The Voluntary Sector, the State and the Law 9781474200400, 9781841130672

Citation preview

(A) Dunn Prelim

25/1/00

1:35 pm

Page v

Foreword Richard Best, OBE Director, Joseph Rowntree Foundation During the 1990s hopes and expectations for the voluntary sector grew. Disillusionment with the State’s direct (often monopoly) provision of public and social services led to calls for greater pluralism and competitiveness to achieve better value for money, more flexibility and sensitivity. At the same time, the nation rejected the politics associated with the supremacy of market forces, electing a Labour government with a large majority. Interest in the voluntary sector as an acceptable alternative to both public and private sectors has chimed with the new government’s quest for a “Third Way”. Is the sector equipped to take centre stage? Has it got the capacity and the qualities lacking in private and public sector providers? Certainly, the UK’s voluntary sector is big: it accounts for about one in 25 full-time paid jobs and nearly one tenth of all service employment. The total operating income of the broad voluntary sector is well over £30 billion per annum (and the broad definition excludes the Churches/faith communities/ party political bodies). Even if the sector is defined more narrowly and universities, “independent” schools, sports clubs and trade unions are taken out of the equation, it still accounts for more than one in 60 of all paid jobs and has a turnover of over £14 billion (in 1999 prices).1 And, of course, measuring the scale of the sector in terms of paid staff and income/expenditure omits the key component of the volunteer. In 1995 the National Centre for Volunteering estimated the contribution of volunteering to the national economy at £41 billion per annum (although subsequent research at Loughborough University suggested a rather lower total2). By all accounts, the sector is operating on a substantial scale. The problem in discerning trends for the voluntary sector is the diversity of its component parts. With nearly 200,000 charities, together with all the community based organisations, Friendly Societies (and Industrial and Provident Societies) the most striking feature is the small scale for most bodies. But there are big and powerful members of the sector too: the largest housing association 1 J. Kendall and M. Knapp, The Voluntary Sector in the UK (Manchester, Manchester University Press, 1996). 2 K. Gaskin and B. Dobson, The Economic Equation of Volunteering (Loughborough, Centre for Research in Social Policy, 1997).

(A) Dunn Prelim

25/1/00

1:35 pm

Page vi

vi Foreword owns more than 40,000 properties; the major care providers employ several thousand staff; major trusts like the Joseph Rowntree Foundation have hundreds of millions of pounds of assets. The objectives of these bodies is astonishingly diverse. But all share the common characteristic of detachment from the control of the State (nationally or locally) and from the world of profit-making (and distribution). However much they depend upon statutory funds, ultimately they can turn their back on the institutions of the State and go their own way (even if this makes them penniless!). And although they may accumulate surpluses, these cannot be distributed for private gain and must be redeployed to meet not-for-profit objectives. But is the sector’s independence from government increasingly an illusion? And is the distinction between the voluntary and private provider—in terms of motivations as well as outcomes for service users—really a deceit? A 1995 study from Manchester University analysed the income structures and funding experiences of a sample of 17 voluntary agencies, all providing care and support of different kinds, in the North of England over the preceding years. This showed how total income had increased sharply (by an average of 10 per cent above inflation each year) but how the bulk of the extra money came from statutory sources, particularly local authorities: 60 per cent of total income was from statutory funding.3 Perhaps unsurprisingly, the extra cash brings with it a sense of insecurity and unease for many organisations. Total income continues to be volatile and there is discomfort with the dependency upon time-limited project-funding (usually with the voluntary body’s core funding remaining static). So funding increased during the 1990s for very many service-providing bodies but fears for the future, sometimes reflecting funding problems for the statutory bodies themselves, have grown. Meanwhile, researchers from South Bank University and Sheffield Hallam University have noticed the heavy dependence of locally based voluntary organisations on their relations with local authorities.4 Nicholas Ridley, when responsible for local authorities as Secretary of State for the Environment, once famously described the model council as one which met annually to sign contracts for all services. He had in mind that privatesector bodies, in competition, would ideally provide all these services; but he recognised that sometimes voluntary bodies would successfully compete for the business. There are still incentives from central government to persuade the local authorities to take a more pluralist approach to service provision, shifting to the role of funders/purchasers/enablers (and sometimes regulators). For example, 75 per cent of funding for residential care is ring-fenced for the “independent 3 L. Russell, D. Scott and P. Wilding, Mixed Fortunes: The Funding of the Voluntary Sector (Manchester, Manchester University Press, 1995). 4 P. Alcock, J. Harrow, R. Macmillan, J. Vincent and S. Pearson, Making Funding Work (York, York Publishing Services, 1999).

(A) Dunn Prelim

25/1/00

1:35 pm

Page vii

Foreword vii sector”; the provision of new social housing has shifted almost entirely to voluntary bodies. But in different forms, the relationship has become a contractual one—with the danger of “State capture”. A 1997 report on the impact of a contract culture has shown that it has made recruitment of volunteers more difficult; it has formalised their roles, requiring increased supervision and training; and for many, but by no means for all, it has meant that existing volunteers feel their status and value have reduced. Increasingly, paid workers are driven by the contents of the contract not the views of their management committees.5 It is not only the constraints and culture of the public sector which have been impinging upon the independence and identity of voluntary bodies: the voluntary sector has also found it necessary to adopt the techniques and methods of the private sector. On the fund-raising side, a competitive environment between major charities, intensified by TV telethons and some changes in giving patterns provoked by the National Lottery, has led them to employ expensive fund-raisers and adopt advertising methods and marketing ploys lifted from their commercial counterparts. With business sometimes after the same contracts from statutory bodies, some of the distinctions between the two sectors have evaporated. A report by Diana Leat noted that voluntary organisations were sounding and acting more and more like for-profit businesses, which could lead to their distinctiveness and special fiscal privileges being questioned. She found there were no clear, unqualified differences in management.6 Is it possible for the voluntary sector to bring together its traditional attributes—altruism, independence of thought, the pioneering spirit—with the key qualities of both public and private sectors? The ethos of public service could live on within voluntary agencies, alongside new characteristics of efficiency and cost-effectiveness learnt from exposure to market forces during the 18 years of Conservative government. An attempt has been made by central government (principally the Home Office) working with the National Council for Voluntary Organisations in the wake of the Deakin Commission Report,7 to establish a national compact with the voluntary sector. This enshrines the basis for mutual respect and support, valuing the sector’s independence whilst expecting it to accept responsibilities in an accountable and open manner. And at the local government level, work is continuing on achieving a partnership between the statutory and voluntary bodies in each local area.8 5

L. Russell and D. Scott, Very Active Citizens? (Manchester, Manchester University Press, 1997). Challenging Management: A Study of Managers who have Moved from For-profit to Voluntary Organisations, Centre for Voluntary and not-for-profit management (London, City University, VOLPROF, 1997). 7 Meeting the Challenge of Change, Voluntary Action into the 21st Century: Report of the Commission on the Future of the Voluntary Sector (London, NCVO, 1996). 8 See M, Taylor, The Best of Both Worlds (York, York Publishing Services, 1997); G. Craig, M. Taylor, C. Szanto and M. Wilkinson, Developing Local Compacts (York, YPS, 1999). 6

(A) Dunn Prelim

25/1/00

1:35 pm

Page viii

viii Foreword Not for the first time, the conclusion may be that the voluntary sector is at a crossroads. The danger of losing out in the provision of services to the private sector may have receded. And the chances of it entering a mutually beneficial accord with government seem better than in times past. But it has always contained the seeds of its own potential destruction—in its unwillingness to act cooperatively, its confusion about its role which flows from its diversity, and its inherent financial instability which can tempt it to abandon its independence— as well as its constant capacity to regenerate and capture the commitment and talent of a multiplicity of the highest quality people.

(A) Dunn Prelim

25/1/00

1:35 pm

Page xi

Notes on Contributors Christine R. Barker is Director of the Charity Law Research Unit (CLRU) at the University of Dundee, and has been conducting research into charity law issues since 1993. She has published widely on the subject and is co-author, together with other members and associate members of the CLRU, of Charity Law in Scotland (Edinburgh, W. Green, 1996), the first comprehensive guide to charity law in Scotland. Alice Belcher is a Senior Lecturer in law at the University of Dundee. She specialises in taking an economic approach to legal issues. She is author of Corporate Rescue (London, Sweet & Maxwell, 1997) and a number of articles about governance issues, including “Scottish Charities and Governance” (with C. R. Barker and S. Cross) and “Housing Association Governance in Scotland and England” (with V. Jackson), both in the Juridical Review. Richard Best has been the Director of the Joseph Rowntree Foundation and its associated housing association, the Joseph Rowntree Housing Trust since 1988. The Foundation spends nearly £10m per annum on a programme of social policy research and development. Richard was Director of the National Federation of Housing Associations from 1973–88, and has acted as Secretary to the Duke of Edinburgh’s Inquiry into British Housing, an Advisor to the House of Commons Environment Committee and as trustee of various charities. Ian Dawson is a Lecturer in law at the University of Newcastle upon Tyne and a Barrister. He has taught, researched and practised throughout the full Chancery sphere. Both as an academic and a practitioner he has specialised in many aspects of charity law, including taxation issues, but his wider interests have enabled him to place those fields within a larger framework. Nicholas Deakin is currently a Visiting Professor at the Local Government Centre, Warwick Business School, and at the LSE. Before that, he taught social policy at Birmingham University and worked as a civil servant and local government officer. His most recent project has been a study of the Treasury and social policy. In 1995–6 he chaired the Independent Commission on the Future of Voluntary Action in England. Alison Dunn is a Lecturer in law at the University of Newcastle-upon-Tyne. She is a member of the Charity Law Association and has written a number of

