Donors Increasingly Use Legal Contracts to Stipulate Demands on Charities

More and more donors not only want control over the gifts they make to charity, legal and

fund-raising experts say, but they also are demanding that the terms of that control be put in binding, sometimes exhaustive, contracts.

The written agreements often contain a host of provisions beyond those that spell out how and when donors will make their contributions and how charities will spend the money.

For example, a contract may include a backup plan in case the charity ceases to exist or changes its mission. Or a contract may state that the institution will not challenge the right of the donor, or a representative of the donor, to sue to enforce the terms of the contract — a right typically reserved for state attorneys general.

A contract may also include what is known as a most-favored-nation clause, a provision directing an institution never to treat the gift or the project the gift underwrote any less favorably than other gifts or projects, such as when it comes to publicity or future upkeep.

Some contracts also stipulate how the proceeds gleaned from research projects financed by donations will be split and spent.

Provisions setting out penalties if beneficiaries do not meet the contracts’ terms also are becoming more common. Such provisions, called Sword of Damocles clauses — after the threat faced by the Greek courtier Damocles, who, legend says, was seated at a banquet beneath a sword suspended by a single hair — may require gifts to be returned to donors’ foundations, or be transferred to other charities.

Case Western Reserve University, for example, is bound by a contract with a donor to select for an endowed professorship a faculty member who belongs to a particular association of physicians. If the university does not choose a qualified individual for the post, the contract says, the money for the endowed position must be transferred to a similar institution that will appoint such a person. The contract even specifies who will judge whether a faculty member fits the criteria.

Duncan Hartley, associate vice president for development and alumni affairs at Case Western, says that the university found the conditions of the gift acceptable. Key, he says, is that the qualifications for the professorship spelled out in the contract are compatible with the university’s standards.

“We wouldn’t agree to something we wouldn’t feel perfectly comfortable carrying out,” Mr. Hartley says. “And if it is something we believe in and the donor believes in, there’s no reason not to feel comfortable making written assurances. It makes perfect sense that donors would want complete confidence that their money will be spent as they wished.”

Protecting Charities

Still, Mr. Hartley and other charity officials say, nonprofit groups have to make sure their interests are protected, especially when donors make specific demands.

Frank J. Connors, a lawyer at Harvard University, says he favors adding language to gift agreements that give Harvard wiggle room in the event that it becomes impossible or overly burdensome to carry out a donor’s wishes. For example, he says, an institution would need to maintain some discretion if a donor specifies that a gift be used exclusively for scholarships for students entering Harvard who have graduated from a certain secondary school.

Years after the gift is made, Mr. Connors says, the university could have “a scholarship fund generating a couple of million of dollars, but you have only five people graduating from the school, or there no longer is a school.” In those circumstances, he says, “the university has to be able to use that money as it sees fit for other scholarships.”

David W. Lawrence, a longtime fund raiser who retired this year as president of the Northwestern Memorial Foundation, in Chicago, says that while many gift agreements protect the interests of contributors, they also can be shaped to help institutions handle what he describes as zealous donors.

“Some donors become more and more involved with a project, and come up with more ideas down the line,” he says. “You want to try to put guidelines up front in the agreement so that you don’t put the institution in the position of releasing too much control as the donor wants to become more involved.”

For example, he says, an agreement could provide for the creation of a committee to hear the donor’s future suggestions.

“That puts some insulation between the development officer and the donor,” Mr. Lawrence says. “The donor reserves the right to enter into discussions about additional elements of the project, the acceptance of which would be determined through an established process. You wouldn’t have a development officer out there having to say yes or no.”

Over all, he says, a thorough gift agreement helps strike the right balance between donor and beneficiary.

“Everyone has a chance to buy into the particulars of the gift,” Mr. Lawrence says. “Everyone knows what to expect.”