The Contract Clause Every Nonprofit Should Negotiate

Every week, nonprofits sign vendor contracts — for software, consulting, event services, printing, facilities — without meaningful legal review. The contracts are drafted by the vendor. They’re presented as standard. And the nonprofit, eager to get the work started and mindful of limited staff time, signs.

This is understandable. But there’s one clause that appears in nearly every vendor-drafted contract that nonprofits should always push back on. It’s the indemnification clause.

What indemnification means (in plain language)

An indemnification clause says: if something goes wrong related to this contract, one party agrees to cover the other party’s losses — including legal fees, damages, and settlements.

In vendor-drafted contracts, the indemnification almost always runs one direction: the nonprofit indemnifies the vendor. This means if a dispute arises — even one caused by the vendor’s work — the nonprofit agrees to pay the vendor’s legal costs and any resulting damages.

Read that again. The vendor drafts a contract, delivers a service, and if that service causes a problem, you pay for it.

Why this matters for nonprofits specifically

For a commercial company, one-sided indemnification is a negotiable business term — annoying but manageable. For a nonprofit, it’s a fiduciary issue.

Your organization is entrusted with donor funds and public resources. Agreeing to an open-ended indemnification obligation — where you could be responsible for costs you can’t predict or control — may conflict with your board’s fiduciary duty to manage organizational resources responsibly.

If a vendor’s negligence causes harm to a third party, and your contract says you’ll cover the vendor’s losses, you could be spending donor money to pay for someone else’s mistake.

What to negotiate instead

You don’t need to eliminate indemnification entirely. You need to make it balanced and bounded. Here’s what to ask for:

1. Mutual indemnification

Both parties indemnify each other for losses caused by their own negligence or breach. This is fair. If the vendor’s work causes harm, the vendor covers it. If your organization’s actions cause harm, you cover it. Each party is responsible for its own conduct.

Language to propose: “Each party shall indemnify and hold harmless the other party from and against any claims, damages, or expenses arising from the indemnifying party’s negligence, willful misconduct, or breach of this agreement.”

2. Cap on liability

Even with mutual indemnification, you want a cap — a maximum amount either party could owe under the indemnification. A common approach: cap liability at the total contract value, or at the fees paid in the prior 12 months for ongoing engagements.

Without a cap, a $10,000 vendor contract could theoretically expose your organization to unlimited liability. That’s not a risk any nonprofit board should accept.

3. Carve-outs for third-party IP claims

If you’re buying software or creative services, include a specific provision requiring the vendor to indemnify you for intellectual property infringement claims. If the vendor delivers work that infringes someone else’s copyright or patent, that’s the vendor’s problem — not yours. This carve-out is standard in well-drafted technology and creative services agreements.

4. Insurance requirements

Require the vendor to carry adequate insurance — general liability and professional liability (errors and omissions) at a minimum. If the vendor is indemnifying you, their insurance is what actually pays the claim. Indemnification without insurance behind it is just a promise.

How to raise this in negotiation

Many nonprofits are uncomfortable negotiating contracts because they feel they lack leverage. The vendor is bigger, the contract is “standard,” and pushing back feels adversarial.

Here’s what we tell our clients: you’re not being difficult. You’re being responsible.

A vendor who refuses to accept mutual indemnification is telling you something important about how they view the relationship. A vendor who won’t cap their liability is asking you to accept unlimited risk for their benefit. And any vendor who says “our contract is non-negotiable” is a vendor you should evaluate carefully.

The conversation can be simple: “We’d like to make the indemnification mutual, add a liability cap equal to the contract value, and include an IP infringement carve-out. These are standard terms in our vendor agreements.”

Most vendors will agree. The ones who won’t are worth knowing about before you sign.

The five-minute test

Before signing any vendor contract, look for these three things:

Who indemnifies whom? If it’s one-sided (you indemnify the vendor), flag it.
Is there a liability cap? If not, you’re accepting unlimited exposure.
Who owns the work product? If the vendor retains ownership of work you paid for, that’s a separate conversation — but one worth having.

This isn’t about being litigious. It’s about protecting the resources your organization is entrusted with. Your donors expect it. Your board should require it.