Litigation should never be taken lightly, particularly by charities. Donations have been made intending to benefit the cause, not to be used for legal fees. Before a charity finds itself involved in legal proceedings, its trustees need to ensure they have taken the correct approach, to avoid acting illegally and being personally liable for costs.
Trustees should check:
- Are proceedings allowed under the charity’s governing document?
Generally a charity has in its constitution or trust deed, the ability to do anything that is desirable to further the purposes of the charity. This allows it to litigate but only if it’s actually beneficial for the charity. It’s also important to ensure the governing document has the power to settle any claim without the need for court proceedings. If it doesn’t or if the trustees are conflicted from making a decision in the charity’s best interest, then the Charity Commission may have to make a ruling allowing it.
- Is it in the charity’s best interest to take or defend proceedings?
Trustees can find themselves caught between a rock and a hard place. On the one hand they have a duty to protect the charity’s assets (suggesting they should take legal action if there are reasonable prospects of success), but on the other they must not risk such assets unnecessarily.
Any litigation must be expected to be beneficial to the charity, taking into account the uncertainty and costs involved. The basis of the decision should be recorded so if the trustees are questioned they can demonstrate they made a sensible and rational decision. Often trustees will seek professional advice which can be used as protection if matters don’t turn out as planned. Litigation should always be a last resort.
- Do the trustees have sufficient protection from finding themselves personally liable for costs?
If a charity loses a claim it is likely to have to pay costs. These could be claimed from the trustees personally if either their decision to litigate was wrong, or if the charity has insufficient funds. Trustees should see if legal costs insurance is in place or obtainable.
Additionally trustees can seek a protective order. Initially they should ask the Charity Commission to confirm that it is reasonable for a charity to fund the litigation. This application can be made under section 105 Charities Act 2011. If this is refused an application to the court can be made. In some circumstances trustees can ask the commission for a ruling under section 110 of the Act to confirm it’s acting within its powers.
In some circumstances a protective costs order known as a Beddoe Order can be obtained from the court, but before embarking on such an application the permission of the Charity Commission should be obtained.
- Is permission required from the Charity Commission?
Where the legal proceedings concern the internal workings of the charity (such as removing a trustee) then they are called charity proceedings. In such cases proceedings cannot be commenced without the permission of the Charity Commission having been obtained under section 115 Charities Act 2011. Before the commission will make an order it will want to see that a genuine attempt has been made to resolve the dispute e.g. through mediation. Further if the commission believes it can resolve disputes under its own powers then it will not make a section 115 order at that stage.
Deciding whether to embark on litigation is difficult enough if you are an individual or a company. If you are a charity then be aware of these additional considerations to ensure you are not breaking the law and that trustees do not incur personal liability for costs.
If you have any questions about this article please contact Toby Claridge on 01872 265100 or email@example.com