(A) Dunn Prelim

25/1/00

1:35 pm

Page xii

xii Notes on Contributors articles on charity law issues including “Charity Law—A Political Scandal” (1996) 2 Web JCLI, “Charity law as a Political Option for the Poor” [1999] Northern Ireland Legal Quarterly, and (with A. R. Everton) “Old Hats, New Models or Chapeaux Révisés? Defining Charity” (1999) 5 Charity Law and Practice Review. She is currently engaged in an empirical research project on the legal and practical effect of the restrictions against political activities and campaigning placed upon charities. Joanna Gray is a Reader in Financial Regulation at the University of Newcastleupon-Tyne and a Solicitor. In 1997 she was Senior Research Fellow at the Institute of Advanced Legal Studies, London. She is Legal Editor of the Journal of Financial Regulation and Compliance and a member of Financial Services Working Party of the Law Society Company Law Committee. Chris Handy is Chief Executive of Accord Housing Association, which operates primarily in the West Midlands. The Association works with a wide range of community groups and voluntary organisations and is controlled by a voluntary Board of Management. His publications include The Law of Registered Social Landlords (3rd edn., London, Sweet & Maxwell, 1997) (with J. Alder), and Discrimination in Housing (London, Sweet & Maxwell, 1993). Stuart Harrop is Professor of Wildlife Management Law at the University of Kent at Canterbury, where he researches into the role of non-governmental organisations in the development of conservation and animal welfare law. Between 1991–6 he was the Director of Legal Services of the Royal Society for the Prevention of Cruelty to Animals where part of his portfolio of responsibilities included the charity’s extensive prosecution function. David Harte is a Senior Lecturer in law at the University of Newcastle upon Tyne and a Barrister. His main interests are Law and Religion, and Environmental Law. He has contributed papers in a number of edited collections, and articles in the Journal of Environmental Law, the Journal of Planning and Environment Law, the Ecclesiastical Law Journal and the British Journal of Religious Education. He is a member of the General Committee of the Ecclesiastical Law Society, the Editorial Board of the Ecclesiastical Law Journal, the Diocesan Board of Education of the Diocese of Newcastle, and the Transitional Council for St. Nicholas Cathedral in Newcastle. Ian Leigh is a Professor of Law at the University of Durham, specialising in Public Law. He is a Solicitor, having previously worked with a large district council. He has written extensively in legal journals and is co-author (with L. Lustgarten), of In From the Cold: National Security and Parliamentary Democracy (Oxford, Clarendon, 1994). His recent research includes analysis of the implications of the Human Rights Act 1998 and examination of the consti-

(A) Dunn Prelim

25/1/00

1:35 pm

Page xiii

Notes on Contributors xiii tutional significance of the Scott inquiry. He is currently writing a study of legal and political accountability in local government. Peter Luxton is Professor of Property Law at De Montfort University, Leicester, having previously been a Senior Lecturer at the University of Sheffield. His publications include Charity Fund-Raising and the Public Interest: an AngloAmerican Legal Perspective (Aldershot, Avebury, 1990), and he is currently completing a book on charity law to be published by Oxford University Press in 2000. He is a member of the Advisory Editorial Board of the Charity Law and Practice Review, and also of the Charity Law Association. Ann Lyon read history at the University of Newcastle-upon-Tyne and did postgraduate work in history and archaeology at the Universities of York and Durham before moving into law. She qualified as a Solicitor in 1991 and worked in private practice and local government before taking up a lectureship at De Montfort University, Leicester in 1993. Her main academic interests are in the public law sphere, particularly military law and the history of the British constitution. Susan R. Moody is a Senior Lecturer in law at the University of Dundee and a founder member of the Charity Law Research Unit there. For five years she ran a major Scottish charity and has continued to be actively involved in the Scottish voluntary sector. Her particular research interests are volunteering and the law and she is a member of Volunteer Development Scotland’s Advisory Panel on Volunteering and the Law. She is currently co-editing a book (with C. Mitchell) on the Foundations of Charity to be published by Hart Publishing in 2000. Debra Morris is Director of the Charity Law Unit, University of Liverpool, where she leads a team of researchers working on various projects concerned with aspects of charity law. She is author of Schools: An Education in Charity Law (Aldershot, Dartmouth Press, 1996), and is assistant editor of the leading text on charity law, Tudor on Charities (8th edn., London, Sweet & Maxwell, 1995). She is also case note editor of the journal Charity Law and Practice Review and has written many articles in the area of charity law. Stephen Swann has lectured in English property law at Oxford Brookes University and the University of Dundee. He developed his interest in the law reform needs of the voluntary sector while engaged at the Law Commission on its preparatory work for HM Treasury’s 1996 consultation paper on reform of the Trustee Investments Act. Recently involved in collaborative research on British and German charity law, he is presently research fellow at the University of Osnabrück’s Institute for International Private Law and Comparative Law. He also provides legal advice to the Fenland Lighter Project in a voluntary capacity.

(A) Dunn Prelim

25/1/00

1:35 pm

Page xiv

(A) Dunn Prelim

25/1/00

1:35 pm

Page xv

Acknowledgements This book arises out of a Newcastle Law School conference on The Voluntary Sector, The State and The Law which took place in March 1998. The conference was devised and organised by my colleague, John Alder, and my first and foremost debt of gratitude is to him for his invaluable help in organising and editing this book and for allowing me to see his project through to publication. Secondly, I would like to thank the conference delegates for lively discussion, and the book contributors for developing with enthusiasm the conference’s themes. They have collectively developed a very stimulating set of essays on the area. Book preparation and conference organisation are no small tasks. I am grateful to Elayne Thorburn for her assistance in both, and to Joanne Pinnock and Suzanne Johnson who stepped in at the most pressured moments. I am also particularly grateful to Mia Murillo for discussing the issues of this book with me and for her many valuable suggestions; and to Richard Hart for his patience and his enthusiasm for the project. Finally, an immeasurable debt of gratitude is owed to Anthony R Zito, whose moral support and practical assistance have been invaluable and greatly appreciated. Alison Dunn Newcastle upon Tyne, August 1999.

(A) Dunn Prelim

25/1/00

1:35 pm

Page xvi

(B) Dunn Ch1

25/1/00

1:36 pm

Page 1

1

Introduction ALISON DUNN

The origins of this collection of essays lay in a conference organised by John Alder and Newcastle Law School in March 1998. One aim of the conference was to draw together and analyse the themes underpinning the relationships between the voluntary sector, the state and the law. Common themes that one would expect to find in this area are those of independence and autonomy, regulation and accountability, and patronage through partnership. The papers delivered at the conference and produced in this book illustrate that the accommodation of these themes in the working relationships between the voluntary and public sectors has created tensions. This is particularly the case in recent decades, given the way in which the sectors have changed and developed, and the dichotomy between their complementary roles but diverse responsibilities and expectations. The voluntary sector is extensive.1 To say that it covers a wide range of organisations, issues and users is still to underestimate its nature, extent and heterogeneity, and the difficulties of defining its boundaries. From acts of neighbourliness within communities to organised programmes of global poor and disaster relief, with self-help and advocacy in between, it is of polymorphous character. On the other hand, the sector is united by its independence, innovation and spontaneity. As a pioneer of community collaboration and representation it represents a significant force within society.2 The hallmark of the sector’s innovation and capacity to respond is its autonomy. An independent voluntary sector is a distinct and important element of any democracy. It is a vehicle for direct public participation, with its autonomy enabling it not just to participate, but also to maintain a check upon the state.

1 On the size of the sector as an economic and human resource see L. Hems and A. Passey, The UK Voluntary Sector Almanac 1998–99 (London, NCVO, 1998). 2 The European Commission, for example, has recognised that the contribution made by the voluntary sector is “immense”, and that voluntary organisations have “led the fight for the recognition of human rights and the dignity of the human person, and for the preservation of our cultural heritage and of the natural environment. Many promote a spirit of solidarity on behalf of the less favoured, the sick or people with disabilities, the poor and excluded, the aged and the young, and between those who have jobs and those who do not, between men and women, between generations, between the more prosperous regions and the poor or struggling regions”: Promoting the Role of Voluntary Organisations and Foundations in Europe, Com(97)241, para 7.1.

(B) Dunn Ch1

25/1/00

1:36 pm

Page 2

2 Alison Dunn Voluntary organisations have been an important aspect of public life since Tudor times, when charities were first given state backing.3 Such patronage, advantageous at the time, has proved to have a double edge. While it enables organisations to pursue goals outside market pressures, it also carries the risk of dependence and political control. During the last two decades, state patronage has been a significant pressure upon the independence of the voluntary movement, not least because the boundaries between state and voluntary responsibilities have shifted. The emphasis of government has switched from the role of provider of services to enabler and regulator, with the voluntary sector through a series of contracts taking on more of the public sector’s responsibilities, particularly in the delivery of welfare services.4 The relationship between government and voluntary organisations has been characterised as a “contract culture”,5 in which legalistically defined rights and duties replace the traditional voluntary service ethos. This new relationship is still insecure. The notion of creating partnerships between the public sector and the voluntary sector6 has entered into common parlance, if not into the reality of their relationships. Additional pressures upon the voluntary sector’s independence stem from the fact that in the current economic climate, with its emphasis on financial efficiency and competition, the line between voluntary bodies and the private sector is becoming increasingly blurred. Many voluntary organisations have been forced by financial pressures to offer services, chase funding, engage in trading activities and perform a wide range of functions, such as lobbying as pressure groups and offering a framework for co-operative and mutual activities, which sometimes conflict and threaten their relationship with their users and funders. Efficiency, effectiveness and efficacy have become key reference points, almost replacing need, responsiveness and innovation as the standards of evaluating voluntarism. In terms of regulation and accountability, voluntary bodies have traditionally been accountable primarily to their members. Their relationship with government has been largely informal and based upon trust, whilst their relationship with their users and beneficiaries has tended to be paternalistic. However, the way in which the sector and the pressures upon it are changing and developing raises legal questions about their governance, openness, accountability, conflicts of interest and regulation. As voluntary organisations increasingly straddle the divide between the private and the public, the issue of their accountability becomes more pressing. For example, the accounting requirements for charities have become more stringent in recent years under sections 41–49 of the Charities Act 1993, as have government controls for housing associations. So 3

See preamble to the Act of Charitable Uses 1601. M. Taylor, The Best of Both Worlds (York, YPS, 1997). 5 J. Warburton and D. Morris, “Charities and the Contract Culture” (1991) 55 Conv 419. 6 See Compact on Relations between Government and the Voluntary and Community Sector in England, Cm 4100 (London, Stationery Office, 1998), Building Real Partnership: Compact Between Government and The Voluntary and Community Sector in Northern Ireland, Cm 4167 (London, Stationery Office, 1998), The Scottish Compact, Cm 4083 (London, Stationery Office, 1998). 4

