AN INTRODUCTION TO CONTRACTS AT UCAR
What is the difference between a contract and a sponsored agreement? Why go to the time and effort of drafting a formal contract for your collaborative research agreement when a Memorandum of Understanding (MOU) will do just as well? Is there a legal difference between a contract and an MOU? What is the legal difference between a Memorandum of Understanding and a Memorandum of Agreement? Why are standard contract terms so important? This article will address these and other issues as an introduction to Contracts at UCAR.
The legal definition of a contract is:
An agreement between two or more persons that creates an obligation to do or not to do a particular thing.
The purpose of a contract is to document each party’s obligation and to allocate and minimize each party’s risks during the performance of the agreement. The contract includes standard terms and conditions that serve as the skeleton of the contract and a statement of work that serves as the substance of the contract. In general, the standard terms and conditions can support any statement of work, with only minor modifications to some of the terms.
At UCAR, we use two types of contracts: Sponsored Agreements and Subcontracts. These contracts are the legal funding documents UCAR uses to accept funds for research or to issue funds to acquire services or equipment to support UCAR activities.
Authority to Commit the Corporation is addressed in 1-1-6 of the UCAR Policy Manual. It states that the authority to execute and bind UCAR in subcontracts and sponsored agreements resides in the President of UCAR. The President may delegate all or part of this responsibility for preparation, execution, and administration of UCAR subcontracts and agreements. The President has delegated this responsibility to the Contracts & Sponsored Agreements (C&SA) department. No binding commitment for materials or services shall be made in writing or otherwise except by persons having contractual authority acting within the limits of the said authority. If you are interested in entering a contract or sponsored agreement, contact the C&SA Office.
In a Sponsored Agreement, UCAR agrees to perform a service (its obligation) and the sponsor agrees to pay UCAR for the service (the sponsor’s obligation). The most obvious example of a Sponsored Agreement at UCAR is the cooperative agreement with NSF. In that agreement, UCAR agrees to operate and NSF agrees to fund NCAR. If the statement of work anticipates UCAR will issue a subcontract to accomplish the work, the sponsored agreement will also include flow-down provisions that UCAR must include in any related subcontract.
In a UCAR Subcontract, UCAR issues the funding and the subcontractor agrees to deliver equipment or perform a service for UCAR. In most cases, UCAR funds subcontracts with funding from a sponsored agreement and therefore, UCAR must include the flow-down provisions from the sponsored agreement. For example, through a sponsored agreement, NSF provides the funds for the purchase of HIAPER. Therefore, the UCAR subcontract with Gulfstream includes all required flow through provisions from the NSF funding document.
A third type of contract also arises in work at UCAR, a Memorandum of Agreement (MOA) also known as a Memorandum of Understanding (MOU). These titles are interchangeable and the use of the term “Agreement” or “Understanding” has no legal significance. Often, divisions will submit an MOA that is in essence only the statement of work. The best use of this document is to modify it to serve as the statement of work for the more formal contract document.
As explained above, only the President and the Contracts office, through a delegation, have authority to sign contracts, sponsored agreements, or MOAs that bind UCAR. Every MOA that involves the exchange of funds must, therefore, go through review by the Contracts & Sponsored Agreements office on behalf of the President.
On occasion, the MOA drafter may request that the Contracts & Sponsored Agreements officer sign the MOA, as is, instead of using the more formal contract document. Using an MOA seems to be an attractive option because it is straight forward and simple without the complicating and quarrelsome standard terms and conditions.
Real dangers exist, however, in using an MOA. The MOA lacks the standard terms and conditions that protect both parties during the performance of the work. At a minimum, an MOA fails to include the flow through terms and conditions from a sponsor. Failure to include these provisions will likely jeopardize the funding and in the worst case scenario may jeopardize the research project.
UCAR operates in a cooperative environment of academic research and collaboration and parties may be reluctant to use a more formal contract document for fear of spoiling the openness and collaboration of the parties. Putting a more formal contract in place at this stage, however, when cooperation levels are high, is much simpler than resolving a dispute without the benefit of the standard terms and conditions. (One of these standard terms is a dispute resolution provision that allows work to continue during resolution of the dispute.) If the agreement involves an exchange or a promise to make an internal commitment of funds, UCAR will use a Subcontract or Sponsored Agreement, as appropriate, and use the text of the MOA as the statement of work.
The provisions outlined below apply to both Sponsored Agreements and Subcontracts. The term “contract” refers to Sponsored Agreements and Subcontracts.
A contract usually begins with the Purpose provision, a summary of the more detailed statement of work. The provision is typically an outgrowth of the MOU the parties have prepared or a proposal the Principal Investigator has drafted. The Purpose can also be generic so that the parties can later amend the contract by adding new tasks that fall within the purpose and also protects against imposing new tasks that a party would not want to perform. Setting forth the purpose sets boundaries on the scope of the work the parties will perform.
