Rob Smith, chief officer of Kids in Communication, said the directors had used their own money for the settlement because they feared the organisation would have gone bust if the judge ruled against them.
“We felt we had a very strong case, but did not want to risk seeing 10 years work going to waste,” he said.
The case concerned a £119,000 contract from the LSC to Kids in Communication to provide basic skills training to young people over 16. The LSC claimed the group “failed to carry out the services with reasonable care and skill” and did not provide the documentary evidence required by the contract.
Kids in Communication, which has trained 4,000 young people using radio skills since 1999, has assets of £4,500. The LSC receives £10.4bn a year from the government to pay for education and training for over 16-year-olds.
“The LSC have been absolutely uncompromising about this,” said Smith. “The matter could have been settled much sooner and much more easily.
“I will never work with them again and would call for all other voluntary organisations to boycott taking contracts with them until they agree to abide by the Compact. They have totally disregarded it.”
Both the NCVO and Acevo had asked the LSC to drop the case because they say it has a history of abuses of the Compact in relation to this case and other voluntary organisations.
Saskia Daggett, Compact manager at the NCVO, said it was “a dark day for government promises”. She said: “This case has been absolutely horrendous. This is a small organisation working with kids and hard-to-reach young people, and I’m appalled at the LSC. They haven’t given us any answers to the Compact breaches.
“The message to voluntary organisations is do not enter into contracts unless you are absolutely sure it is worth it for your organisation and make sure your statutory partner is Compact compliant.”
Daggett said the Department for Education and Skills and the Office of the Third Sector had both “washed their hands” of the case since the NCVO took it up in October last year. “All parts of government need to learn from this and make sure it never, ever happens again.”
She said not-for-profit organisations should “think very, very carefully” about working with the LSC.
Stephen Bubb, chief executive of Acevo, called on Compact Commissioner John Stoker to launch a full inquiry into the LSC's Compact abuses and said the skills body needed to review its procedures.
"They seem to have a legislative approach and don't seem to have an understanding of the particular issues around small, innovative organisations in the voluntary sector," he said.
Rob Wye, director of strategy and communications at the LSC, said: “We’re absolutely delighted that this has been settled out of court.”
He said the third sector was “vital to our delivery,” but that anyone who did not deliver a contract according to its terms put public funding at risk “and we will pursue them for it”.
He said the LSC “would not acknowledge any Compact breaches” with Kids in Communication. “That’s not to say we don’t need to work together with the Compact Commissioner’s office,” he added.
Wye said there were 300 voluntary sector organisations among the 5,000 providers contracting with the LSC.
“There are also hundreds of third sector organisations that receive LSC funds as sub contractors, and hundreds of third sector organisations that receive other small scale funding through special projects, including the European Social Fund."