COVID-19 and charities: Commercial contracts FAQs
We continue our series of FAQs for our charities COVID-19 Hub with a set about commercial contracts below.
We will be posting these responses on our COVID-19 Hub. Here you can also access further updates and content from our charities team, as well as content in respect of wider COVID-19 related concerns, beyond those specific to the charity sector.
1 We have had to cancel our event. What is our liability to participants?
A whole host of events have been cancelled as a result of the coronavirus outbreak, including fundraising events that were due to bring in critical income, education and training events run by charities and also events hosted at a charity’s premises as part of its trading activities.
Where a charity has had to cancel an event or is considering cancelling one later in the year due to concerns about lockdown measures, it will be important to assess the charity’s liability to planned participants (in addition to the venue (if not being hosted at the charity’s premises) and to any suppliers or contractors involved in the event).
Careful consideration should be given to the contract governing the event, in particular, to whether the COVID-19 outbreak (or more generally a pandemic), and/or the government measures taken to stop the virus spreading, would be considered a ‘force majeure’ event under the contract or – failing that – whether the common law doctrine of frustration may otherwise apply. For more detailed guidance in relation to force majeure events and the frustration of contracts in the context of COVID-19, click on the link here.
If any force majeure clause does not adequately cover current circumstances, then there may be other saving provisions, such as cancellation and termination rights under the contract. In addition, charities should check their insurance policy to see if the scope of that policy would cover the cancellation of the event (and we have produced some guidance on Coronavirus and Business Continuity insurance cover, link here).
Concerns around cancelling events are likely to include not just the question of liability but also concerns about the impact on the charity’s reputation, the ability of the charity to deliver its purposes, and the impact on funding – and in relation to the broader financial considerations, our finance and funding FAQs set out a number of options available to charities, which charities may wish to consider.
Planning ahead, particularly given the suggestion that COVID-19 may be managed by ‘waves’ of lockdown measures, we suggest that all charities ensure that they include appropriate force majeure clauses in any contracts currently under negotiation (in addition to various other protective clauses – see FAQ 3 below) and that they also review their insurance cover.
2 We have had to cancel our event. Our terms and conditions provide that no refunds are due to participants, but in the circumstances we would like to make a contribution to them as a matter of goodwill. Can we do that?
Charities can be put under a lot of pressure to pay out refunds to people who have signed up and put down a payment for now cancelled events. However, there are strict charity law restrictions on the basis on which charities can provide refunds. This is because the law requires that charity funds and property are only applied in furtherance of the specific charitable objects of that charity. As a result, the payment by, for example, a community sports charity to a supporter who would have been a guest at a planned fundraising event that has now been cancelled, would not be a payment made in furtherance of that charity’s community sports charitable purposes.
Accordingly, the general rule is that if a charity has already requested and/or received payment in relation to an event that it has cancelled, the only basis on which it will be appropriate to provide a refund is if the related terms and conditions for that event require the charity to make a refund in the particular circumstances; without that contractual obligation, the charity will not be permitted to elect to pay out a refund. (An exception to that may be if, depending on the nature of the event, the charity’s terms and conditions are not compliant with consumer rights legislation, such as to make it disproportionate to exclude a refund. Coming out of lockdown, there may be other issues to consider with forthcoming events, where for example the event may proceed but in a pared down form, which may give rise to consideration of whether the fee should be adjusted).
There are, however, some circumstances where a charity’s trustees can make what are known as ‘ex gratia payments’, in cases where it could be fairly said that it would be morally wrong to refuse to make the payment.
What is an ex gratia payment?
An ex gratia payment is a payment made by a charity which does not support its charitable objects and which it has no legal obligation to make but which the charity trustees decide they have a moral obligation to make. Before a charity can make an ex gratia payment, its trustees must first obtain the authority of the Charity Commission. The charity would need to demonstrate that the proposed refund was in the best interests of the charity, rather than just a demonstration of goodwill to those due to attend its now cancelled event (taking into account not only the charity’s relationship with the individuals concerned, but also the impact of paying out refunds on the charity’s finances and the knock on effect on the ability of the charity to support its beneficiaries, as well as the potential precedent it may set). Obtaining this consent would be by no means guaranteed and even then, obtaining it within the timeframe required may be a challenge.
Even if a charity is contractually required to refund supporters in relation to a cancelled charity event, the current financial climate should prompt charities to at least consider asking their supporters whether they would be willing for their payments to be treated instead as donations to the charity. Acknowledging that many charities will be looking at this option, HMRC has somewhat relaxed the Gift Aid rules to enable payments made for cancelled charity events to be treated as donations for the purposes of Gift Aid and it has published some short guidance on this (link here). Whether approaching participants in this way is appropriate in the circumstances of the charity will depend on a number of factors, not just on the charity’s financial position but also practical considerations such as the number of attendees due to have attended the event and the value of the potential refunds.
