When may a Charity make Ex Gratia Payments?
If you are a trustee of a charity you are already aware that it is a position of great responsibility. Whether large or small, it is the trustees of a charity who must properly manage the funds a charity receives whether as a result of a specific appeal, by way of a legacy, or in the ordinary course of its fundraising activities. The trustees make decisions as to how those funds are utilised and ensure that they are being spent in furtherance of the charity’s purpose as stated in its constitution. The Charity Commission monitors the activities of all charities and is empowered to take action against trustees if they act contrary to the interests of their charity.
Why are charities monitored so closely?
The simple answer is that donors to a charity are not like investors in a business who take the risk of the business failing and losing their investment. A donor should not bear any risk that funds donated should be used for purposes other than those stated by the charity. Other than when charities make payments like other organisations for rent and salaries etc, funds disbursed by a charity for reasons other than its charitable purposes must be carefully justified in its accounts. Sometimes they may find themselves in the awkward position of wishing to pay money to a third party when:
- there is no legal obligation to do so;
- the payment cannot be authorised by the charity’s constitution;
- the payment would be against the charity’s best interests.
This is known as an ex gratia payment.
Ex gratia payments are possible
The literal translation of this Latin term is “done as a matter of favour” and arises whenaparty makes a payment without being under a legal duty to do so. The court in Re Snowden  3 All ER 208 held that a trustee could make a payment (when under no legal obligation to do so) in cases where it could be fairly said that if the charity were an individual it would be morally wrong to refuse to make the payment. Accordingly, although it is possible, such payments are strictly controlled. A trustee wishing to make such a payment must formally apply to the Charity Commission for permission and the payment must not be made until the Commission has delivered an order to the Charity authorising the payment.
Wills, probate and legacy disputes between beneficiaries often give rise to claims against a charity
This issue most commonly arises in the area of wills and probate. If the effect of a deceased person’s will means that significant sum of money (or perhaps their entire estate) goes to a charity, family members or potential beneficiaries may be seriously affected and could request the charity to repay some or all of the funds which form part of the legacy. Such a legacy to a charity might arise if there was a defect or illegality in the will making it impossible for the executors to carry out what the deceased had intended.
Another example might be where the deceased had instructed his solicitor to make or change gifts to beneficiaries in a new will but dies before executing it. The trustees must consider such request and if they are satisfied that, for example, a testator had changed their mind about the legacy before they died, but had not got round to signing a new will, they might wish to decide to make a payment out the funds received or to return the claimed legacy. As a charity is legally obliged to accept all legacies it has to require strong and independent evidence to reach such a conclusion.
The mental capacity of a donor could also give rise to a moral obligation to repay donated funds. The charity itself could decide, for reasons of reputation and its own moral values, to wish to return funds donated should they be made aware of facts regarding the donor which could give rise to a moral case for the charity to return their money.
How to decide if there is a moral obligation to repay the money
The trustees will have to look at the evidence, carefully consider it and then make their decision. It is important for the trustees to bear in mind that:
- a person who makes a will is free to dispose of their money and possessions as they see fit;
- the fact that relatives are disappointed is not enough on its own to justify an ex gratia payment;
- returning funds or property is likely to negatively affect the charity’s beneficiaries.
How to obtain ex gratia payment approval from the Charity Commission
A trustee (and not a delegated person) must make a written application to the Charity Commission using the appropriate form. This document has be signed only by a trustee and no other person. Detail in the form must set out the factual background as to how the funds came to be received by the charity, the circumstances which give rise to the charity’s belief that it should make an ex gratia payment and in particular the reasons why it considers that failure to make the payment would be morally wrong. The Charity Commission will consider the application and make its decision. The Charity Commission provides extensive guidance to the ex gratia payment process and warns that this is not something that it will consider lightly meaning that the moral case for the payment must really be a compelling one.
The party who wishes the charity to repay the money cannot make the application to the Charity commission. The application can only be made by the charity itself.
Recent examples of the Charity Commission granting permission for ex gratia payments
The approach of the Charity Commission is that that they will refuse an application where:
- they conclude that the trustees in fact have the power to make the payment without the need for approval from the Charity Commission, or;
- on assessment of the evidence, they do not accept that reasonable trustees properly exercising their discretion could have concluded that they were under a moral obligation to make the requested payment.
A dubious claim rejected
In one case a person claimed that certain property, which had already passed to the charity under a will, had already been given to them by the testator prior to his death. There was no independent evidence of these facts and the trustees decided that, on the evidence, they were under no legal obligation to return the property. Instead they applied for permission to make an ex gratia payment. The application was refused on the basis that the trustees rejected the claimant’s evidence as unconvincing yet used the same evidence in support of the claim that they had a moral obligation to return the property. The Commission held that reasonable trustees must consider their decision as to whether they have a moral obligation or not, solely on the evidence. If they are not convinced that they have a legal obligation, then they cannot properly conclude that they have a moral one.
An unenforceable but clear indication of a testator’s wishes
An example of where the Charity Commission agreed that the trustees properly exercised their discretion that they had a moral obligation to repay money is in the case of woman who made a will in 1993 leaving her residual estate to three charities. She died in 2002 and her niece discovered a note handwritten and signed by the deceased which indicated that she wished to increase the legacy to her niece from £10,000 to £30,000. The Charity Commission agreed with the decision of the trustees of the four charities that the deceased wished the greater legacy to go her niece and authorised the four charities to give up part of their entitlement totalling £20,000.
Donation made lawfully but donor in a vulnerable mental state
In August 1982, a man donated £20,000 to the South Atlantic Fund. He was being treated for paranoid schizophrenia and there was evidence to suggest that he may have believed he was lending money to the charity to allow it to generate income through investing the capital. The South Atlantic Fund was dissolved in 1993 and its funds distributed to four other service charities. Three of the charities applied to make ex gratia payments of the portion they received from his £20,000 donation back to the man concerned on the basis that he lacked the capacity to manage his financial affairs at the time of the donation. The fourth charity no longer had any of the funds passed over by the South Atlantic Fund distribution. The Charity Commission approved the payment of the ex gratia payments.
Ex gratia payments – difficult but not impossible
From the above it is evident that although it is possible for a trustee to obtain permission from the Charity Commission to make an ex gratia payment, great care has to be taken to assess the evidence before deciding that the charity has a moral obligation to make the payment. Any application to the Charity Commission for approval should be very well thought out with sufficient evidence to substantiate the moral value of the claim and the proper exercise of the trustees’ discretion.
This article is provided by Burlingtons for general information only. It is not intended to be and cannot be relied upon as legal advice or otherwise. If you would like to discuss any of the matters covered in this article, please contact Brian Eagles or write to us using the contact form below.