The contract also includes a Term and Termination provision that sets forth the length of the agreement and each party’s rights to terminate the agreement under certain conditions. A definite timeframe for the contract is useful for budget and planning purposes and keeps the project on track.
What happens if one party breaches the agreement by failing to perform its obligations or missing a deadline? A termination for default provision establishes the ground rules for the parties if this failure happens. The termination for default (or T for D) allows one party to terminate the contract if the other party has not cured the default after notice. Without this right to terminate, it may not be clear when one party can terminate the contract if the other party isn’t performing. In that case, a party may be forced to sue the other party or be subjected to a lawsuit if the contract is not properly terminated. Using a right to terminate for default in a contract can lower these potential litigation risks and costs.
In the Intellectual Property provision, the contract identifies what intellectual property each party will contribute to the effort. The contract itself does not accomplish the transfer but only lists what intellectual property, if any, the parties will use. This provision may be an addendum to the contract. The parties will enter a separate licensing agreement in addition to the contract to provide a party access to protected or licensed technology, such as hardware, software, and other equipment. Specifically, the contract provision addresses 1) existing intellectual property brought to the research effort, 2) intellectual property developed separately by each party during the effort, and 3) joint intellectual property developed by both parties during the effort. Each party has its own institutional policies and procedures and the provision typically requires legal review by both parties. For more information on Licensing see Licensing Proposal.
In a subcontract, this provision is particularly important. Federal sponsorship agreements have notification requirements regarding any intellectual property developed with federal funds. The collaborative partner should understand that the U.S. Government may have an interest in any joint intellectual property developed under the collaborative agreement.
For additional information on intellectual property, see the Technology Transfer Web site.
Intellectual Property Indemnification. Intellectual Property (IP) indemnification provisions allocate the risk in the event a third party files a claim against one or both of the parties for patent or copyright infringement. The IP indemnification identifies rights and remedies if the third party is successful and the IP is no longer available for use in the contract. These steps can include replacing the IP or if necessary terminating the project if no alternative, non-infringing IP is available.
Indemnification. An indemnification provision allocates the risk of the agreement by stating the obligations of the parties in the event a third party is harmed, financially or physically, due to the actions of the parties when performing the contract. Intellectual property is addressed separately.
In a research context, an indemnification scenario will likely be more complex, but for illustration purposes, here’s a simplified example of how an indemnification provision works in the context of a rental car contract. Rent-a-heap rents John a car and while driving it, John runs over a tricycle. Assume the rental car was in mint condition and John didn’t see the tricycle because he was busy dialing a number on his cell phone. John is solely at fault for the damage to the tricycle. The litigation savvy three-year old owner of the tricycle, Billy, sues Rent-A-Heap for the damage to the bicycle. In turn, Rent-A-Heap pays Billy, but because Rent-A-Heap had no fault in the accident, looks to John to indemnify, or pay, Rent-A-Heap for the cost it has to pay Billy.
Limitation of Liability. This provision limits the amount and types of money damages each party will have to pay the other if either party to the contract suffers any harm during the performance of the agreement.
Dispute and escalation procedures. These procedures can be invaluable if parties are at loggerheads in a dispute. The provision identifies decision makers, sets time lines for resolution, and typically includes a requirement that work and payment continue during the resolution of the dispute. A dispute resolution procedure is an excellent step to avoid litigation and allow the parties to complete the agreement.
Confidential Information. Even though parties may have signed a nondisclosure agreement before entering discussions or contract drafting, the contract also has a nondisclosure provision to cover the work performed under the agreement. The provision defines confidential information, procedures for disclosure, and the term of the confidentiality obligation. This provision is particularly important to commercial partners sharing their highly confidential information with UCAR. A breach of this provision can result in serious penalties.
Payment. The purpose of this provision is self-explanatory but also provides a mechanism to ensure payments are timely. Without this provision, enforcing payment obligations is more difficult and may even require litigation, a costly way to enforce especially when salaries may be contingent on timely payment.
Acceptance and Inspection. This provision can be incredibly important in research contracts where a party is delivering a product. This provision should set forth what is being tested, the testing procedures, who performs the testing, and who accepts the test results.
Warranty. A warranty provision guarantees the party will receive a functional product or a certain level of service. The most common warranty seen is NO warranty, especially in MOAs. Software providers rarely warrant the software they sell, they make very broad disclaimers about the future performance of the software in particular environments. If a contract includes a warranty, the warranty will establish the level and duration of performance.
© Catherine Shea 2002, University Corporation for Atmospheric Research