What do charity trustees need to know about litigation?

During their tenure, trustees of CIOs, companies, trusts and  membership bodies, may be faced with a decision to commence litigation or have the need to defend a claim and will need to manage that process. Litigation can be a distraction from a charity pursuing its charitable objects albeit litigation may be a necessary tool when acting in the best interests of the charity and managing its assets.  Litigation can have significant consequences to a charity or Not For Profit Organisation (NFP) including reputational, and be a drain on a charity’s monetary and management resources.

This article provides an overview of points for trustees to consider when faced with a decision to commence litigation or when faced with defending a claim.

General litigation and “charity proceedings”

The types of claims which a charity or NFP may come across can fall into two categories:

1. Claims between the charity and a third party, for example, a breach of contract claim, debt claim, employment claim, enforcing property rights, contesting a charity’s rights under a will (“general litigation”)
2. “Charity proceedings” which relate to the internal administration or domestic affairs of a charity, for example, the removal of a trustee from office, breach of trustee duty, challenging a trustee’s decision about the management of the charity, internal disputes about the control or misuse of charity property.

This article focuses on charities and “general litigation”.

Incorporated organisations and unincorporated organisations

The legal structure of a charity or NFP will have a significant impact on the consideration of trustees for commencing legal proceedings and/or defending proceedings.

Trustees of an incorporated charity or NFP will commence or defend proceedings in the name of, and on behalf of, the charity or NFP. The risks and liability attached to the proceedings will be borne by the charity or NFP.

Whereas for trustees of an unincorporated charity or NFP proceedings will be brought in the names of the trustees and therefore they will be personally liable. Whilst trustees may have the benefit of an indemnity from trust assets, consideration should be given as to whether or not there are sufficient trust assets to provide the indemnity.

That being said, if a trustee of an incorporated charity has breached its duty or the decision to bring or defend a claim was not taken reasonably then the trustee(s) may be personally liable.

Costs

The legal costs of pursuing or defending a claim can be tens of thousands of pounds. A winning party typically gets its costs paid by the losing party, however, a winning party is most unlikely to recover its costs in full.

Trustees should also consider the proportionality of pursuing or defending a claim if, for example, the cost of litigating outweighs the actual sum being disputed or the objective (as not all claims relate to a sum of money).

Trustees should also consider the solvency of the entity or individual it is pursuing because it is not worth spending thousands, or tens of thousands of pounds, pursuing a claim when the organisation or individual being pursued cannot satisfy a judgment or order, including an order to pay your costs.

The overarching question, to be considered at all stages of the litigation process, is whether or not the cost of pursuing or defending a claim is in the charity’s best interests.

Document preservation and disclosure

A practical point for trustees to consider at the point they are aware of the existence of a dispute is their obligation to preserve documentation and to understand their disclosure obligations to avoid creating documents which are disclosable which may damage the organisation’s position.

A party to a claim is under an obligation to preserve documents that support or adversely affects a party’s position. “Documents” includes electronic documents, such as emails, recordings, WhatsApp or text messages.

A party is obligated to disclose key documents during the “pre-action” phase of the litigation process (i.e. the exchanging of letters prior to the issuing of proceedings) and through each phase of the litigation process.

It is common that when an issue arises, or the existence of the dispute becomes known, in an organisation that a flurry of emails exchanges occur internally discussing the issue or dispute. Those emails are likely to be disclosable to the other side and if the contents of those emails looks to apportion blame internally or otherwise, those emails can be harmful to the organisation’s legal position.

Trustees should, therefore, be mindful not to create disclosable documents after the existence of a dispute is known.

Alternative dispute resolution

As litigation attracts risk as well as being expensive and time consuming, trustees should consider whether or not an alternative dispute resolution method is a viable option to pursue, for example mediation, or without prejudice settlement discussions or third party determination.

Mediation can be an effective method of achieving a resolution or settlement. Mediation is privileged (i.e. it is private and whatever is said during mediation cannot be disclosed during proceedings) and the parties jointly instruct a mediator who shuttles between the parties and seeks to facilitate a settlement. The mediator is neutral and only discloses information to one party on the express instructions by the other.

Whilst mediations are not guaranteed to achieve a settlement, mediations have good prospects of successfully achieving a settlement. Parties have a common interest to avoid wasting the cost of mediation (by failing to achieve a settlement) and can be more motivated and focused to bring the dispute to an immediate halt.

Another option is to engage with without prejudice settlement discussions i.e. a negotiation (WP discussions). WP discussions are privileged provided they are genuine attempts to settle the dispute and allow parties to speak freely, not fearing that whatever is said in those negotiations will be used against them in proceedings.

Parties in proceedings will be encouraged to engage in WP discussions and the issuing of proceedings may be avoided if WP discussions are commenced promptly after a dispute arises.

Trustees’ pervasive duty to preserve, protect and secure trust assets will apply when settling a claim.

Principles that trustees should follow

Trustees have an ongoing duty to preserve, protect and secure trust assets and a duty to act in the best interests of the charity, including when deciding to pursue or defend  a claim. Charity Commission’s guidance CC38 contains a checklist of key actions for trustees when deciding whether or not to pursue or defend a claim.

Trustees should perform the actions in this form, such as obtaining specialist legal advice and the advice of a surveyor or accountant, if appropriate.

Evidencing the trustees’ use of this checklist, the documentation of minutes of meetings in which the decision to pursue or defend litigation is made along with obtaining independent specialist legal advice, will assist trustees avoiding acquiring personal liability from their decision and will assist achieving good governance and management.

Do trustees need to obtain the Charity Commission’s consent and do they need to notify the Charity Commission of a dispute?

The consent of the Charity Commission is not required for disputes relating to a charity and a third party and trustees do not need to disclose to the Charity Commission the existence of a dispute between a charity and a third party.

The consent of the Charity Commission is required when a charity wishes to commence “charity proceedings” i.e. proceedings relating to the internal administration or domestic affairs of a charity.

Conclusion

Prevention is better than the cure. Good governance and the implementation of policies should assist reducing the risk of litigation. However, acknowledging that the risk of litigation can never be removed completely, trustees ought to consider the guidance from the Charity Commission including satisfying the checklist CC38 and obtain specialist legal advice whilst always acting in the best interests of the charity and preserving, protecting and securing its assets.

If you have any questions about the topics raised in this article, please get in touch.