Charities have become increasingly involved in legal disputes and litigation and when this does arise, charitable funds are at risk. Litigation is costly and once commenced, costs generally follow so that if a charity were to lose the litigation, it would almost certainly have to pay the costs of the other party in addition to its own. Where a litigating charity is unincorporated, it is the trustees who are party to the litigation and if the charity does not have the funds to meet costs, the trustees will be personally liable.

There are a wide range of legal proceedings in which a charity may become involved including claims brought by a third party for breach of contract, an employment claim or a boundary dispute. In this edition of Charity Matters, our experts focus on the following issues:

  • Claims concerned with the internal administration of a charity.
  • Claims which contest a charity’s right to property under a will.
  • Payments to third parties.
  • The seeking of comfort on costs from the Charity Commission (the “Commission”).

The internal administration of a charity

Trustees considering commencing or defending legal proceedings need to consider whether those proceedings constitute ‘charity proceedings’ as defined by section 115 of the Charities Act 2011 (the “Act”). If so, an Order of the Commission may first be required.

What is the effect of section 115 of the Act?

Section 115 is a statutory filter to protect the assets of a charity from being spent on inappropriate/ unnecessary litigation. ‘Charity proceedings’ relating to a charity must not be “entertained or proceeded with” in any Court, unless the Commission has authorised the taking of those proceedings by an Order.

What are ‘charity proceedings’?

‘Charity proceedings’ relate to proceedings in any Court in England or Wales with respect to charities, or any proceedings with respect to trusts in relation to the administration of a trust for charitable purposes. Whether legal proceedings fall within this definition will depend on the nature of those proceedings, but trustees should be mindful that even if the original claim is not ‘charity proceedings’, the defence or counter-claim might raise issues which are, and which will therefore, need to be authorised.

Generally, for proceedings to be ‘charity proceedings’ they must relate to the constitution or administration of the charity – that is, internal or domestic matters. Examples would include a challenge to the validity of a trustee’s appointment, the removal of a trustee from office, or an action for breach of trust. Debt actions, breach of contract claims, possession proceedings and employment disputes would not constitute ‘charity proceedings’.

Who can bring ‘charity proceedings’?

The Act provides for only a limited class of applicants who can bring ‘charity proceedings’. This class includes the charity itself, the trustees, a “person interested in the charity”, or two or more inhabitants of the area if the charity is a “local charity” (as defined by the Act). A “person interested” must have an interest materially greater than the general public.

In what circumstances can the Commission authorise the taking of ‘charity proceedings’?

If proceedings are ‘charity proceedings’, and the applicant falls within the class of persons that can bring those ‘charity proceedings’, the Commission has to consider whether to authorise the taking of those proceedings.

The Commission cannot, without special reasons, authorise the taking of ‘charity proceedings’ where they can deal with the case under their various enabling or regulatory powers. These would include powers under section 69 of the Act to make a Scheme relating to the internal administration of the charity or powers under section 110 of the Act to give written advice to the trustees on any matter affecting the performance of their duties.

If the Commission cannot use its enabling or regulatory powers, then it has to consider whether it is in the interests of the charity for the matter to be adjudicated by the Court. The Commission exercises its discretion in light of its overriding statutory duty – that is, to best “promote and make effective the work of the charity in meeting the needs designated by the trusts”.

Other points to consider

Any ‘charity proceedings’ commenced without a section 115 Order may be stayed pending consideration by the Commission. If the Commission refuses to grant authorisation under section 115, the Court can grant leave to allow the proceedings. The Act also empowers the Commission to request the Attorney General to take on ‘charity proceedings’ himself, where it in the interests of the charity, or its property and affairs, for him to do so.

A charity’s right to property under a will

Legacies are a huge source of income for many charities. They are heavily relied on to further charitable aims and can be gifts of money (pecuniary legacies), of a particular item such as furniture (specific legacies) or the whole or a share of what remains of a donor's estate, following the distribution of all other gifts and after the deduction of debts and expenses (residuary gifts).

Defending a charity’s interests

From time to time, a relative or friend of a donor may seek to dispute a legacy. Such challenges are disparate and include claims that the donor was subjected to undue influence or did not have the mental capacity to make the Will or claims that adequate financial provision was not made for family members or other dependants.

A charity facing a challenge may feel morally obliged to succumb to the claims of disappointed and aggrieved family members, so that it receives a reduced amount or no legacy at all.

Early risk assessment

A charity is restricted by charity law in its ability to simply disclaim a legacy. Trustees have a legal responsibility to protect a charity’s assets and to act in its best interests, which includes pursuing or defending claims. Under Section 110 of the Act, trustees can apply to the Commission for advice on whether they are acting within their duties to the charity if they litigate.

Where a potential legacy challenge emerges, a thorough risk assessment should be carried out as early as possible, particularly if the legacy is of significant financial value.