(B) Dunn Ch1

25/1/00

1:36 pm

Page 3

Introduction 3 too has the sector’s range of stakeholders expanded and diversified, along with the expectations that they place upon individual organisations. From the perspective of the volunteer working within the sector these developments have also raised the stakes in respect of individual liability and legal regulation, and brought to the forefront the question of their status in employment law and any fiduciary duties that they may owe. The increased responsibilities of volunteers and the uncertain state of the law in their regard may well act as a deterrent against pursuing voluntary activity.7 The difficulty of reconciling accountability and regulation with independence and autonomy is a dilemma faced by both the state with its policies and the law with its regulatory framework. Reconciliation will be no easy task. The core problem is that a sector as multifaceted as the voluntary one is pulled in too many directions without respect being accorded to its distinct role. At one level, for example, a veneer of professionalism has permeated the sector, requiring quality standards, efficiency and financial audits, the meeting of targets and benchmarking.8 At another level, demands are placed upon organisations by their users to act as their voice in society and to draw attention to individual concerns in a manner which may not be cost-effective. This could be by quasiofficial representation for example, or through lobbying. Yet again, pressure is placed upon voluntary organisations to partner local or central authorities, or to participate in joint ventures with private bodies, which may mean sacrificing the organisation’s central purpose to other agendas and which also raises questions about the nature and purpose of charitable status. Further, individuals within voluntary organisations often fall between the two stools of lack of legal protection on the one hand, and regulation by legal standards which were not designed to apply to them, on the other.9 Quite often it is said that the voluntary sector is best defined by what it is not, but the tensions which interplay between the conflicting themes of accountability and independence mean that it is equally true to say that quite often the voluntary sector is forced to act out a role which is not its own. The essays in this book draw out the tensions between the voluntary sector, the state and the law and highlight the many areas where the relationships between the principal actors are uneasy. They echo the point of view put forward by the Kemp Commission that, in order to be feasible, “the bargain

7 A recent Rowntree Study emphasised the absence of accountability to users: S. Kumar, Accountability in the Contract State (York, YPS, 1997). The Deakin Commission considered questions of accountability and independence and made broad proposals for reform, emphasising the need to preserve the independence and diversity of the voluntary movement: Meeting the Challenge of Change, Voluntary Action into the 21st Century: Report of the Commission on the Future of the Voluntary Sector (London, NCVO, 1996). 8 See, for example, the Quality Standard Agency’s “White Paper” on Quality in the Voluntary Sector (London, NCVO, 1998), and the Charity Commission’s Hallmarks of a Well-run Charity, Leaflet CC60 (London, TSO, 1999). 9 Consider in this regard the uncertain status of the voluntary “worker”.

(B) Dunn Ch1

25/1/00

1:36 pm

Page 4

4 Alison Dunn between the sector and government must be equitable and sustainable”.10 The book’s discussion applies across a broad range of voluntary organisations, including both charitable and non-charitable bodies. The broad areas which are considered include the governance of voluntary bodies; their accountability to government and to their users; legal structures; openness; regulation and privatisation; the standard of behaviour of volunteers; political control; volunteer vetting; and conflicts of interest. The structure of the book divides into two parts. Part One concerns the regulation and accountability of the voluntary sector and sets forward an overview of how the sector is changing. Chapter 2 (Leigh) considers the regulatory boundaries between local authorities and the voluntary sector, including the legal constraints which may prevent effective partnerships. Chapter 3 (Lyon) discusses the regulation by judicial review of the activities of voluntary bodies when those bodies are carrying on the functions of the state. Another current interest is the status, regulation and monitoring of volunteers within the sector, and an examination is made in Chapter 4 (Moody) of the implications of Part V of the Police Act 1997 and the protection of service users through volunteer employment and vetting. Management board responsibility in the voluntary sector is the subject of Chapter 5 (Belcher), taking into account the effect of economic and social pressures and the general culture shift towards accountability. Chapter 6 (Gray) turns to the legal structures for voluntary organisations, concentrating on the legal form of the guarantee company and the framework provided by general company law for voluntary activity. Part One concludes with a consideration in Chapter 7 (Barker) of the regulatory framework for charities in Scotland, and how regulation and changing legislative frameworks can alter the nature of bodies within the voluntary sector, with Chapter 8 (Handy) using the housing arena as a case example of state capture. Part Two focuses on the activities which voluntary bodies undertake and the particular legal problems which arise. Many of these activities and their associated conflicts result from the pressures which have forced the voluntary sector to change. Analysis is made in Chapter 9 (Morris) of the problems which arise from bodies engaging in a contracting role with local authorities, particularly in terms of how dependence upon public sector contracts for funding is partly responsible for the erosion of the independence of voluntary organisations. Political campaigning presents a further challenge, particularly in terms of maintaining the sector’s independence. Chapter 10 (Dunn) considers political activity of the voluntary sector in the European and UK contexts along with the obstacles that remain in the way of full political inclusion, whilst Chapter 11 (Swann) examines the cogency of the policy arguments which have been advanced for justifying the restrictions on charities in the political arena. The current economic climate has forced many charities to take up trading activities, 10 Head and Heart: The Report of the Commission on the Future of the Voluntary Sector in Scotland (Edinburgh, SCVO, 1997), 1.

(B) Dunn Ch1

25/1/00

1:36 pm

Page 5

Introduction 5 and Chapter 12 (Dawson) discusses the uncertainty in the law as to which activities amount to trading and the taxation issues which are there involved. An argument for how the activities of voluntary bodies can create “community” as a self-sustaining centre, such as the Church of England model, is advanced in Chapter 13 (Harte). The diverse activities of voluntary organisations, such as those discussed in this section, can often result in conflicts of interest arising for those who act for, or are in charge of, them. Chapter 14 (Harrop) provides an account of the issues involved in balancing the specialist law enforcement responsibilities of charities such as the Royal Society for the Prevention of Cruelty to Animals (RSPCA), with their wider role as advocates and lobbyists. Part Two is brought to a close in Chapter 15 (Luxton) by an analysis of the legal liability faced by charity trustees for conflicts of interest, particularly in the context of the trustee’s relationship with the charity, the position of the trustee who is also a beneficiary and the conflict concerning remuneration and indemnity insurance. Chapter 16 (Deakin) provides an overall conclusion to this series of essays with an examination of civil society and what the future may hold for the sector, the State and for voluntary action. Given that the boundaries between the voluntary sector and the public sector are in a state of flux, the themes of independence and autonomy, regulation and accountability, and patronage through partnership, identified in this book, will not be effortlessly accommodated. It is hoped that this collection of essays will contribute to the continuing debate which is required to resolve the tensions which have been created through trying to form partnerships on the one hand, and serve the different roles and responsibilities of the government and voluntary organisations, on the other.

(B) Dunn Ch1

25/1/00

1:36 pm

Page 6

(C) Dunn Ch2

25/1/00

1:37 pm

Page 9

2

The Legal Framework for Community Involvement IAN LEIGH

INTRODUCTION

This essay discusses the legal regime governing dealings between local authorities and the voluntary sector. In recent years the role of local authorities has changed dramatically, away from being the sole or main providers of local services towards the concept of the “enabling council”. Increasingly, debate about the proper role of the local authority centres upon the notion of “community leadership” in which the council is seen as the facilitator and co-ordinator of activities within the community whether undertaken by elected bodies, quangos, the private or the voluntary sector. This essay will discuss the extent to which existing patterns for relationships between local authorities and the voluntary sector, such as those based on the distribution of grants, the establishment of trusts, guarantees of financial arrangements, and participation in companies allow for the realisation of “community leadership”. Constraints upon the actions and role of local authorities arising from the ultra vires doctrine and limitations on the delegation of their powers by councils will be considered. In conclusion the essay discusses whether reforms announced by the Labour government will create a legal climate in which a genuine partnership between voluntary bodies and local authorities can flourish.

THE CHANGING NATURE OF LOCAL GOVERNMENT

The “enabling council” is the phrase which, more than any other, sums up the change over the last two decades in the role of local government and its relationship with the voluntary and private sectors. Used as a rallying call by the New Right in the early 1980s, it signified an emphasis on new modes of service delivery, where the council became a purchaser and regulator of services delivered by the private sector through contracting out. However, a more recent, communitarian, version, which has become the current orthodoxy, is much

(C) Dunn Ch2

25/1/00

1:37 pm

Page 10

10 Ian Leigh broader. It sees the council as a “community leader”1—the advocate, representative and co-ordinator of a range of services delivered by the local public, private and voluntary sectors to the local community. Two quotations from a 1998 Green Paper convey the flavour of this approach: The days of the all-purpose authority that planned and delivered everything are gone. It is in partnership with others—public agencies, private companies, community groups and voluntary organisations that local government’s future lies. Local authorities deliver important services but their distinctive leadership role will be to weave and knit together the contributions of the various local stakeholders.2 Councils are in a unique position to take the lead in developing a vision for their locality and provide a focus for partnership in delivering that vision. But they cannot act alone. All need to work together, in conjunction with local people and with local business and the local voluntary sector, if they are to be effective in tackling the difficult cross-cutting issues and achieving the benefits that can accrue from a genuine partnership approach.3

This co-ordinating role is partly a matter of necessity because of the increasing fragmentation of the local State (commentators have resorted to the description “local governance” in preference to “local government”). The resulting apparent deficit of accountability where services are fragmented and delivered by non-elected bodies may be partly offset where the council is exercising “Community Leadership”. Change in the role of councils should also be understood in the context of a declining faith in traditional forms of local representative democracy: participation in local elections fell below 30 per cent in many areas in the May 1999 election and as low as 10 per cent in some. In these circumstances the traditional objections to public service delivery by nonelected bodies (that they lack democratic legitimacy and are not accountable to the public) increasingly ring hollow.

COMPLEMENTARY FEATURES OF LOCAL GOVERNMENT AND VOLUNTARY BODIES

Local authorities and voluntary bodies have a number of similarities: they are non-profit bodies, each emphasises user needs, each has a limited legal capacity (at least in the case of voluntary bodies enjoying charitable status) and each is financially constrained. However, there are also significant differences between the two sectors. Although voluntary bodies and councils frequently rely on outside grant funding, councils are often also in the position of distributing grants to voluntary 1 See especially J. Stewart and G. Stoker (ed.), Local Government in the 1990s (Basingstoke, Macmillan, 1995), chap. 14. 2 Department of the Environment, Transport and the Regions Consultative Paper, Modernising Local Government: Local Democracy and Community Leadership (Feb 1998), para 1.9. 3 Ibid., para 6.5.

