Recently, I received an interesting phone call from a client who works for an Israeli based nonprofit organization who asked me the following question, “We just received a grant from the Chaya Foundation in Chicago. They want us to sign a contract that stipulates any legal disagreements will be settled in the State of Illinois. Should the organization sign this agreement with this specific clause?” (In order to protect the privacy of the foundation the name and state have been changed.)

When I heard this a red light went off in my head. I immediately thought of the nature of the relationship between the funder and the recipient organization. What goes into establishing the ground rules for receiving a grant from a foundation? What are appropriate requests that a funder can make of a recipient organization? What are the rules guiding the implementation of the grant and the running of the program? Are there limits as to what the foundation awarding the grant can request from the grantee?

These are all key questions and too often they are not considered by organizations that apply and successfully receive funding. Most nonprofit organizations know they are in a very competitive market. When they are notified that they have been awarded a grant they are so thrilled to receive the funding they do not always pay attention to the fine print in the contract. In this case, however, the recipient’s staff member read through the letter of award and the attached letter of agreement between the Israeli based organization and the Foundation with attention to potential points of conflict. A great deal can be learned from this example and it behooves all of us to consider the lessons learned from this case example.

In order to understand the ground rules and requests when it comes to funding, I would first like to define some important terms. The most sought after form of support to the nonprofit organization is an unrestricted allocation or gift. Essentially what this means is the agency is free to use the money in any way it sees fit. This is the most valued form of support an organization can receive because it is up to the leadership of the organization how to use the funding.

In contrast there is the restricted contribution or allocation that must be used for a specific purpose. There are many forms of restricted contributions and they range from funding capital projects, such as buildings and providing subsidies for services to underwriting entire programs. What they all have in common is that the funder is very clear about how the support they are providing should be used. In most cases, a letter accompanying the contribution or a letter of award from a foundation will state very clearly how nonprofit is expected to use the funds.

Most organizations know that they have to follow the donor’s wishes for both legal and ethical reasons. Since a Letter of Award is considered a binding contract, in most cases a separate written agreement between the donor and the recipient is not necessary. However, there are times when it is important to be very clear about the funder’s intentions and the expectations they have of the nonprofit receiving their support.

In most cases, organizations will not abuse the funder’s desires in regard to the use of the money. For obvious reasons, the nonprofit’s leadership want to maintain a good relationship with the donor to ensure continued contact and perhaps continued funding. In most cases, there is the possibility of receiving continuing support for either the specific project or future unrestricted contributions.

Having said this, there are philanthropists and foundations that require a formal agreement to be signed between them and the recipient organization. When a contract is requested it does not imply that there is no faith or trust in the nonprofit organization. More often than not what this indicates is the foundation’s desire to be very clear about how the funds are expected to be used and a way to prevent any misunderstanding between the two parties.

A nonprofit organization should take the opportunity to make sure their leadership is aware of the contract and has a full understanding of its implications before signing any agreement. Usually, the signing of the agreements signifies the board of directors’ understanding of how the allocated funds are to be used and they accept the legal obligation for ensuring the funds are used as stipulated in the contract. It is not unusual for the chief executive officer or the president of the board to have the agency’s lawyer review the agreement as a safety net against any issues that may be problematic for the nonprofit.

In the case of the Chaya Foundation mentioned at the beginning of this article, for example, which stipulated that any legal issues concerning the use of its funds would be subject to the law of Illinois, where the foundation is based, is not so simple. I recommended the recipient agency consult with a lawyer who was either familiar with the Illinois laws or was licensed to practice there.

The crucial question in this particular case is whether a disagreement between the foundation and the agency could be settled in a court in Israel or only in Illinois. Did the Illinois court have jurisdiction over a nonprofit organization in Israel? Did an Israeli court have jurisdiction over a foundation located outside of Israel? These questions and more should be considered by both the foundation and the agency before any agreements are signed.

When a foundation awards a grant it needs to understand the limits of what it can dictate and when a nonprofit organization agrees to accept funds it needs to understand the full extent of its responsibilities and, at the same time, what is within its legal rights. For both sides it is essential to both protect their separate interests and maintain goodwill. Unfortunately, while good intentions and goodwill are essential components to the funder-recipient relationship, they are still not sufficient when it comes to the fulfillment of fiduciary responsibilities.

Stephen G. Donshik, D.S.W., is a lecturer at Hebrew University’s International Nonprofit Management and Leadership Program and has a consulting firm focused on strengthening non-profit organizations and their leadership for tomorrow. Stephen is a regular contributor to eJewish Philanthropy.