals regarding your situation and jurisdiction.