(C) Dunn Ch2

25/1/00

1:37 pm

Page 11

The Legal Framework for Community involvement 11 bodies and, obviously, local authorities have tax-raising powers, where voluntary bodies rely on gifts. Accountability mechanisms are another point of contrast: councils are subject to the political accountability of elected members and financial accountability of local audit which strictly reinforces the legally limited scope of their powers. Charities are subject not only to a trust deed specifying their objects, but also general limitations (for example, on political activities) and to the jurisdiction of the Charity Commissioners. Charities and other voluntary bodies may also be incorporated as companies (and so subject to a Memorandum and Articles of Association and control by directors) or, if unincorporated, subject to a constitution conferring powers and duties on members and officers. One major contrast concerns political activities. Local authorities are by nature political bodies, whereas charities are prevented from engaging in political activities unless those activities are ancillary to their main charitable purpose. However, on closer examination this difference is more one of degree: councils are prevented from engaging in many of the same political actions forbidden in charity law, especially political advertising and campaigning using taxpayers, or trust money. The fundamental difference concerns the voluntary principle—council discretion and assistance for sections of the public and users of public services is generally underpinned by a complex web of coercive powers, which voluntary bodies lack.4 The boundary between the voluntary sector and the State (at whatever level) is, as other essays in this collection demonstrate, controversial and contingent. In some fields the local public and voluntary sectors have overlapped, especially in social services (e.g. residential homes); education (special needs, playgroups, nurseries); housing (as social landlords, and in relief of homelessness); leisure (community groups). A number of charities have been established against a pattern of partial state provision in education, health and social services with the intention of supplementing what the State does not provide. However, the financial restraints of the past two decades have led to councils increasingly eliminating discretionary expenditure in these areas and providing instead the bare statutory minimum service. The delivery of social services has been particularly affected and the courts have proved generally sympathetic to the plight of councils, turning away claims from disappointed service users.5 This has left voluntary organisations to fill the gap with increasing strains on their own resources. This realignment may be efficient in the sense of discouraging overlap between council and voluntary-sector provision and encouraging complementary working. It can, however, also pit voluntary bodies as representative challengers to council policy decisions to cut services.6 Replacing state provision 4

Although some, like the RSPCA or the NSPCC, may work closely with statutory agencies. E.g. R. v. Gloucestershire CC, ex parte Barry [1997] 2 All ER 1. See E. Palmer and M. Sunkin, “Needs: Resources and Abhorrent Choices” (1998) 61 MLR 401. 6 R. v. Sefton MBC, ex parte Help the Aged [1997] 4 All ER 532, CA. 5

(C) Dunn Ch2

25/1/00

1:37 pm

Page 12

12 Ian Leigh with their own may also place voluntary organisations which are charities at the boundary of their legal powers under their trust deeds. Much of the literature on local governance (especially that in InterGovernmental Relations) treats local authorities and voluntary bodies as parts of a wider local policy network.7 This empirical description is meant as a corrective to a misleading emphasis on the study of discrete institutions, with a distinct legal status, powers, membership, resources and modes of control. Such networks are envisaged as interdependent rather than hierarchical, and they thrive on informal links such as consultative mechanisms and joint or overlapping membership of bodies. Within the network the modes of interaction may vary across the full range of governing techniques: assisting, funding, consulting, inspecting, accounting, directing, co-ordinating. Some of this literature, especially that on central–local relations sees law as a “resource”, for example, a government department has access to Parliament to promote legislation, judicial review may be used by or against a local authority, and so on. However, voluntary organisations and local authorities are in many respects in an equally disadvantaged legal position: each is subordinate and without access to the levers of power with which to change the legal framework in which they operate and co-operate. For councils, ultra vires—the legal doctrine which holds that as artificial legal entities their powers are limited and that they have no “innate” capacities—acts as a significant constraint, both on what they can do and how they can do it.

LEGAL PATTERNS OF INVOLVEMENT

Adapting the network perspective, we can consider the legal modes of interaction between local authorities and the voluntary sector as being points on a spectrum, reflecting the degree of dependence or subservience on the one hand, or independence and autonomy on the other, of the voluntary organisation. One example of subservience is where provision of services by voluntary bodies is subject to inspection or licensing by local authorities; including inspection of playgroups and nurseries under the Children Act 1989 and of residential care facilities under the Registered Homes Act 1984. Equally, grants of council resources and permission to use council premises (for example, for community groups) involve a high degree of subservience, that is, there is little legal constraint on the local authority’s discretion.

7 See, e.g., D. Wilson, C. Game, S. Leach and G. Stoker, Local Government in the United Kingdom (Basingstoke, Macmillan, 1994), chap. 16. Nationally specialised and powerful charities may, of course, in addition have access to policy networks involving central government from which individual local authorities are excluded.

(C) Dunn Ch2

25/1/00

1:37 pm

Page 13

The Legal Framework for Community involvement 13

ACCESS TO COUNCIL RESOURCES

The importance of local grant funding to the voluntary sector cannot be overemphasised, especially in urban areas. For example, one metropolitan borough alone distributed grants totalling £5.9 million from 21 different council budgets to 1,286 voluntary projects in its area in 1996–7.8 Of the total, £3.67 million was council money (from the social services, community and leisure services, housing and education budgets) and £2.3 million came from central government initiatives (including City Challenge, Mental Illness Support Grant and Community Chest). Grants varied in size from £8 to £132,0000. Some national charities such as Age Concern and the NSPCC benefited, but so too did many purely local bodies, such as local residents’ associations, youth clubs, arts and theatre groups, ethnic minority cultural groups, and sports clubs. The same council imposes a series of conditions upon bodies receiving grants from it, concerning information (e.g. access to accounts of the voluntary body and to supply data on numbers of people attending events of the body, and their gender and ethnic composition), access for monitoring purposes to meetings and events organised by the sponsored body, compliance with the council’s (non-statutory) equal opportunities policy and salary scales of staff employed by the body. In addition, the council in effect extends the restrictions on political publicity, which apply to it under the Local Government Act 1986, to the voluntary bodies which it aids. The wide range of such conditions is part of a well-recognised strategy, especially among Labour councils, to extend their reach of influence in implementing social policies beyond their immediate employees and service users. Whereas ability to do so by imposition of similar conditions in contracts (so called “contract compliance”) was constrained by a prohibition on use of “non-commercial” criteria,9 grant conditions are less regulated. Although the power of grant is largely unconstrained, administrative law may impose some minimal restrictions on its use. In R. v. Liverpool CC ex parte Secretary of State for Employment10 it was held that a local authority which 8 I am grateful to the Funding Information Support Unit of Newcastle City Council for supply of the information in this para. The Unit gives advice and information to organisations seeking grant aid, develops and manages corporate bidding and monitors use of grants. 9 The Local Government Act 1988 (LGA), s.17 makes contract compliance unlawful, subject to a minor exception for promotion of race discrimination policy: s.18(2). The provision covers both the actual award of a contract and pre-contractual arrangements such as the drawing up of a list of tenderers. Local authorities are prohibited from acting on factors deemed to be “non-commercial”: these include employment and training conditions of the contractor’s or sub-contractor’s workforce, a contractor’s involvement in “irrelevant” fields of government policy (i.e. concerning defence or foreign policy: s.17 (8)), the political or industrial affiliations of contractors, the geographical location of the contractor’s interests, the involvement of the contractor in industrial disputes, or the making or withholding of support by the contractor to institutions to which the authority gives or withholds support. For analysis see S. Arrowsmith, The Law of Public and Utilities Procurement (London, Sweet and Maxwell, 1996), chap. 16. See also now Local Government Act 1999, s. 19. 10 (1988) 154 LGR 118.

(C) Dunn Ch2

25/1/00

1:37 pm

Page 14

14 Ian Leigh disapproved of central government policy had acted unlawfully in withdrawing grants from voluntary bodies which participated in the government’s Employment Training Scheme; the withdrawal of the grant was seen as an unlawful act of punishment. Interpretation by the House of Lords of the power to make grants to voluntary bodies by the former Greater London Council (GLC), however, had the effect of increasing the dependence of these bodies upon other local authorities for annual grants.11 The Court held by a majority that the Council had no power of “forward funding”: attempts by the GLC to give grants of £25 million to 17 umbrella organisations, which in turn undertook to distribute them to 900 voluntary organisations after the council’s abolition, were held to be ultra vires on the application of London boroughs which otherwise stood to have the GLC’s balances distributed to them.12 Use of council premises such as community centres, sporting facilities and parks is often equally important to voluntary bodies which are unable to make the capital investment to provide their own premises or to pay commercial rates to use private-sector alternatives, where these exist. Here too, administrative law may impose constraints on the discretion of councils to give or withhold permission to use land and premises. So, for example, when a local authority imposed conditions on the use of a park by a community festival which prevented any political activity by any of the voluntary bodies represented at the festival, these were held by the Court of Appeal to be meaningless and Wednesbury unreasonable.13 Similarly, in Wheeler v. Leicester CC14 the House of Lords considered section 71 of the Race Relations Act 1976 (which requires local authorities, in relation to the exercise of their “functions”, to promote good race relations) when striking down the council’s decision to revoke the licence of a rugby club to use a training ground after the club failed unreservedly to condemn the actions of several of its players in taking part in a rebel tour of South Africa. The House of Lords stressed that since the rugby club had done no wrong, the council could not use its discretion to manage land under the Open Spaces Act 1906 and Public Health Act 1925 to terminate the licence to use the training ground.15

11

Westminster CC v. Greater London Council [1986] 2 All ER 278. Fears that the abolition of the GLC would lead to a collapse of the voluntary sector in London subsequently proved to be unfounded as these bodies successfully obtained alternative funding: see Wilson et al., supra n.7, 288–9. 13 R. v. Barnet LBC ex parte Johnson (1991) 89 LGR 581, 590–1 (Purchas LJ); his Lordship also held that it would be lawful for the council to attach conditions to a grant to the festival prohibiting use by any political party, but that an extension to any organisation promoting or opposing any political cause would be ultra vires. 14 [1985] AC 1054. 15 See especially Lord Templeman, ibid., 1112–13. The procedure that the council had adopted, by insisting on public denunciation from the rugby club of their players and on an affirmative response to specific questions was treated as ample evidence of an unfair and unreasonable approach. 12

(C) Dunn Ch2

25/1/00

1:37 pm

Page 15

The Legal Framework for Community involvement 15 In another case a local stag hunt successfully challenged a decision by Somerset County Council to ban deer-hunting from common land held by it, notwithstanding the wording of section 120(1)(b) of the LGA 1972, which allows councils to appropriate land “for the benefit, improvement or development of their area”. In the High Court Laws J rejected the suggestion that, having regard to their role as elected representatives, councillors could form their own view of the desirability of deer-hunting which they might apply to the question whether the community would benefit by prohibiting it on council land; he saw this as raising the danger that the councillors would give priority to their own personal moral preferences, which was impermissible.16 A majority in the Court of Appeal affirmed the decision, although on narrower grounds that the council had acted unlawfully in failing to consider the provision at all in its discussion of the deer-hunting ban.17 The council was not free to treat the land as its own and to impose conditions on its use in the same way as a private landowner: its belief that it could suggested it had failed to consider the powers correctly.

