OG11B1 Ex gratia payments by charities: What is an ex gratia payment and who may authorise it?

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OPERATIONAL GUIDANCE

EX GRATIA PAYMENTS BY CHARITIES

WHAT IS AN EX GRATIA PAYMENT AND WHO MAY AUTHORISE IT?

OG 11 B1 – 2 May 2006

Purpose

This guidance explains: (i) what constitutes an ex gratia payment in relation to a charity; (ii) the law allowing us to authorise or refuse an application to make such a payment.

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Contents

1. What is an ex gratia payment?
2. What is NOT an ex gratia payment?
3. Moral obligation
4. Who may authorise an ex gratia payment?
5. Exceptions: charitable companies and charities governed by statute
Glossary of Terms used in this Guidance

Index to further related information


The Law	Refer to a lawyer	Refer to an accountant

1. What is an ex gratia payment?
	A proposed payment is an ex gratia payment where the trustees:
	believe that they are under a moral obligation to make the payment;
	are under no legal obligation to do so;
	have no power under the governing document of the charity which they could properly exercise to make the payment;
	and
	cannot justify the payment as being expedient in the interests of the charity within the meaning of s.26 of the 1993 Act.
	In this context a payment means any transfer of value from a charity to a third party including all of the following:
	a payment of money out of the charity’s existing funds, including any cash legacy to which the charity is entitled;
	a transfer of some existing charity property, including any specific legacy or share of residue to which the charity is entitled; or
	(less typically) the waiver of rights to money or property to which the charity is legally entitled but which it has not yet received;
	Trustees must obtain our authority under s.27 of the 1993 Act before they can make an ex gratia payment (there is one exception to this - see section 5 of this OG).

2. What is NOT an ex gratia payment?
	2.1 Authority or means of authority already exists 2.2 Payments made to settle legal obligations 2.3 Payments not justifiable 2.4 De minimis payments

	2.1 Authority or means of authority already exists
	A payment is not ex gratia for the purposes of this guidance if it is either:
	a payment which can be properly made in the interests of the charity under express or implied powers, ie:
		a payment which is for the specific purpose of furthering the objects of the charity as laid down in its governing document; or
		if there is a power in the governing document to do things which are incidental or conductive to that purpose; or
	a payment which can be authorised as being expedient in the interests of the charity under s.26 of the 1993 Act.
	For example, a proposed gratuity to a long-serving employee on his retirement, or additional severance payment to an employee made redundant, might be over and above the legal entitlement and not within the express or implied terms of the charity’s governing document. Nevertheless, either might serve the interests of a charity by confirming it as a good employer and making it easier to attract and retain employees of high calibre in the future.
	If such a payment is judged to be expedient in the interests of the charity, it may be authorised by a s.26 Order. However, where the charity is being wound up or dissolved, it may be difficult to establish that the proposed payment is expedient on those grounds.
	The advice of Legal Division should be sought in such cases.
	It is important to note that, in the absence of the trustees having express or implied powers, such payments can be made only if authorised by an Order made under s.26 of the 1993 Act, and only then if judged expedient in the interests of the charity. The payment could not, for instance, be authorised by giving advice under s.29, as this can sanction only the use of an existing power; it cannot confer a power the trustees do not already have.
	The exception is a set of special statutory provisions which affect charitable companies in respect of these types of payment to employees.

