Trustees responsibility when entering into contracts.

Charities regularly enter into contracts with third parties, and the charity trustees must take the time to ensure they are acting in the best interests of the charity before entering into the contract and take professional advice when necessary. A recent inquiry published by the Charity Commission into Hospice Aid UK shows that this doesn’t always happen,

The contract in question was with a fundraising agency, and the provisions which should really have alarmed the then charity trustees related to the termination of the contract. These provisions effectively gave the charity no practical way to terminate the agreement which was for a term of 7 years.

What if the fundraising agency turned out not to be effective at its job, and the income of the charity fell into decline during that period? And, even if the fundraising agency turned out to be competent, a lot can change in 7 years.

The inquiry found the terms of the agreement, especially the termination provisions, disadvantaged the charity and were not in its best interests.

Apart from termination provisions which don’t allow the charity trustees to terminate the contact within a reasonable period if they consider it in the best interests of the charity to do so, other warning signs to look out for in contracts are:

• In the realms of fundraising, agreements with a third party fundraiser which are structured to avoid the legal rules – for example, the fundraiser is called a consultant or advisor, but is clearly in control of solicitation of funds on behalf of the charity.
• Medium or long term contracts with limited adjustment provisions.
• Agreements under which the charity only benefits (if at all) at the end of the contract term.

Charities should ensure regular reporting of financial matters to trustees, including details of the charity’s financial position and performance. The financial information sent to trustees typically should include the latest management accounts, a comparison of budget to actual figures, an explanation for variances between forecasts and what actually happened and details of cash flow and closing bank balances.

Keeping these points in mind when reviewing new contracts, and seeking independent professional advice if there are concerns over whether a contract really is in the best interests of a charity, should help charity trustees ensure they do not inadvertently bind their charity into a contract which may cause financial or reputational damage to the charity. We can provide appropriate legal advice.