PARTNERSHIPS

Co-operation between the public and voluntary sectors takes place on many levels, from the co-ordinating role that local authorities play in bidding for external funding (for example from the Single Regeneration Budget), to statutory co-operation and consultation with regard to education and social services, to use of companies and trusts as a vehicle for joint action. The diversity of the voluntary sector means that there is no one pattern for public–voluntary-sector partnerships. A study based on the experience of one Metropolitan Borough Council suggests that they may vary both in geographical extent (whether region-wide, borough-wide or in a single locality) and in objectives. The purpose may range from project management, resource acquisition (for example, to give access to grant funding), service delivery (especially with community care programmes), strategic policy, information exchange, to community empowerment.18 Particular problems have been encountered in forming such partnerships to do with liabilities on the transfer of staff, with treatment of the assets of the partnership and with the ethical position and liability of officers and councillors who participate in the partnership arrangements, especially the extent to which they remain bound by the local government ethical framework. Partnerships can take one of two basic legal forms. A separate legal entity such as a company or a trust may be created. Alternatively, joint working can be facilitated by a legal framework which either allows (or requires) joint 16

R. v. Somerset CC, ex parte Fewings [1995] 1 All ER 513, 527 ff. [1995] 3 All ER 20, 28 (Sir Thomas Bingham MR) and 35 (Swinton Thomas LJ). 18 A. Johnson, “Making A Reality of Partnership”, in Local Government Information Unit, Turning Community Leadership into Reality (London, Local Government Information Unit, 1999). 17

(C) Dunn Ch2

25/1/00

1:37 pm

Page 16

16 Ian Leigh working between the council and voluntary body without creating institutions which are legally independent. We approach them in that order.

Local Authority Companies As partnership between the public and private sectors began to play a significant role in the 1980s in initiatives aimed at local economic development, it became increasingly common for local authorities to be involved in the formation of companies. The advantage of private corporate governance was perceived to be a more commercial and flexible style of decision-making and management, and one with which private-sector partners would be familiar. The company provides a useful vehicle for partnership because control can be shared through apportionment of company shares or directorships, according to the degree of involvement or control required. At the same time the constitution of the company (the memorandum and articles of association) could permit it to undertake projects which would be ultra vires the local authority. Moreover, the affairs of a company are, in the name of commercial confidentiality, subject to a much less rigorous regime of public disclosure than local authorities. However, the disadvantage was a corresponding democratic deficit. Actions undertaken through a company in which councillors or officers participate would be outside the normal range of controls designed to render their actions publicly accountable: answering to Council meetings, the ombudsman’s jurisdiction, the auditing process, and judicial review. Specific legislation on local authority companies has attempted to remedy some of these defects. The legislation distinguishes between companies controlled by local authorities, those influenced by authorities and those where the authority has a minority interest.19 Broadly these categories mirror the degree to which the council can influence company decisions, through use of shareholdings or appointment of directors. Regulations restrict the use of payments by the authority to a controlled or influenced company. Further provisions apply to the terms on which influenced companies can be granted interests in land held by the authority, and to other contracts, loans and gifts between the two. Local authority expenditure outside these regulations will be unlawful. The intention is that controlled companies should not be a vehicle for avoiding the strictures of the ultra vires rule. Such companies are also subjected to the remit of the local ombudsman, required to use auditors approved by the Audit Commission and are under duties to allow public access to information.20 Regulations prevent controlled or influenced companies being used to circumvent other controls on 19

See Local Authorities (Companies) Order 1995, SI 849 of 1995. However, where the council forswears before a given financial year from using its powers of control and the company is operating commercially to produce a return on capital, a controlled company may be treated as “arms-length company”, with the consequence that the public information and grievance redress provisions will not apply. 20

(C) Dunn Ch2

25/1/00

1:37 pm

Page 17

The Legal Framework for Community involvement 17 the use by councils of capital finance, on councillors’ entitlements to information and the prohibition of party political activity, on disqualification from public office and the placing of contracts. Where a council officer or member represents the authority on any of these categories of companies arrangements must be made to enable questions to be tabled in the authority about their performance. The stringency of this scheme (especially attributing capital receipts to the local authority) provides a powerful incentive to local authorities to bring their degree of involvement below the thresholds at which the company becomes regulated, i.e. 20 per cent shareholding of directorships in the case of “influenced” companies. This means, however, that such companies are less useful to councils as a vehicle for community leadership, since it leaves them as junior partners.21 Moreover, formal delegation of council business to companies of this type is not permitted (section 101 of the LGA 1972). It has been suggested that a new type of company (a Public Partnership Limited Company) based on US models, which would have an overriding duty to act to benefit the community, should be introduced specifically with public–private and public–voluntary sector co-operation in mind, which would then allow relaxation of other controls.22 The relation between local authorities and companies has also been questioned in the courts when councils have sought to disown as unlawful their dealing through or with companies. An argument of this type succeeded in the Allerdale case in which a local authority’s loan indemnity given in respect of timeshare development by a company owned and controlled by it was held to be ultra vires.23 The Court of Appeal held that the decisions to establish the company and to give the guarantee were part of a scheme to avoid controls on local authority borrowing and therefore ultra vires, since they were undertaken for an improper purpose. In another case a local authority established a “deadlock” company (in which it had a 50 per cent shareholding, the other 50 per cent being owned by a company specialising in public housing finance and leasing schemes), and entered into a loan guarantee to enable the company to purchase properties which it then leased to the council to enable the provision of accommodation for homeless people. The council was found by the Court of Appeal not to be liable on the guarantee: it was ultra vires for the council to delegate its functions as a housing authority to a partly-owned company, since this was not envisaged under section 101 of the 1972 Act (authorising delegation), nor could it be permitted under the ancillary powers rule (section 111 of the same Act) since Parliament had made a detailed scheme elsewhere for these matters.24 In 21 Z. Billingham, “Partnerships and the Legal Framework” in Local Government Information Unit, A Framework for the Future (London, Local Government Information Unit, 1997). 22 Johnson, supra n.18. 23 Crédit Suisse v. Borough of Allerdale [1997] QB 306 (CA), 332–3 (Neill LJ) and 345 (Peter Gibson LJ). 24 Crédit Suisse v. Waltham Forest LBC [1997] QB 362 (CA), 374 (Neill LJ) and 379 (Hobhouse LJ).

(C) Dunn Ch2

25/1/00

1:37 pm

Page 18

18 Ian Leigh Morgan Grenfell and Co. Ltd. v. Sutton LBC,25 it was held that a guarantee to an unregistered housing association was ultra vires because section 111 could not be used to override a specific limitation on loans and indemnities in section 60 of the Housing Act 1985. Only guarantees of loans to registered associations were permitted under these provisions. Collectively these decisions fail to advance the notion of the “enabling authority”, by inhibiting councils from financially guaranteeing the liabilities of arm’s length organisations. Each example turns on its own particular statutory context. Nevertheless, there are some lessons of general application. It is clear that the courts will not allow councils to establish companies, whatever their degree of interest in them, solely for the purpose of evading financial or legal restrictions. This means that use of companies is effectively restricted to fields in which there is specific authority to do so,26 or where the statutory context is permissive and it cannot be said that the authority has improperly delegated its statutory functions.

Trusts The use of trusts to extend council powers will be subject to the normal principles of trust law. Thus, in R. v. District Auditor, ex parte West Yorkshire MCC27 a purported trust to disseminate information to fight the abolition of the council was held to be invalid since the intended beneficiaries were uncertain (or, if they were the two and half million people within the area, too numerous making the trust administratively unworkable). As with its use by private individuals, one advantage of the trust may be the ability to provide for the execution of the settlor’s intention beyond death (political, in the case of councillors). It was precisely this point which provoked controversy in a case from Manchester involving a dispute between the Conservative-controlled Metropolitan County Council and the Labour City Council.28 The city council brought an action for declarations that the County Council had acted beyond its powers in passing the resolutions of April 1978 to establish a trust (to which it later paid £1.12 million) for the purpose of providing free or assisted places at independent schools. It was held that the council had power to establish the trust as being incidental to or consequential on the power under section 137 of the LGA 1972 and the trust was to be regarded as the means of achieving the council’s legitimate end (education, notwithstanding that it was not a Local Education Authority (LEA)), rather than a distinct objective in its own right. An objection, that, because the money was to be applied 25

(1996) 95 LGR 574. E.g. Housing Act 1985, s.58; Education Act 1985, s.2; Transport Act 1985, s.67; Local Government and Housing Act 1989, s.33; Environmental Protection Act 1990, s.32. 27 (1985) 26 RVR 24. 28 Manchester CC v. Greater Manchester MCC (1980) 78 LGR 71 (CA); (1980) 78 LGR 560 (HL). 26

(C) Dunn Ch2

25/1/00

1:37 pm

Page 19

The Legal Framework for Community involvement 19 over seven years to pay it was ultra vires the educational costs of the children starting school in 1978 failed; it was held that a single payment from the council within the current year was permissible, even if the trust were to use the money over a longer period. The Court of Appeal held that there was no general principle that a local authority could not enter into a commitment which would continue beyond the life of the currently elected body.29 The same decision raised an interesting question about the degree of control which the council had over the money in trust. The first trustees were the chairman and vice-chairman of the County Council. The Court of Appeal had argued that the County Council retained control over the trustees both in law and in fact. However the House of Lords held that while the County Council effectively directed the trustees, through the medium of the trust purposes which governed the manner in which the money was to be used, it did not thereafter have any legal power to exercise direct personal control over the actions of the trustees.