	2.2 Payments made to settle legal obligations
	A payment is not ex gratia if it is made in order to settle or compromise a legal claim against the charity. Trustees may settle or compromise such claims using either:
	an express or implied power in the charity’s governing document; or
	the relevant power contained in s.15 of the Trustee Act 1925.
	An example would be a claim under the Inheritance (Provision for Family and Dependants) Act 1975 out of the estate of a deceased person who has left his or her money to charity, by or on behalf of dependants who might otherwise have expected to benefit. If the charity settles or compromises that claim out of its entitlement, that is not an ex gratia payment.
	A further example would be where a charity asks us to sanction settling or compromising a claim made against it in relation to the application of s.101 of the Mental Health Act 1983. Where a "patient" gives, by will, specific property (eg a house) to particular beneficiaries, the intention of the patient may be frustrated if the property is disposed of during his or her lifetime in accordance with the 1983 Act. Section 101 seeks to rectify this by substituting for the gift of the specific property a gift of the assets which represent the "disposed of" property at the date of death.
	No action is required to give effect to s.101 unless there is a dispute - for example as to the identity of the assets which represent the disposed of property. Where there is a dispute, it can be settled or compromised under s.15 of the Trustee Act 1925 without reference to us - assuming the trustees consider a settlement to be in the interests of the charity.
	If it is established that no legal claim can be, or will be, made under the Inheritance (Provision for Family and Dependants) Act 1975, or in relation to the application of the Mental Health Act 1983, then if the trustees feel under a moral obligation to make an ex gratia payment, we can consider the application in the usual way. (The trustees should be asked to confirm, on the basis of appropriate professional advice, that no legal claim can be, or will be, made).
	A charity can also compromise a claim for rectification of a will under which it benefits. But, in contrast to claims under the 1975 or 1983 Acts, in many cases where rectification is a theoretical possibility, it may be possible to consider an ex gratia payment before any claim for rectification is made. This issue is discussed in more detail in section 3.2 below.
	It is emphasized that a compromise does not necessarily require the taking of formal litigation proceedings - the assertion of a legal right and an indication that the party concerned is minded to pursue a serious claim may be sufficient.
	Any assessment by charity trustees of the merits of such a claim should of course be approached from the point of view of the charity's interests. The Trustee Act 2000 provides that any compromise will also need to be consistent with the statutory duty of care to which (by virtue of section 1, and paragraph 4 of Schedule 1) trustees will be subject when exercising powers of compromise - see OG 86 B6.
	The vague intimation of a possible claim which, on the face of it, had little merit, would not justify a charity settling on inappropriate terms, and it would not be appropriate to satisfy a moral claim by inflating the amount which might properly be payable under a true compromise.
	If trustees are in any doubt about the propriety of settling or compromising a legal liability, they can ask us to sanction it under s.26 of the 1993 Act.
	Advice from Legal Division should be sought in any case where:
	we are approached concerning a claim under either the 1975 Act or the Mental Health Act 1983; and otherwise if
	there is any doubt concerning the propriety of compromising a legal claim.
	there is any doubt concerning the propriety of compromising a legal claim.

	2.3 Payments not justifiable
	Sometimes attempts are made by charities to justify making payments, without obtaining an Order under s.27, on the following grounds:
	The "enlightened self-interest" of the charity. We consider that this ground cannot justify a payment except in the most exceptional circumstances. Whilst the apparent justification might be that retaining a gift will adversely affect the reputation of the charity, particularly locally, this is not normally an effective justification when set against the potential reflection on the good name of the charity if it turns away gifts made to it.
	An example of where a charity might reasonably make a payment would be where it is expected to secure a future gift from the person to whom it is made (eg a one-off payment to meet the costs of a will under which the charity would receive a substantial legacy).
	To compromise a claim based on "promissory estoppel" (or "proprietary estoppel" as it is also sometimes known in this context). The basis of such a claim might be that there was a link between a "promise" by a testator to make a gift (which was not in fact made during the lifetime of the testator or by will) and the conduct of the intended "beneficiary" who, in reliance on this "promise", acted to his or her detriment (eg agreed to be employed at some lesser contractual rate than might be usual, or made some other disadvantageous financial commitment).
	Though such a claim was established in Gillett v Holt [2000] 2 All ER 289, the facts of the case were exceptional. In general, such claims are extremely difficult to establish, and charities would be unwise to settle a claim on this basis.
	Whenever we become aware of an attempt to justify a payment on either of these grounds advice from Legal Division should be taken, in the expectation that we will challenge the propriety of the payment.
	If trustees make unjustifiable payments on either of these grounds they are at risk of personal liability.
	Similarly, sometimes trustees feel that they have a moral obligation to "prop up" an ailing subsidiary trading company associated with the charity. They may have an eye on their responsibilities as directors of that company and see their "moral obligation" to creditors of that company. Such payments, guarantees or other commitments by the charity are neither "expedient in the interests of the charity" nor justifiable as ex gratia payments.

