Reading the Fine Print

Tips and tactics to remember when it comes to contracts.

The deal sounded good. About 50 churches in the Washington, D.C., area leased interactive electronic kiosks for their entrance areas so that members and visitors could check on activities and news and register for classes and meetings. The selling point? Church leaders say the kiosks were presented to them as “cost-free,” with the chance for their churches to potentially earn revenue from advertisers interested in reaching church audiences.

But in April 2009, a lawsuit filed against three commercial leasing firms, an online services firm, and an interfaith digital network services firm by the District of Columbia churches suggested the deal wasn’t a good one. The churches say they received lengthy—and costly—leases and faulty equipment, as well as fees and termination expenses. All told, the lawsuit estimates hundreds of thousands of dollars in combined losses for the churches.

Officials from at least two of the firms denied the allegations. News reports indicated that the companies must prove the charges and expenses were disclosed—in the “fine print”—even as the equipment was advertised as cost-free.

The situation underscores why it’s important for church leaders to review any contract before signing it. Legal experts concede that contracts and agreements can be tough to navigate, but necessary to do nonetheless.

“One insurance coverage contract I reviewed was over a thousand pages long,” says Frank Sommerville, a Christian attorney based in Houston. “There was a lot of complex language surrounding liability coverage and exclusions, and that could create a lot of potential issues for the church.”

Church leaders don’t want to find themselves on the wrong end of a deal. Details really do matter. For that reason, it may be especially important to secure an attorney’s help with reviewing larger contracts. In addition, these seven items are important to remember when it comes to reviewing purchasing and leasing deals:

1) Amendment and waiver provisions. Church leaders need to know whether there is any flexibility in contract provisions should there be a change in operating needs or conditions. For example, a church may need to renegotiate the terms of a bank loan repayment schedule due to the impact of the recession. Can the repayment terms or the monthly payment be renegotiated? If so, on what terms and by what processes? Amendments and waivers usually are at the discretion of the property-holder or debt-holder. Those typically are the parties who can change terms and disclose them through a revised agreement copy sent to the debtor or lessee—with no guarantee that all parties will benefit. Contract language and terms also change when an original business party to the contract is merged with, or purchased by, another company if the contracts allows.

2) Interest, fees, and penalties. Credit card holders discovered in recent years that interest rates, credit limits and late-payment fees can be changed with minimal or no notice. The language was contained in the fine print of credit agreements—which few, if any, read. Recent legislation, signed by the president, will modify these practices within the next year. Investment fees for market investments may have brokerage fees and account management expenses built into transaction agreements. Equipment leases may require a noncompetitive service agreement at an annual cost. Contracts also may include provisions that lead to three possible types of penalties: fees for late payments, fees for nonsufficient funds, and fees or charges for a failure to abide by all of the terms of the agreement.

3) Loss, damage, and liability. Contracts can hold a church liable for loss or damage to equipment due to improper use, negligence, or failure to comply with all contract terms.

Insurers, for instance, may require specific training in sexual harassment prevention, or background checks for youth workers, or safety and security training. If an incident occurs, the insurer may require proof of policy compliance in order for the liability coverage to be in effect. Specific riders—an additional amount of insurance coverage specific to a piece of equipment or property that, if damaged, could jeopardize future insurance coverage—may be required by insurers to cover potential extraordinary losses. Church risk reductions and safety policies may be required by the insurer. When providing insurance coverage for financial transactions, additional insurance may be required for those involved in church finances, and best practices may have to be demonstrated should a church file an embezzlement claim.

4) Exclusions. Contracts also may include exclusions of certain services or materials. One church contracted with a construction firm to build an educational wing adjacent to the sanctuary. Upon completion, church leaders were aghast at the condition of the interior as well as the grounds. In the exclusionary language, the contractor stated that the company did not provide landscaping or interior decorating.

Some churches located in areas prone to hurricanes and floods have discovered that property insurers excluded flood damage, and that hurricanes were considered “acts of God,” which were not covered.

5) Termination or default of agreement. Early termination of an agreement can create an enormous expense—as cell phone users have discovered after signing promotional agreements. Charles Watkins, a Christian attorney with Webster Chamberlain & Bean in Washington, D.C., says that a copier lease is a good example of termination restrictions. “Typically, this type of lease is for a fixed term. If you decide that this copier is not serving your needs, you still have to pay for the balance of the term. That can be costly.” Early termination of a cell phone contract can present similar problems. “When you sign up at a promotional rate, you sign for a guaranteed term of the contract—usually two years,” Watkins says. “That’s how they make all their all their money. With early termination, usually there is a substantial fee.”

6) Noncompete clauses. Contract language may require that the church use a specific product or service provider for maintenance or support. Those expenses can add up, but are necessary for compliance with contract terms.

7) Nonperformance clauses. Contracts may specify how either party may handle complaints about product or service delivery. One church contracted with a professional organ installation specialist to get a new instrument into operation by a specific date, but the work was not even close to completion when the date arrived. The contractor apologized and promised a new date, but wanted to be paid in full for the services already delivered. The church withheld payment and demanded completion to avoid litigation. The installer finally was motivated to complete the work according to specifications.

Before the Contract Comes

The fine print in contracts can be costly and can cause major administrative headaches in the local church. Legal experts recommend that churches engage in some best practices regarding contract administration. These should include the following:

Create a contract review policy. Know the people who are authorized to negotiate the contract. Frank Sommerville says that churches will often appoint a person or a committee to review contracts involving larger financial commitments, but often bypass less significant deals. “A good procedure is to review all contracts, with different types of review at different levels,” he says. It is equally important, he says, to know the people who are negotiating the contract. “The character of the people you are doing business with should be able to help you understand contract terms and to make sure that, if there is a problem, you have solutions.” If problems or concerns develop, people with integrity will try to work them out in a fair manner. “The paper of a contract is only as good as the character of the people behind it,” he says.

Engage in competitive bidding. Watkins says that this process reflects good stewardship of resources. “This is especially important when negotiating with people who have relationships with church member or board members,” he says. Even if there is no direct relationship to the congregation, multiple bids for larger contracts can provide comparisons for costs, services, and contract requirements.

Put all contracts in writing. Watkins says that churches must move away from oral or “handshake” agreements for products and services. “Relationships are rightly grace-based, but when someone agrees to perform service for a price, writing is important because you want expectations to be clear,” he says. If there are problems, a written agreement helps both parties understand what corrective action, if any, needs to be taken.

John Throop is a consultant and trainer in church and nonprofit management. He is an adjunct professor at Eureka College in Illinois, an ordained Episcopal minister, and a contributing editor to Your Church.

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