Community Planning and Consultation One of the legal mechanisms currently favoured in the vogue for “joined-up” (or “collaborative”) government is the statutory plan. Statutory plans serve several purposes: to make transparent the objectives of public bodies, to structure discretion and to provide a measure for audit and performance review. They also require consultation of the public and of other stakeholders about the provision of public services, co-ordination of efforts among public authorities and other service providers in tackling intractable cross-cutting social problems, especially in the areas of crime, social exclusion and health. The archetype of planned cooperation is a provision requiring local authorities in formulating a community care plan to consult voluntary organisations representing likely users of community care and their carers.30 The position of voluntary bodies under these various existing plans, strategies and reviews is generally fairly weak: there may be a procedural right to be consulted but even the choice of bodies consulted may be within the discretion of the public authority. To add to what some local government practitioners describe as strangulation by plan, it is now proposed that there should be a “Community Plan”, to bring together local stakeholders to identify needs and aspirations of local communities and to improve service provision in response to those needs and aspirations.31 It is to be developed with local people, local business and with the public and voluntary sectors. The White Paper suggests that there will be some freedom about the content of the Community plan and the process of its 29

Cf the Westminster CC Case supra n.11; especially the dissenting speech of Lord Bridge. National Health Service and Community Care Act 1990, s.46(3). 31 White Paper, Modern Local Government: In Touch With the People, Cm 4014 (London, Stationery Office, 1998), chap. 8. 30

(C) Dunn Ch2

25/1/00

1:37 pm

Page 20

20 Ian Leigh preparation. Although the plan will have no direct effect, it will be considered when applications are made for special funding and will be a background consideration to other statutory plans which the council is required to prepare for particular services or functions.32 The White Paper also commends the establishment by councils of non-statutory local public forums, to allow for public debate and education on issues of concern; in some instances these have included giving public or private bodies the opportunity to respond to local concerns about their actions or proposals. However, these are not to be a statutory requirement nor underpinned with powers, for example, to compel the attendance of and information or evidence from other local actors, such as quangos and privatised industries (for example, water companies).33 The weak nature of these arrangements contrasts with the requirements applicable under the devolution legislation to the National Assembly of Wales, which is required to have formal arrangements for liaising with voluntary bodies.34

REFORM OF THE ULTRA VIRES RULE

A number of problems with, and limitations in, the ultra vires doctrine can be identified, namely that it engenders an excessive concern with legality, gives too little recognition of local diversity and no deference to representative democracy. However, in dealing with voluntary bodies it is two other disadvantages which are prominent: the lack of innate powers (unlike private individuals local authorities are heavily constrained in their use of property and contracts) and that the doctrine draws too sharp a boundary between the corporation and other actors. Several factors have given the reform of the ultra vires rule cogency and urgency. A series of court decisions earlier in the 1990s gave a restrictive interpretation of the ancillary powers rule under section 111 of the LGA 197235 on which many local government practitioners had pinned their faith for relaxation of legal constraints.36 These have emphasised the subordinate nature of section 32 A different approach is taken in the case of the new strategic authority for London where the Greater London Authority Act 1999 does not require the preparation of an overall plan. Instead there are to be a series of strategies dealing with spatial development, transport, waste management, air quality and ambient noise. 33 Modernising Local Government, supra n.2, paras 6.25–6.27. 34 The Government of Wales Act 1998, s.114 requires the Assembly to make a scheme setting out how it proposes in the exercise its functions to promote the interests of relevant voluntary organisations, how it proposes to provide assistance to such organisations (and how use of any such grants etc. will be monitored) and how voluntary organisations will be consulted about the exercise of its functions relating to them. 35 This section enables local authorities to do anything “which is calculated to facilitate, or is conducive or incidental to, the discharge of any of their functions”. 36 Hazzell v. Hammersmith and Fulham LBC [1991] 1 All ER 545; McCarthy and Stone v. Richmond upon Thames LBC [1991] 4 All ER 897; Allerdale, supra n.23; Waltham Forest LBC, supra n.24; Morgan Grenfell, supra n.25.

(C) Dunn Ch2

25/1/00

1:37 pm

Page 21

The Legal Framework for Community involvement 21 111: that its proposed use must be directly connected to some explicit primary statutory power (and not “ancillary to ancillary”) and that the provision cannot be used to overcome barriers on the use of other powers, whether imposed by primary or secondary legislation. The power of discretionary expenditure under section 137 of the same Act has also been progressively limited. Section 137 gives a power of discretionary expenditure within set financial limits (calculated on a per capita basis) and has been widely used as an instrument of local initiative. The section also allows local authorities to make donations to charities.37 It was successfully used to establish a trust to provide free or assisted places at independent schools,38 and in another case a council grant to the British Olympic Association towards the costs of sending a team to the Moscow Olympics was upheld.39 In view of the subsequent tightening of section 137, it is doubtful if the latter case would be decided in the same way today. The section has been revised so that there must be a “direct benefit” to some or all of the inhabitants of the area and the benefit must be “commensurate” with the expenditure involved. These restrictions, together with a specific regime for local authority participation in economic development projects (Local Government and Housing Act 1989, Part V), have diminished the appeal and perhaps the need for a discretionary power of expenditure. Research published recently by the Department of Environment, Transport and the Regions40 found that (in contrast to the proposed new duty and power of community concern, discussed below), section 137 was seen by councils in a negative light, hedged around by restrictions, irrelevant to their situation, and unlikely to encourage innovation. However, the same study found that few local authorities use anything approaching the permitted levels of expenditure under the section. The ambivalent message may help partially to explain why the government has been slower to draft the proposed new community leadership duty and power than other parts of its reformed local democracy programme.41 Various proposals have been made for reform of the doctrine. These include: a widening of section 13742; granting a power of general competence which would permit any activities considered to be in the interests of the area unless specifically prohibited by law43; licensed experiments granting additional 37

S.137(3)(a). Manchester CC v. Greater Manchester MCC (HL), supra n.28. 39 Lobenstein v. Hackney LBC (unreported, Div Ct, 16 July 1980). 40 N. Mason, R. Turner and Michael Dodd Consulting Ltd., Local Authority Activity under S.137, LGA 1972 (London, DETR, 1999). 41 Detailed proposals were omitted from a draft Bill and accompanying White Paper published in March 1999: Local Leadership, Local Choice (London, DETR, 1999); Local Government (Organisation and Standards) Bill. 42 Proposed by the Association of Metropolitan Authorities (cf. Republic of Ireland Local Government Act 1991). 43 Commission for Local Democracy, Taking Charge: the Rebirth of Local Democracy (1995); House of Lords Select Committee. 38

(C) Dunn Ch2

25/1/00

1:37 pm

Page 22

22 Ian Leigh powers to selected councils, as in the Scandinavian “free commune” schemes44; and a stronger presumption of legality.45 Prior to the 1997 election the Labour Party proposed that there should be an overall duty to promote the social, economic and environmental well-being of the community, coupled with a general power of community initiative.46 With the election of the new government in 1997 the context for the debate altered considerably. Some of the more commercially inconvenient results of the courts’ interpretation of local government powers have been removed through the introduction of a system of “certificated” contracts under the Local Government (Contracts) Act 1997. The United Kingdom has signed the European Charter on Local Self-Government, which requires powers and responsibilities of local authorities to be prescribed by the constitution or statute and councils to have full discretion to exercise their initiative over maters not excluded from their competence, and in adapting powers to local conditions.47 More sweeping changes were proposed, however, in a 1998 White Paper48 which whole-heartedly embraced the notion of councils as community leaders within a broader vision of the renewal of local democracy, as had been urged by a number of earlier reports.49 The White Paper uses a variety of terms to describe the essential position of local authorities: they are described as best placed: to take a comprehensive overview of the needs and priorities of their local areas and communities and lead the work to meet those needs and priorities in the round.50

Subsequent paragraphs use the phrases “at the centre”, “ideally placed” and “key roles”. Three significant changes to the ultra vires rule are foreshadowed. The first is for expanded discretionary powers to enter into partnership arrangements with other local bodies, organisations or agencies, intended to remove the present uncertainty over the legality of some of these co-operative ventures.51 The second proposal is the introduction of a general duty and linked power of community initiative to apply to all councils. The new duty on councils to promote the economic, social and environmental well-being of their areas is intended to 44

Local Government (Experimental Arrangements) Bill 1998. Cf “certificated contracts” under the Local Government (Contracts) Act 1997. 46 Renewing Democracy, Rebuilding Communities (London, Labour Party, 1995). 47 See especially Arts 4 and 5. However, a House of Lords Select Committee accepted the DoE’s argument that the ultra vires rule was consistent with these provisions and that a power of general competence was not a requirement of the Charter (House of Lords Select Committee, Rebuilding Trust (HL 97, 1995–6), para 3.28). 48 White Paper, supra n.31. 49 Taking Charge, supra n.43; Rebuilding Trust, supra n.47; A Framework for the Future, supra n.21; Modernising Local Government, supra n.2. 50 White Paper, supra n.31, para 8.1. 51 The 1998 Green Paper proposed a modest reform of s.111, supra n.2, para 6.13. The purpose was twofold: to broaden it so that ancillary power can be more than one step removed from the primary power (i.e. ancillary to ancillary) and to resolve doubts over use of s.111 for co-operation and partnership activities, including participation in companies. 45

(C) Dunn Ch2

25/1/00

1:37 pm

Page 23

The Legal Framework for Community involvement 23 enshrine in law the role of the council as “the elected leader of their local community”.52 It is to be “underpinned” by a power enabling councils to act for the well-being of their area and for those who live, work and visit there. The Green Paper53 described the new duty as an intended spur to the community leadership role, which would remove uncertainty without significantly extending local authority powers. This power is to be limited so that it cannot be used to prejudice other council functions or those of other statutory bodies, and the Government will retain a reserve power.54 The third proposal takes the form of a ministerial relaxation of controls for authorities which can demonstrate that they deserve greater freedom because of their strong existing performance (“beacon councils”55). Powers are being taken to allow for ministers to set aside legal constraints on forms of service delivery by local councils where these cut across “best value”.56 Together, these proposals should go a long way towards modifying the ultra vires doctrine for the new roles and working relationships now expected of local authorities. Ultimately, though, their success may depend on the attitude of the courts and of central government. Partnership working and community leadership cut across organisational and institutional boundaries; accountability and delegation do not fall in tidy lines. The new provisions will have to be drafted and interpreted in a quite different spirit from that which has applied, for example, to the use of local authority companies and to section 111 of the LGA 1972 in the cases discussed above.