	2.4 De minimis payments
	There is no dispensation under s.27 of the 1993 Act for small ex gratia payments to be made without complying with the requirements of that section. Whether a proposed payment or a series of payments is, or is not, "material" for charity accounting purposes is irrelevant.
	However, we do accept that where the administrative cost of seeking authority to make an ex gratia payment is out of all proportion to the amount of the payment, then the payment could be made in the interests of the charity without reference to us.
	It would be open to trustees to delegate decisions in these circumstances, including delegation to an employee or to an agent.
	Whether it is the trustees themselves, or a delegate who takes the decision, there would need to be proper grounds for concluding that:
	the administrative cost of seeking authority to make the payment was out of all proportion to the payment in question; and
	if an application had been made to us under s.27 we would have authorized the payment*; and
	(in the case of delegation) the charity trustees would be likely to decide that they were under a moral obligation to make the payment.
	Where the trustees make the decision themselves, they must recognise the moral obligation. (See section 3 below).
	*(Where we are asked to confirm whether a payment is of the type we would approve, there will be no avoidance of administrative cost, and the matter will in our view no longer be de minimis, but will fall to be considered as an ex gratia payment in the usual way).

3. Moral obligation
	3.1 Trustees’ belief paramount 3.2 Charity as beneficiary of a will 3.3 Other types of case

	3.1 Trustees’ belief paramount
	Under s.27(1)(b)(ii) of the 1993 Act, the trustees must believe themselves that they are under a moral obligation to make a payment (or waive an entitlement to property).
	This must be their personal view. The issue may not be delegated to a committee of trustees, nor to staff or other agents. (Delegation to a committee of the trustee body would exclude the other trustees from the decision, which would be inconsistent with our view that s.27 requires a decision by the trustee body collectively.)
	The determination by the charity trustees that they regard themselves as being under a moral obligation should be taken in accordance with the terms of the charity's governing document. This means that:
	the determination can be taken (normally by majority vote) at a duly convened and quorate meeting of the trustees; but
		if:
		the governing document allows the trustees to adopt different quorum arrangements for different types of business; and
		the trustees have adopted provisions whereby a quorum of trustees for considering ex gratia cases is smaller than in relation to general business; and
		a meeting of trustees is convened in the usual way which enables all the trustees to attend if they so wish or to comment on the proposals;
		- then a determination at a meeting which satisfies the particular quorum requirements will be a determination by the charity trustees for the purposes of s.27 of the 1993 Act.
	if it is open to the charity trustees to deal with business in correspondence, then if all the trustees receive written details of the proposal, they can all participate in the decision-making. If a majority of the trustees respond by accepting the moral obligation in a particular case, then this will be a determination by the charity trustees for the purposes of s.27 of the 1993 Act.
	Whilst it is for the trustees (and not for us) to determine within their constitutional framework how to conduct their business, we would expect all the trustees to have familiarised themselves with what constitutes a moral obligation within the context of s.27, and of the principles which emerged from Re Snowden.
	If a charity would like to adopt the second or third procedures referred to above, but do not have the constitutional powers to do so, then we will be willing to assist them to make any changes which may be required.
	Whether or not the trustees feel a moral obligation for the purposes of s.27(1)(b)(ii) of the 1993 Act is judged to be a particularly subjective matter. (Compare, for instance, the need under s.36(3)(c) for trustees to satisfy themselves that a proposed disposal of land is at the best terms reasonably obtainable, which may be lawfully delegated to a committee or officer to be decided on their behalf).
	The trustees will need to be able to persuade us that there are reasonable grounds for their belief taking all the circumstances into account. However, as set out above, this is a matter for the trustees to decide themselves, and we should not seek to persuade them.
	The trustees may be under some pressure to agree, or may themselves believe, that "it would be nice to do something for" disappointed potential beneficiaries where there is no real moral obligation. We should point out the remarks of the Judge in Re Snowden quoted in our publication CC7 (Ex Gratia Payments by Charities) to the effect that the jurisdiction is not to be exercised lightly or on slender evidence as to the need for a feeling of moral obligation. We should not, however, press the point if the trustees appear to have reasonable grounds for thinking that one exists.
	It is for the Head of Legal Section (HOL) considering the application to decide whether it is justified and sufficiently compelling to warrant authorisation. Some examples of the type of case in which a valid moral obligation might arise are given below.

