Charities and litigation: New Charity Commission guidance

Published on
4 min read

We explain the principles set out in the guidance and comments on the approach suggested by the Commission.

In recent years there has been a remarkable rise in the number of probate claims issued in the High Court. A significant number of such cases involve Wills benefitting charities, and some of those cases have resulted in high profile, and occasionally very negative, media coverage for the charities involved. Charities, therefore, increasingly need to be aware of the risk of litigation in this area, and what they should do when faced with such litigation.

Helpfully, the Charity Commission has recently published new guidance for charities involved in litigation. The guidance is applicable to all types of litigation, and not just cases involving Wills, except cases of a criminal nature or challenges to decisions by the Commission.

Impact of the guidance

The Commission has a regulatory role in ensuring that decisions made by trustees are in the best interests of their charity. The guidance highlights the very real risks of litigation for charities and their trustees and, while the published guidance no longer explicitly states that litigation should be a last resort, as the draft guidance did, it is clear that the Commission expects trustees to explore all avenues available to resolve a problem before committing to litigation.

The guidance outlines both what trustees are legally required to do, and that which is simply “good practice”. However, the guidance specifies that the Commission will always expect trustees to be able to explain and justify any approach they have taken, especially where good practice has not been followed. Any departures from good practice can also be taken into account by the Commission when investigating breaches of trust or other purported misconduct/mismanagement by the trustees.

When should a charity defend legal action?

The general position is that all charities have the right to take or defend legal action. However, wherever trustees decide to litigate, the key principles to consider are:

  • The trustees’ duty to protect or secure their charity’s assets.
  • The trustees’ duty to act in their charity’s best interest.

In addition, the guidance advises that, when deciding whether to litigate, trustees should:

  • Take and consider professional legal advice.
  • Consider the economic impact of litigation success or failure on the charity.
  • Consider how litigation or compromise could affect the charity’s reputation, and its position in other disputes.
  • Thoroughly explore other methods of resolution prior to litigation, such as negotiation and mediation (so long as they are not prevented from doing so by statutory time constraints, for example).
  • Judge whether legal action is proportionate.
  • Consider whether advice or permission to litigate should be sought from the Commission.

Whatever decision is reached, the trustees must be able to explain and justify the course of action taken. If the principles are not followed, or the trustees are otherwise unable to demonstrate that the decision to litigate was made reasonably, the trustees potentially make themselves personally liable for the legal costs incurred, whether or not the charity is incorporated.

The guidance suggests that trustees may consider taking out insurance products to provide both the charity and themselves with some protection against liability for costs, and notes that in some situations the trustees can seek advice under the Charities Act 2011 from the Commission itself on whether or not they should pursue or defend legal action. Such “comforting” advice, however, is not the norm and will only be provided in very limited circumstances.

In even more limited circumstances, it is sometimes possible to apply to the Court for confirmation that the trustees are acting reasonably in their decision to litigate and incur the costs of litigation.

When is the Commission’s permission needed?

The final section of the guidance considers “charity proceedings”, which are generally proceedings that relate to the internal administration or domestic affairs of a charity. The Commission has responsibility for authorising whether or not such proceedings are allowed to proceed.

This is to prevent charities’ funds (which must normally be used to further the purposes of the charity) being expended on claims with no merit, or claims which might be pursued as a result of personal motives instead of being in the best interests of the charity.

Those who can apply to the Commission to bring charity proceedings are:

  • The charity
  • Any of its trustees
  • Any “person interested in the charity” (a phrase defined comprehensively by neither the Charities Act 2011 nor case law)
  • If a local charity, any two or more inhabitants of the area of the charity

For authorisation to occur, the Commission must be convinced that court proceedings are in the interests of the charity and that alternative resolution is not possible. The guidance sets out the procedure for application, and the notification process.

Conclusion

The new guidance is rooted in key principles that will be very familiar to trustees.

However, many trustees are unfamiliar with, and find the possibility of, litigation very worrying. They are well aware of the possible negative impact of litigation on the charity’s assets, beneficiaries and reputation, and also fear personal liability for costs if they make the wrong decision. Disputes involving Wills, putting a charity in direct opposition to a grieving family, are often particularly unpalatable to trustees. A trustee’s duty to protect or secure the charity’s assets, however, may sometimes require litigation.

What is clear is that trustees should be aware of this guidance, exercise some caution when faced with potential litigation, and seek legal advice at an early stage.

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