3 We are negotiating an agreement for the receipt of services but, in the current arrangements, the nature of the service and our ability to police it will be affected. How should we protect ourselves?
The current crisis gives rise to inevitable uncertainties and challenges for potential suppliers which risk leaving the charity in a position where it has been short-changed or unexpectedly left without critical services or supplies. However, there are provisions that charities can incorporate into a service agreement to reduce the risks and afford them greater protection.
Here are some tips about what to consider when negotiating a new service agreement (and potentially reviewing your existing ones):
- Care should be taken when agreeing and drafting the scope of services.
For example, make sure you consider whether the services could still be performed if both the supplier’s and charity’s staff are working remotely.
- Check whether you would be protected under the agreement in the event the supplier doesn’t perform their services by the agreed date(s), forcing you as the customer to engage another company to supply those same services.
For example, you could include a clause requiring the supplier to cover the costs of enlisting another provider and it can be useful to include a mechanism in the agreement under which your payments can be adjusted in the event the pandemic forces the supplier to reduce their service to below the levels specified in the agreement.
- In view of the uncertainty as to the shape and length of the current/future lockdowns, agreements will need to build in flexibility as to timescales for the delivery of services whilst making sure the charity, as the recipient, retains a degree of control over those deadlines.
For example, you could incorporate provisions which set out a procedure under which you and the supplier would hold (remote) meetings on a regular basis to touch base on how things are progressing, what the delivery timescales are likely to be and whether these are likely to be affected by the relevant government guidance at that time. That way, you can agree to any changes in deadlines depending on how matters develop.
- Given the government may introduce further legislation to deal with the pandemic, it can be useful to incorporate what is known as a change in law clause, which ordinarily allows either the termination of the agreement by the parties or a variation of the price in the event a significant change to the law impacts the supplier’s ability to deliver the services.
- You can also include suspension provisions, which would allow you to require the supplier to suspend the provision of part of or all of their services (as well as your corresponding payment obligations), if it is looking like the contract cannot be performed due to certain developments or government guidance at that time. The services that have been suspended would be resumed at a later date, which you can determine following discussions with the supplier.
- Lastly, make sure that the administrative logistics of validly executing and servicing notices under the agreement do not become an unnecessary headache, eg by building in the flexibility under the agreement for it to be signed in counterpart using electronic signatures (save in relation to deeds – see our guidance here) and for notices to be given by email.
- Care should be taken when agreeing and drafting the scope of services.
4 We have provided services to an organisation and they have explained that because of COVID-19 they do not have sufficient resources to settle our invoice. What can we do?
This sort of situation is, sadly, becoming increasingly common in the current crisis with regular income streams across many businesses having ceased overnight.
If your charity is faced with an unpaid debt then the first thing that should be considered is the financial position of the person who owes you the money (the debtor), as if they have already gone into liquidation or filed for bankruptcy it may prove difficult to recover the debt – you may end up spending more money than the debt pursuing a fruitless claim and may have to decide whether it is better just to write off the debt.
On the other hand, if the debtor is solvent, the first step (before taking legal action) should be to write to them explaining that the debt is owed. Depending on the debtor’s response, you and the debtor may be able to come to an agreement for the settlement of the debt such as an instalment payment plan or alternative method agreeable to both parties. Alternative dispute resolution avenues should also be explored (such as mediation) in an effort to save costs, with actions through the courts being a last resort to recover the debt. By taking this approach, it allows the parties to understand the full position before heading down the ‘legal’ route and can facilitate broader and more collaborative conversations about how and when the debtor can settle the invoice.
The next step is to send the debtor a letter before action. This is essentially a letter sent by the party claiming they are owed a debt (creditor) to the debtor informing them that if the debt is not paid within a specified period of time, court proceedings will be commenced against them. This is an important part of the process and the Civil Procedure Rules places an obligation on creditors to send letters before action prior to commencing proceedings, and a failure to do so can result in being penalised by way of costs against the creditor. It is recommended to seek legal advice before embarking on this stage in the recovery of the debt.
Should the debt be paid after sending out the letter before action and within the specified period of time set out within it, then no further action is required and it is not necessary to proceed to court. However, if the debt is not paid within this period of time, the next step will be to issue the claim (sue) in the relevant County Court for the debt and to proceed to legal proceedings, unless you can in the meantime reach a settlement.
We will be writing up further FAQs soon, but do let us know if you have any urgent questions in the meantime.