CONCLUSION

As we have seen, legal constraints may prevent effective partnership between local authorities and voluntary bodies in three ways. First, by limiting the range of activities undertaken to those which the council itself could lawfully engage in under the ultra vires rule. Secondly, by what can be termed organisational limitations. Two examples of these can be given. Section 101 of the LGA 1972 permits only certain forms of delegation of council decision-making and functions; joint arrangements with other local authorities are permitted, but those with other bodies were not envisaged. A second illustration is the rules on local authority companies, which in some instances treat the company as a mere extension of the council itself, so neutralising any advantage in using a company in the first place. The third constraint is financial: rules which attribute partnership capital, income and expenditure to the council are a disincentive to participation for councils already subject to stringent controls in those areas. 52

White Paper, supra n.31, para 8.9. Modernising Local Government, supra n.2, para 6.10. 54 For discussion see I. Leigh, “The Proposed Duty of Well-Being: Comparable Powers and Duties”, in Local Government Unit, Turning Community Leadership into Reality, supra n.18. 55 DETR, The Beacon Council Scheme: Prospectus (Feb. 1999). 56 Local Government Act 1999, s. 16. 53

(C) Dunn Ch2

25/1/00

1:37 pm

Page 24

24 Ian Leigh With the proposed reforms, however, we are moving from a period in which voluntary bodies were seen to be subservient to local authorities to an era of partnership. If the new legal structures for planning and service delivery succeed in drawing councils and voluntary bodies together as genuine equals the implications could be profound. In the new order of local governance it is not merely the boundary between the State and the voluntary sector which is being redrawn: our understanding of local democracy and of citizenship may need to be revised also.

(D) Dunn Ch3

25/1/00

1:38 pm

Page 25

3

Judicial Review of Voluntary Bodies ANN LYON

INTRODUCTION

This essay intends to raise questions as much as answer them. It deals with one aspect of the accountability of voluntary bodies, in the context of the increasing involvement of such bodies in such functions as caring for elderly, disabled and mentally handicapped persons, for which local authorities have statutory responsibility. In recent years there have been a number of cases where a person has been denied what might be called “social care” assistance by a local authority, or has had assistance previously granted withdrawn, and has sought to challenge the decision of the local authority by application for judicial review. By no means have all these applications been successful, but judicial review has now become established as a significant means of securing the accountability of local authorities when carrying out these functions. The question which is considered in this essay is whether this means to accountability remains available where the same function is carried out, not by a local authority established by and deriving its powers from statute, but by a non-statutory body such as a charity. An example may illustrate the point.1 An elderly war veteran who needed assistance with mobility after losing a limb had been supplied without charge with an electric wheelchair and a continuing supply of batteries for its power by the Royal British Legion. The Royal British Legion decided to withdraw this service from the veteran. Its spokesman cited pressure on the Legion’s financial resources, which had led it to review existing provision, that the veteran had been somewhat profligate with batteries in the past and that, on the facts as known to it, he had sufficient resources to be able to provide himself with wheelchair batteries. The Legion was a charity and constrained by general charity law to give assistance only on the basis of need. Had the batteries been supplied by a local authority social services department, there is no question that an application for judicial review could have been brought, and the court asked to decide whether, on the construction of the relevant statutory power, the individual’s own financial resources and the competing demands on the Legion’s resources were, inter alia, relevant factors in the making of decisions concerning 1

As provided on the Radio 4 programme, “You and Yours”.

(D) Dunn Ch3

25/1/00

1:38 pm

Page 26

26 Ann Lyon the supply of batteries to an individual. The availability and ambit of judicial review in circumstances where the same service is provided by a charity are much less clear-cut. It is necessary not only to consider whether judicial review is available in respect of decisions taken by charities as “free standing” bodies, but also where they carry out functions delegated to them by central or local government. Under the Local Government Act 1988 local authorities were required to operate a system of compulsory competitive tendering for most services, rather than always carrying them out directly, with the aim of reducing costs and increasing efficiency. This led to the transfer of a wide range of “social care” functions to commercial and voluntary bodies. The present Labour government enacted a modification of the scheme, to be known as “Best Value”, although it is as yet unclear what effects this will have. The framework for this is contained in Part I of the Local Government Act 1999, which is due to commence 12 months after Royal Assent, except where specific provisions are brought into effect earlier by Order. This Act abolishes compulsory competitive tendering,2 but requires a “best value authority”, as defined in section 1 and including a local authority, to “make arrangements to secure continuous improvement in the way its functions are exercised, having regard to a combination of economy, efficiency, and effectiveness”.3 Guidance on the implementation of this requirement will be issued by the Secretary of State in the form of performance indicators.4 The terms of the legislation are broad and, until performance indicators are actually issued, rather vague, but it appears that local authorities must continue to consider whether “best value” in carrying out specific functions can be achieved by awarding contracts to outside bodies rather than by carrying out those functions in-house. In awarding contracts they are to be allowed to consider matters beyond the narrowly financial in deciding to which body contracts should be awarded.5 It thus appears that contracts will continue to be awarded to voluntary or commercial bodies where these appear to provide “best value” under the new scheme. The question then arises of the accountability of these bodies in carrying out the function for which they have been awarded a contract. To that end, this essay considers three areas: the susceptibility of the actions of a voluntary body to judicial review—is a voluntary body a public body exercising a public power?; who can obtain judicial review; and the discretionary nature of judicial review. In the last 20 years in particular, since the creation of the unified system of judicial review by the revised Order 53 of 1977, judicial review has come to be a major source of the accountability of public bodies. The courts are concerned with the legality of an action rather than its merits, and a considerable proportion of applications fail because in the circumstances it is not possible to prove 2 3 4 5

S.20. S.3(1). S.4. See Explanatory Notes issued with the Bill, and P. Keith-Lucas, The Lawyer, 17 June 1997.

(D) Dunn Ch3

25/1/00

1:38 pm

Page 27

Judicial Review of Voluntary Bodies 27 a negative—it cannot be shown that the body concerned has acted unlawfully.6 However, even an unsuccessful application leads to detailed judicial scrutiny and brings what is frequently a major point of principle into the public eye, so potentially providing an impetus for a change in policy or indeed in the existing law. Recent case law has shown increasing use of judicial review as a source of accountability in the social care field. Reported cases to date have in the main turned on the precise construction of the statutory duty or power concerned, rather than the exercise of discretion, except in relation to issues of relevance, although there seems no reason why the exercise of discretion should not be susceptible to judicial review. In R. v. Gloucestershire CC, ex parte Barry7 and R. v. Sefton MBC, ex parte Help the Aged8 the question for the court was whether an authority was entitled to take its own financial and other resources into account when assessing a person’s “needs” for the purposes of the Chronically Sick and Disabled Persons Act 1970, section 2(1) and the National Assistance Act 1948, section 2(1)(a) respectively. Both applications failed at first instance, since it was held that resources were a “relevant consideration” under the Wednesbury principles, although the decision in Help the Aged was overturned on appeal.9 These cases have stimulated a debate on the issue of a local authority’s duty to provide assistance in both residential and non-residential settings, to elderly and disabled persons, and the authority’s powers to charge a person, directly or indirectly, for such assistance.10 A number of cases have also arisen in related fields, again turning on the construction of the statutes concerned. A decision by a local authority to reduce home tuition for a schoolgirl with chronic fatigue syndrome from five hours to three hours per week as a cost-cutting exercise was held unlawful in a first-instance decision, on the basis that under the Education 6 The principle of legality, that a public body must show a positive statutory, prerogative or common law power to act in the way it purports to, is relevant only where its actions interfere with the rights of a subject (contrast Entick v. Carrington (1765) 19 St Tr 1030 with Malone v. Metropolitan Police Commissioner (No.2) [1979] Ch 344). In all other cases the burden of proof is on the applicant to show that the public body acted unlawfully. 7 [1997] 2 All ER 1. 8 The Times, 27 March 1997. 9 The Times, 23 August 1997, on the basis that although the Council was entitled to take account of its own financial resources in deciding whether an elderly person was in need of care and attention under the 1970 Act, it was not entitled to take account of the elderly person’s capital resources, if they fell below the £16,000 threshold prescribed by the National Assistance (Assessment of Resources) Regs 1992, in determining whether such care and attention was “not otherwise available”, under the 1948 Act, s.21(1)(a), which would require the Council to provide that elderly person with residential accommodation. 10 See also R. v. Powys CC, ex parte Hambridge: Secretary of State for Health, Intervener, The Times, 5 November 1997, QBD (Council entitled under Health and Social Services Adjudications Act 1970 s.17 to recover such charges as it considered reasonable for services provided under 1970 Act s.2); R. v. Somerset CC, ex parte Harcombe, The Times, 7 May 1997, QBD (Council entitled to take account of the value of a person’s house in assessing how much a person should be required to contribute towards nursing home accommodation, and entitled to obtain a charge over that house, suspended as long as her adult son lived in it).

(D) Dunn Ch3

25/1/00

1:38 pm

Page 28

28 Ann Lyon Act 1993, section 298 the Council’s financial position was not a relevant consideration.11 This decision was overturned by the Court of Appeal. The House of Lords allowed the applicant’s appeal and held that a statutory duty was not to be reduced to the level of a discretionary power, which would be the effect of allowing the Council to take its own financial position into account.12 In R. v. Lambeth LBC, ex parte Caddell 13 the court had to determine whether the responsibility to provide a person leaving care at the age of 18 with continuing advice, assistance and support under the Children Act 1989, section 24 rested with the local authority in whose area he was resident and had been placed when in foster care, or with the authority into whose care he had originally been committed. In White v. Ealing LBC,14 a case not involving an application for judicial review, but decided on public law principles, it was held that an education authority making a statement of special educational needs under the Education Act 1996, sections 324 and 326 was under no absolute duty to name a particular school which the child concerned should attend, but if it did name a school it was under a duty to arrange and pay for the child’s attendance at that school even where it was not a maintained school. By contrast, in B v. Special Educational Needs Tribunal 15 a local education authority determining whether the education of a child with special educational needs at a school in the area of a neighbouring authority, preferred by the parents of that child, was incompatible with the efficient use of resources under the Education Act 1996, Schedule 27 paragraph 3(3)(b) was required to take account not only of its own resources, but of the resources of that neighbouring authority. All these cases, and many more in the judicial review sphere generally, turn on the precise construction of a statutory duty or power and the relationship between a number of such powers or duties. Barry, Help the Aged and Caddell were concerned with decisions of local authorities operating social care services directly. Is judicial review available as a means of securing accountability where the function has been devolved by a local authority to a voluntary body? As yet there is no specific case law on this point, but the state of the law on susceptibility to judicial review suggests that much will depend on the discretion of individual judges. The question arises whether this is a satisfactory state of affairs.