	3.2 Charity as beneficiary of a will
	Intended and unintended benefits
	The most common circumstance in which consideration of a true ex gratia payment arises is where a charity is a beneficiary under a will in respect of property to which the trustees believe some other person has a moral, but no legal, claim.
	A charity may receive, under a will, a larger gift than the testator really intended because of a legal technicality or an oversight on the testator’s part. As a result, some other person (say, a relative) may have been deprived of money or property which the testator intended him or her to receive. The charity is legally entitled to keep the gift, but the trustees may feel a moral obligation to make an ex gratia payment to the relative in order to fulfil the actual wishes of the testator.
	A moral obligation may also arise in cases where the evidence demonstrates only that the testator would have altered his/her will so as to make a smaller gift to charity had s/he not been prevented from doing so by the onset of incapacity or death, but it is not possible to say exactly what provision s/he would have made. These cases are exceptional and turn on their own facts.
	It will rarely be appropriate for trustees to make an ex gratia payment where a testator fully intended to leave his/her property to a charity. The testator has a right to dispose of his assets as he or she chooses and the fact that relatives are disappointed, or feel the testator was not morally justified in leaving the property as he or she did, is not reason in itself for the trustees to feel a moral obligation towards them.
	An exception to this might be where a testator had made a solemn, though not legally binding promise to leave money or property in a particular way which was not fulfilled by the will. In these circumstances, it would be necessary to examine why the testator did not give effect to this intention.

	Negligence proceedings
	There may be cases where instructions given to solicitors by the deceased have not been put into effect because of alleged negligence or delay on the part of those solicitors. This may give a disappointed beneficiary a right of action against them.
	If a disappointed beneficiary is determined to take advantage of a legal remedy against the solicitor who drew up the will, then the charity trustees need take no action. The charity would have no claim against the solicitors, and could not be a party to any formal compromise (see section 2.2 above) of a negligence case.
	However, many disappointed beneficiaries prefer to approach the charity concerned for an ex gratia payment, rather than pursue costly legal proceedings.
	In practice, negligence may be difficult to prove, and the fact that a will has not worked out as intended does not necessarily mean there is any negligence that the Courts would recognise. The facts may be difficult to assess: the client/testator will be dead, and unless there are clear letters or notes on file, much of the evidence may be circumstantial, or hearsay.
	Additionally, if in such circumstances trustees required a disappointed beneficiary to explore the possibility of legal redress before seeking approval for an ex gratia payment, an anomalous and morally dubious situation would have been created.
	In essence, the outcome of a successful negligence suit would be that the disappointed beneficiary is compensated by the solicitors or their insurers, instead of receiving the intended benefit direct from the testator, whereas the charity would have received a benefit which the testator did not intend - known as an "adventitious profit".
	Although such an outcome might superficially appear satisfactory - in that the charity keeps its profit - trustees could reasonably feel that it would be morally unacceptable to refuse to carry out the testator's wishes unless the disappointed beneficiary pursued, and failed in, potentially lengthy and costly proceedings. They could thus legitimately believe that the morally preferable approach would be to achieve by the most direct route (ie making an ex gratia payment) what the testator intended in the first place.
	Our policy is therefore that:
	we would not expect a disappointed beneficiary to exhaust possible claims against solicitors before we consider an ex gratia application from a charity;
	we should not normally refuse an application where the intention of the testator has clearly been frustrated.
	Advice from Legal Division should be sought if there is any doubt as to the propriety of an ex gratia claim in this context.

