Rule out all other options before taking legal action, commission tells trustees

New guidance from the regulator warns that litigation can pose a 'significant risk to a charity's assets and reputation'

The Royal Courts of Justice
The Royal Courts of Justice

Trustees should consider legal action only after exploring and ruling out any other options, according to new guidance on litigation from the Charity Commission.

The guidance, Charities and litigation: a guide for trustees (CC38), looks at what trustees need to know about taking out or defending all types of legal action.

It applies to all charities, including community interest companies, companies, trusts, membership bodies and any other structure, regardless of whether they are registered. But it does not apply to criminal cases or challenges to commission decisions.

The guidance warns that legal action can present a "significant risk to a charity’s assets and reputation" whether or not the case is successful and warns trustees to ensure they maintain transparency and are able to justify why they choose to pursue a case.

It also explains when charities would need permission from the commission to proceed with litigation.

The guidance sets out principles for trustees to take into account when considering legal action, including their duty to protect or recover charity assets and ensure charitable funds are spent on carrying out its aims.

It says they should take and consider legal advice and consider the economic impact of success or failure on the charity.

"The commission expects trustees to consider legal action only after they have explored and, where appropriate, ruled out any other ways of resolving the issue in dispute," it says.

In some circumstances, the guidance warns, trustees may be personally liable to pay any legal costs if the court considers the costs have not been properly and reasonably incurred, if trustees cannot demonstrate they have considered all the relevant principles in making their decision or if an unincorporated charity does not have the funds to pay.

Geoffrey Kertesz, head of will and trust disputes at the law firm Bircham Dyson Bell, told Third Sector the decision to produce such guidance was sensible given the number of recent high-profile court cases involving charities, particularly over disputed wills.

"I think the guidance is very helpful, it comprehensively outlines the reputational and the cost risks to charities and sends a very positive message about, where possible, trying to resolve matters short of hostile litigation," he said.

In a response to a draft version of the guidance a Charity Law Association working group expressed concern that the tone suggested litigation should be avoided at all costs.

But Kertesz said he did not believe the final version was encouraging charities to settle all claims brought against them, but instead was realistic about the options available.

"I think it is encouraging charities to take a sensible commercial view bearing in mind trustees fiduciary obligations to defend the interests of the charity," he said.

"Full blown hostile proceedings are expensive, public and uncertain, and those are three important factors to bear in mind."

But, he said, it was not always possible to negotiate, and sometimes court action was unavoidable.

Kenneth Dibble, chief legal adviser at the Charity Commission, said: "Legal action can present significant risk to a charity’s beneficiaries, assets, and reputation, but in some circumstances it may be the best or only option.

"This guidance aims to help trustee bodies reach a justified decision on litigation and crucially, to manage risk effectively by assessing the challenges and costs their charity might face and deciding how to deal with them."

He said trustees should contact the commission "as a matter of priority" if they needed protection from adverse costs or authorisation to proceed.

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