Trustees should:

  • Take legal advice about the strength of the charity’s position.
  • Review available evidence.
  • Determine whether the legal spend is proportionate to the amount in dispute.
  •  Consider opportunities to settle and check whether the charity’s governing document permits making settlement payments and also whether authority from the Commission is required to make a payment (see below “Payments to third parties”).
  • Assess the effect on the charity’s reputation. Charities are perceived as caring institutions so legacy disputes have great potential to create adverse publicity.

Things to remember

Charities are not to be encouraged to spend huge sums litigating. However, in some instances, it may be appropriate to pursue meritorious claims and trustees should not be deterred from doing so.

Individuals have the testamentary freedom to leave their estate to whoever they choose. To reduce the risk of challenge, charities should encourage potential donors to discuss their intentions with those close to them.

If trustees decide to defend a legacy, a strategy for managing publicity should be implemented. Similarly, an openly sensitive approach to aggrieved family members should be adopted in the handling of the case.

Payments to third parties

If trustees are considering making a payment to a third party in connection with a legacy dispute or legal proceedings, they should consider whether the authority of the Commission is needed.

Ex-gratia payments

The Commission uses the term ‘ex-gratia’ payment to describe a situation in which trustees are proposing to make a payment which they believe they are under a moral obligation, but not a legal obligation, to make, and where they have no power under the charity's governing document that they could use to properly make the payment. To make such a payment, authority of the Commission must be obtained.

Property left in a Will

The most likely situation where the issue of ‘ex-gratia’ payments arises concerns gifts left in wills. Sometimes a charity will receive a larger gift from a testator than the testator really intended. This could be, for example, because at the time of the will, the testator’s estate was worth more than at the time of the testator’s death due to circumstances which were not foreseen at the time of the will making the gift disproportionate.

As a result of this, some other person may be deprived of money or property which the testator intended for them to have, particularly where a person is entitled to the residuary estate.

Whilst a charity is legally entitled to keep the whole of the gift it has received in a will, trustees may conclude, in such a situation, that they are morally obliged to make a payment out of that gift to the person so deprived.

An Order of the Commission under section 106 of the Act would be needed to enable the trustees to make such a payment. It would rarely be appropriate for trustees to consider making a payment where a testator fully intended to leave the whole gift to a charity but where relatives dispute this or feel the gift should have been left to them.

Payments that are ‘expedient in the interests of the charity’

Often, the trustees of a charity will have no legal obligation or power to make a payment to a third party but believe it is in the best interests of the charity to make it. The Commission can authorise such a payment under section 105 of the Act provided that the Commission is satisfied that making the payment is expedient in the interests of the charity, i.e. that benefit will accrue to the charity from making the payment.

Settling a legal claim against the charity

A payment is not treated as an ‘ex gratia’ payment, if it is made in order to settle or compromise a legal claim against the charity.

A compromise does not necessarily require the taking of formal litigation proceedings; the assertion of a legal right and an indication that the party concerned is minded to pursue a serious claim may be sufficient. Any assessment by trustees of the merits of such a claim should of course be approached from the point of view of the charity's interests.

If trustees are in any doubt about the propriety of settling or compromising a legal liability, they can ask the Commission to sanction it under section 105 of the Act.

Comfort on costs

Trustees may want to clarify what comfort on costs they can seek before commencing or defending any legal proceedings, whether or not those are ‘charity proceedings’.

The General Principle

Section 31(1) of the Trustee Act 2000 provides that, subject to the terms of the trust, a trustee is entitled to be indemnified from a charity’s assets in respect of all reasonable and proper costs incurred. A trustee has to be able to demonstrate that such costs are reasonable and proper and is not protected by reliance on legal advice (in the absence of an express provision in the trust).

Direction or Sanction of the Court or Commission

A Re Beddoe Order is an order made by the Court which authorises trustees to take or defend legal proceedings and to use the charity’s funds for that purpose. The application to the Court for such an order, however, is classed as ‘charity proceedings’ and a section 115 Order will need to be obtained before the application can be made.

In practice, the Commission will only grant a section 115 Order where the issue to be considered is complex, the risks are high, or the Court is already substantially involved in the matter. If the Commission determines that it can deal with the matter itself, it will not give authority.

The Commission has, for example, refused to grant a section 115 Order where it has been able to authorise the use of charity funds for litigation by giving advice under section 110 of the Act or by making an Order under section 105 of the Act.

For the Commission to give authority to trustees to use charity funds to take or defend legal proceedings by giving advice or granting a section 105 Order, the Commission needs to be satisfied that the trustees’ reasons for deciding that taking or defending the proceedings will serve the best interests of the charity are robust and, if a section 105 Order is needed, that it would be expedient in the interests of the charity to do so.