	Rectification proceedings
	Under s.20 of the Administration of Justice Act 1982, the court has power to rectify a will on the grounds that it fails to carry out the testator's intentions in consequence of a clerical error or a failure to understand his instructions. Charities may therefore become involved in proceedings for rectification where they have received a gift under a will. (For example, under the decision in Walker v Medlicott & Son [1999] 1 WLR 727 a disappointed beneficiary might need to apply for rectification of the will as a necessary preliminary to bringing proceedings for negligence. The subsequent decision in Horsfall v Haywards (The Times 11 March 1999) shows though, that this is only necessary where rectification proceedings are clearly likely to succeed and result in a material recovery of funds).
	If, for whatever reason, rectification proceedings are brought, the significance for a charity which has received an unintended benefit is that such proceedings would involve it, since clearly its position would be adversely affected by the decision of the Court: ie its share of the estate would be reduced - or even removed.
	A charity therefore needs to assess its position in order to decide whether or not to resist a claim which might involve, or lead to, rectification proceedings.
	If, having done so, it is considered there is a genuine case for rectification which is likely to be successful (and assuming the charity has no other power to make a payment), then:
	the claim can be compromised by the charity under s.15 of the Trustee Act 1925 without reference to us (effectively, an agreement to rectify the will without going to Court); and
	an ex gratia payment would not be appropriate.
	However, there may be instances where trustees are advised that, although their charity has received an unintended benefit under a will, for technical reasons unconnected with the justice of the case, a claim for rectification by the disappointed beneficiary is not likely to succeed in Court.
	In practice, this is likely to be the most common situation. Where it arises, we will not expect a disappointed beneficiary to take proceedings for rectification before we will consider an ex gratia application from the charity. As in the case of negligence claims, trustees could reasonably feel that it would be morally unacceptable to refuse to carry out the testator's wishes unless the disappointed beneficiary pursued, and failed in, speculative legal proceedings.
	Advice from Legal Division should be sought in all cases where we are asked to consider an ex gratia payment in the context of possible rectification proceedings.

	3.3 Other types of case
	Ex gratia payments not connected with property left in a will are likely to be less common and very individual in nature. There is no typical case, but an example might be where a person has made a lifetime gift to a charity in good faith, believing that his or her personal circumstances permitted this, but later finds that, by doing so, he or she has reduced himself or herself to poverty. There would be no legal obligation on the part of the charity to return the gift and, indeed, they would have no power to return it, but the trustees might feel a moral obligation towards the donor.
	Another case in which we could be approached for authority under s.27 of the 1993 Act would be to allow part of a charity’s entitlement to a residuary bequest under a will to be used to meet the costs of a tombstone or memorial going beyond what the law would allow as proper expense of administration.
	In the case of such an approach, legal advice should be sought.

4. Who may authorise an ex gratia payment?
	Previously, only the Attorney General could authorise trustees to make an ex gratia payment although applications were, in fact, normally made through us, and we reported the facts to the Attorney General. Our power to authorise was introduced by s.17 of the Charities Act 1992 (now s.27 of the 1993 Act). Our powers are subject to the Attorney General’s supervision and direction, and we may refer an application to him for a decision if we wish.
	The Attorney General has asked the Commission to submit a regular return of cases in which the power conferred by section 27 is exercised. He has also indicated that the Commission should consult him on cases involving particular difficulty or political or public interest sensitivity.
	In practice this is likely to happen only where an application raises a particular point of principle or practice on which we consider it desirable to obtain the Attorney General’s guidance. In all but these exceptional cases, the decision is made by a Head of Legal Section (HOL).

5. Exceptions: charitable companies and charities governed by statute
	Generally this guidance applies as much to charitable companies as it does to other charities, but there are two statutory provisions which enable charitable companies to make ex gratia payments without official authority.
	The first is s.719 of the Companies Act 1985. The effect of this legislation is that a charitable company, whose business, or whose subsidiary’s business, is being transferred or terminated, can make payments (eg loss of employment compensation) to its employees (or to the employees and ex-employees of the subsidiary). Whether or not it is in the interests of the company to do so is deemed irrelevant, and so payments under these provisions may properly be termed ex gratia.
	There are corresponding powers for liquidators in s.187 of the Insolvency Act 1986.
	S.719(4) of the 1985 Act and s.187(3) of the 1986 Act are primarily concerned with creditor protection. The fact that the assets of charitable companies must be applied for charitable purposes and cannot be distributed to their members does not necessarily mean that the two sections do not apply to charitable companies, notwithstanding the references to payments being permitted out of profits available for dividend or assets available to members.
	If it appears that either of these sections may be relevant, then legal advice should be taken.
	Trustees are not able to make an ex gratia payment – or an ex gratia disposal of property – which is prohibited by statute (for example, in cases where the trusts of the charity are contained in an Act of Parliament which prohibits the disposal of the assets of the charity). Neither the Attorney General nor the Commission has power to dispense with the due observance of an Act of Parliament. In such cases, an ex gratia payment may be made only under the authority of a Scheme made under section 17 of the 1993 Act, or by an amending Act of Parliament. In such cases, legal advice should be sought.

Glossary of Terms used in this Guidance
	1993 Act
	ex gratia
	payment
	testator/testatrix
	trustees
	will

Index to further related information