In brief

  • Not-for-profit organisations (NFPs) often rely on support from private individuals or organisations in obtaining government funding.
  • Such support arrangements can be mutually beneficial, but it is important to remember that NFPs and their supporters may well have different expectations.
  • If these arrangements are not defined and documented from the outset, parties can end up in dispute—with the cost of dispute potentially outweighing the benefit of the funding.
  • We detail some of the risks involved, and provide our key tips for avoiding these risks.  

Not-for-profit (NFP) organisations often become very adept at engaging with, and obtaining support from, a wide variety of sources—government, private organisations (including foundations) and individuals. They often leverage their networks of contacts to support funding applications, through such mechanisms as simple introductions, references, in-kind support and formal agreements.

Supporters often have a range of reasons for offering their assistance—some based in self-interest, and others in generosity. The language used in the sector to recognise those who provide support emphasises the expectation that both the NFP and the supporter benefit in some way from the relationship—terms such as ‘partnership’ and ‘alliance’ are common.

This paper addresses some of the risks that may arise if arrangements between NFPs and their supporters remain informal, and due to the use of language which carries different connotations in the commercial world than in the NFP sector. It also sets out some tips for ensuring that the objectives of both the NFP and the private entity supporter are achieved.

Potential issues and difficulties

A number of issues can arise where assistance is sought by NFP’s from private entities to secure funding. Problems often occur where the expectations of each are not clearly articulated or adequately reduced to writing.

Scenario  

The following provides a useful example:

  • A is an established NFP providing services in the homeless sector
  • B is a private IT company and existing service provider to A
  • A learns of an opportunity to secure government funding to upgrade its IT systems
  • B agrees to provide information in support of A’s application for funding, which is premised on supplementing the existing IT platforms to deliver the desired outcomes. B expends time and resources in assisting A to frame its funding application
  • B is described in A’s funding application as A’s ‘partner’ for the purposes of the project
  • A secures the required funding from the government.  

A and B are both thrilled that the funding has been secured. But for very different reasons. A sees the project opportunities in terms of outcomes for its staff and clients. B sees the revenue stream to be derived from implementing the upgrade.

In these circumstances, a range of questions remain unanswered: Is A obliged to engage B to supplement its IT systems as anticipated in the funding application? If so, must B prove its ability to do so cost effectively? What are the terms of payment? Who owns the IP in the systems once installed? What if the government funding runs out before the project is completed? What if another service provider can perform the upgrade more cost effectively or in a way that will improve its functionality?

With all of the optimism of the funding application and the time pressure associated with meeting funder deadlines, insufficient attention is often given to these questions at the time of the application. A and B may have wildly different expectations of the outcome. The mere fact that B derives revenues from the NFP sector does not change its requirement to derive profit.

Damages to relationships and reputation

The consequences of such uncertainty in the relationship definition can be crippling for the NFP, and can far outweigh the benefits of the grant. The NFP is exposed to:

  • a fractured relationship with its service provider, putting at risk both its existing and anticipated IT systems
  • reputational damage with its clients, other supporters and grant providers if the service provider publicises its discontent with the ‘ethics’ of the NFP
  • damage to the relationship with the funder, and the possible withdrawal of the grant, particularly if it is dragged into the dispute as to the respective rights of the service provider and the NFP, and
  • legal action by the service provider asserting some kind of entitlement to a share of the funding secured, with all of the distraction, potential cost and exposure to a large judgment which that litigation implies. NFP management and boards are rarely equipped to effectively manage such litigation.

The service provider confronts similar risks if it finds itself embroiled in such a dispute, particularly if it derives significant revenues from the NFP sector.

Possible legal issue

Potential allegations that could be made against an NFP in such litigation include that the NFP:

  • was unjustly enriched by receiving the benefit of the service provider’s work in circumstances where it is unjust or unconscionable for the NFP to obtain or retain that benefit
  • has engaged in misleading or deceptive conduct in relation to the benefit that the service provider would take if the funding was secured
  • is estopped from asserting that the service provider was not guaranteed ongoing revenues if the funding application was successful, and
  • has breached an implied contract (including a partnership or joint venture agreement) with the private entity.

The risks of such an outcome are magnified where the role of the service provider is not clarified immediately upon it becoming apparent that the service provider is operating under different assumptions as to its role than are held by the NFP.

Protecting your organisation

There are a number of ways for both the NFP and the service provider to protect their interests from the potential impacts outlined above. Our key tips for staying out of trouble include:

  • Define the relationship between the NFP and the service provider early, addressing the respective rights and obligations both during the funding agreement, and in the event that funding is secured, in a written document such as a ‘teaming agreement’. This should at least:
    • clarify the specific role of the service provider, and confirm the capacity in which it provides assistance during the application phase (ie service provider, rather than partner, joint venturer, agent),
    • agree the cost and scope of work to be performed by the service provider if the funding is secured,
    • deal with ownership of intellectual property, and
    • make clear the nature of the discretion which the NFP retains in relation to the way funding received will be spent/allocated.
  • Where the organisation already uses the service provider and pays for those services, clarify that any additional work to be performed by the service provider in relation to the funding application falls within the separate (teaming) agreement.
  • Formalise any verbal agreements or variations to the initial agreement in writing.
  • Address any dispute or uncertainty promptly to resolve any diverging assumptions.
  • Manage the service provider’s performance consistently with the written agreement, and as soon as problems become apparent.
  • Ensure ongoing communication and correspondence between the NFP and service provider is clear and unambiguous and is consistent with the applicable agreement.
  • Communicate the nature of the relationship between the NFP and the service provider clearly when dealing with the funder and the public (including via newsletters and website content).  

Adopting the discipline associated with these tips from the earliest stage of the relationship will ensure that any funding secured can be directed towards the ultimate objectives of the NFP, and not squandered on distracting disputes.