Disputes can arise within charitable organisations in the same way as within commercial entities.
Charities have unique circumstances given their aims and constitutions. Charities must comply with the codes set out by The Charity Commission, which has produced a Guide for Trustees in respect of their duties. This also gives information on resolving disputes. For some types of litigation, the permission of the Charity Commission is required.
Duties of Trustees
Trustees have a duty to act in the best interests of the charity and must exercise this duty in deciding whether to take or defend legal proceedings. It is incumbent on them to protect and recover any assets of the charity. A Trustee or other officer of the Charity must not seek to profit from any charity business or any litigation.
Before taking legal action, Trustees are expected to try and resolve the dispute where possible by other means such as negotiation and mediation. Any decision to take or defend proceedings must be taken by weighing up the benefits of any proposed litigation against the cost and risk to the charity. Trustees should consider whether to take legal advice in deciding to litigate, and very often it is appropriate to do so. This is necessary as trustees can potentially be personally liable for the costs of litigation in some circumstances; for example:
- Where costs in relation the dispute have not been incurred reasonably;
- Trustees have not considered all the relevant factors in deciding whether to litigate;
- The prospects of success in the litigation are low or marginal; or
If the charity is an unincorporated charity and does not have sufficient funds to meet the costs.
Permission of the Charity Commission to commence proceedings
Where a dispute involves a third party (e.g. relating to an employment issue, contractual dispute or property matter), usually the charity can proceed without involving the Charity Commission (although very often it will be prudent to do so).
If the dispute is an internal dispute and involves the management of the charity and/or Trustee issues, then these are classified as ‘Charity Proceedings’ pursuant to s115(8) Charities Act 2011. In these cases, it is necessary to obtain permission from the Charity Commission before bringing or defending legal proceedings. The Charity Commission has a regulatory role in deciding whether the charity should incur the costs of the action in light of the merits and risks. The Commission will often require the charity to produce a legal opinion on the merits of the proposed claim when deciding whether to give permission.
If Charity Proceedings are commenced without permission, the court upon being advised of the same will stay the proceedings until the requisite permission is obtained.
In order to protect themselves from being ordered to pay costs personally, Trustees should always consider seeking the Charity Commission’s permission to litigate and for a Re: Beddoe order[i]. This is an order which gives them sanction to deal with the proceedings and protection on costs. However, such an order does not protect the charity from being liable for costs if they lose the litigation. A charity should ensure that it has the necessary funds and assets to meet any adverse costs order before litigating or put adequate costs insurance in place.
[i] Re Beddoe 1 Ch 547 which stated that “a trustee who, without the sanction of the Court, commences an action or defends an action unsuccessfully, does so at his own risk as regards the costs.”
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