SUSCEPTIBILITY TO JUDICIAL REVIEW

A decision is susceptible to judicial review where it is made by a public body in exercise of its public powers. Inevitably, in a country like Great Britain, where 11

The Lawyer, 3 June 1997. See White v. Ealing LBC, The Times, 1 August 1997; R. v. Essex CC, ex parte Tandy [1998] 2 All ER 769. 13 The Times, 30 June 1997. 14 Supra n.12. 15 The Times, 26 March 1998. 12

(D) Dunn Ch3

25/1/00

1:38 pm

Page 29

Judicial Review of Voluntary Bodies 29 the constitution itself and many institutions have developed haphazardly, difficulties have arisen about what is a public body and what constitute public powers. Where a body and its powers are creations of statute, there is usually no difficulty.16 Similarly, there is no difficulty where a body owes its origins to the Royal Prerogative, provided its powers are justiciable in nature.17 Problems, however, arise, where a body performs functions akin to those of statutory bodies, but is not itself a creation of statute, nor does it directly derive its powers from statute. A line of cases beginning with R. v. Panel on Takeovers and Mergers, ex parte Datafin18 deals with this area. The Panel on Takeovers and Mergers was part of the City’s self-regulatory system, an unincorporated association set up by the City institutions themselves. It had no direct statutory or common law powers, although its existence and role were recognised by statute, and the Secretary of State for Trade and Industry had certain regulatory powers over the City institutions. Lloyd LJ considered that what was important in determining susceptibility to judicial review was not the source of the power but the nature of the power: If the body in question is exercising public law functions, or if the exercise of its functions have public law consequences, then that may . . . be sufficient to bring that body within reach of judicial review . . . The essential distinction . . . is between a domestic or private tribunal on the one hand and a body of persons who are under some public duty on the other.19

Further, given the “enormous” power which the Panel wielded, it was wholly appropriate that some form of judicial supervision was available, and it was appropriate that the supervision be in the form of judicial review, since proceedings were quicker and the requirement to obtain leave would exclude unmeritorious claims. Sir John Donaldson MR emphasised the statutory underpinning of the self-regulation system, but argued for a broad approach to the question of susceptibility to judicial review. Only bodies whose sole source of power is consensual submission to their jurisdiction should, he postulated, be excluded from judicial review. On the basis of Datafin itself, there should be no difficulty in relation to a voluntary body operating social care functions contracted out by a local authority. The function is not only public in nature but is defined by statute, and although the voluntary body does not owe its existence and powers directly to statute, and its relationship with the local authority in question is a contractual one, its 16 Difficulties occasionally arise over the nature of the power. In R. v. British Coal Corporation, ex parte NUM [1986] ICR 791 the decision to close a colliery was not reviewable, provided the statutory procedural requirements to consult the unions and other specified bodies were satisfied, as the decision was executive in its nature: the requirement to consult was a public duty, but the decision itself was not a matter of public law. 17 See the GCHQ Case [1985] AC 374, especially Lord Roskill. The concepts of “justiciability” and “non-justiciability” apply equally to statutory powers, but seem of more significance in case law thus far where the power concerned arises under the prerogative. 18 [1987] 2 WLR 699. 19 Ibid., 722–3.

(D) Dunn Ch3

25/1/00

1:38 pm

Page 30

30 Ann Lyon role is underpinned by statute in the form of the legislation applying to the local authority which contracted out the function. However, case law since Datafin has shown a considerable narrowing of the original approach, a clear departure from the broad view favoured by Sir John Donaldson MR. In R. v. Chief Rabbi, ex parte Wachmann20 and R. v. Disciplinary Committee of the Jockey Club, ex parte Aga Khan21 it was held necessary that the power was not merely public in nature but governmental—the test being that if the body exercising that power did not exist, the government would create a statutory body to carry out that function. Further, the need for some link with a statutory body remained. Clearly the government would not create a statutory body to carry out the disciplinary functions of the Chief Rabbi as a spiritual leader, these being regarded as essentially spiritual in nature and matters in which a secular court should not intervene. It was also held that although the government might well create a statutory body to carry out the Jockey Club’s function as the licensing body of racecourses, it would not create a statutory body to carry out its disciplinary functions. Further, the Jockey Club had no links, even indirectly, with any system of statutory regulation, perhaps because the Jockey Club had carried out its functions so successfully that there had never been any need for it to be brought within a scheme for statutory regulation. In any event, judicial review was not available to the Aga Khan as he had an alternative source of remedy in contract or tort because of his relationship with the Jockey Club as a racehorse owner. Lord Hoffmann, agreeing, was of the opinion that the Aga Khan was in a contractual relationship with the Jockey Club, and therefore had sufficient means of obtaining a remedy under contract law. This requirement that there should be no alternative source of remedy is made clear in R. v. Secretary of State for Employment, ex parte Equal Opportunities Commission,22 where the Commission was held to have locus standi to apply for judicial review of the compatibility of the five-year period of continuous employment required of part-time workers (eight–16 hours per week) before they could claim unfair dismissal or redundancy payments with the EC Equal Treatment Directive but the individual applicant did not, as the Directive was directly effective in her case and so gave her an alternative source of remedy. In R. v. National Trust, ex parte Scott,23 the court accepted that the actions of a charitable body are susceptible to judicial review if they are sufficiently governmental in nature, and in view of the statutory backing possessed by the National Trust, they seem not to have questioned that the functions of the National Trust, acting here as a landowner, were sufficiently governmental in nature.24 However, an action for leave to move an application for judicial 20

[1993] 1 All ER 249. [1993] 2 All ER 853. 22 [1995] 1 AC 1. 23 [1998] 1 WLR 226. 24 This case follows R. v. Somerset CC, ex parte Fewings [1995] 3 All ER 20, where a similar decision of a local authority was the subject of a successful application for judicial review. 21

(D) Dunn Ch3

25/1/00

1:38 pm

Page 31

Judicial Review of Voluntary Bodies 31 review in respect of a decision by the National Trust to prohibit stag hunting on its land was “charity proceedings” for the purposes of Charities Act 1993, section 33, since it related to the exercise of discretionary powers in the management of trust property. Therefore, the court could not entertain an application for leave unless the action was authorised by order of the Charity Commissioners or, if this was refused, with the leave of a judge of the Chancery Division. This decision means that judicial review of the decisions of a charity which involve their use of discretionary powers in relation to trust property will involve a preliminary stage before the leave stage, the obtaining of authorisation to bring an action under section 33. However, the fact that the decision in that case turned ultimately on a narrow point of procedure meant that the wider issues of when a charity is exercising a governmental function, and in what circumstances no alternative means of remedy would be available, were left virtually unconsidered. To sum up, judicial review will be available where (1) the functions of the body concerned are governmental in nature, meaning that if the body did not exist, the government would create a statutory body to carry out those functions (that the function is subject to indirect statutory control would seem to point to the power being governmental in nature); and (2) the source of the body’s authority is not purely consensual submission; and (3) there is no alternative source of remedy in contract or tort; and (4) where the decision which is the subject of the application for judicial review concerns the use of a charity’s discretionary powers in relation to trust property, authority for the action has been obtained from the Charity Commissioners or from a judge of the Chancery Division. R. v. National Trust, ex parte Scott was concerned with the availability of judicial review in respect of the actions of a “free standing” charity, and it is submitted that there would be no difference in the court’s decision had the National Trust been exercising functions delegated to it by a statutory body, provided, of course, that the decision related to the exercise of discretionary powers over the Trust’s own property. Where a charity is exercising power delegated to it by a local authority, it will presumably not always be the case that it is the charity’s own resources, held by it in trust, which will be utilised, so that section 33 will not apply in every case. What is then the position of a charitable body which has contracted to carry out certain of the statutory social care functions of a local authority? Clearly, the initial decision by a local authority to transfer social care functions to a voluntary body is susceptible to judicial review and the normal Wednesbury principles ought to apply. Further, as the local authority and voluntary body are in a contractual relationship, each has the normal contractual remedies against the other. However, what is more likely to be in issue than this initial decision is the way in which the voluntary body carries out its new functions—the decision to withdraw the provision of free wheelchair batteries—and the way in which the

(D) Dunn Ch3

25/1/00

1:38 pm

Page 32

32 Ann Lyon courts will view an application for judicial review of such a decision is less clear. Clearly, the individual in need of social care will not normally have a contractual relationship with either the local authority or the voluntary body, so that contractual remedies will not be available. There is also considerable case law to suggest that it may not always be in the public interest to subject a local authority to a duty of care to individuals in relation to its execution of social care functions.25 There may therefore be some reluctance to impose a similar duty on voluntary bodies. On this basis, the requirement that the applicant must have no other source of remedy is likely to be satisfied. Further, it seems unlikely that the court will hold that a charitable body derives its power in relation to those that it assists solely from consensual submission.26 Arguably, the courts will consider the function to be carried out by the voluntary body to be governmental in nature since it would be carried out by a statutory body (the local authority) if it had not been contracted out to the voluntary body, and the powers of the local authority are granted by statute. However, until there is judicial authority on this question, the position remains unclear. A further uncertain issue is the extent to which the normal principles of public law will be applied to voluntary bodies. The principles of natural justice are applicable to private bodies and actions alleging breach of those principles may be brought by writ.27 However, existing case law suggests that the concept of ultra vires applies only to public bodies in circumstances where judicial review is available or there is an analogous statutory appeal procedure. It remains to be seen whether the full rigour of the Wednesbury principles will be applied to voluntary bodies.

WHO CAN OBTAIN JUDICIAL REVIEW

This second consideration overlaps somewhat with the third, which concerns the discretionary nature of judicial review. Here we are concerned not so much with voluntary bodies as the subjects of judicial review, but with voluntary bodies as applicants. In order to apply for judicial review an applicant must first obtain leave. Application is made to a single judge, who makes his decision on the basis of a perusal of the papers. Appeal is to the Queen’s Bench Division Divisional Court (two judges). In hearing a leave application the judge considers: (1) whether the matter is susceptible to judicial review—is it the action or decision of a public body acting in the exercise of its public powers?, (2) whether the applicant has 25

See e.g. W v. Essex CC [1998] 3 All ER 111 and cases referred to therein. It is submitted that the question whether a body derives its powers from consensual submission is of relevance only where the body exercises a disciplinary or regulatory function, which is not the case in relation to those assisted by charitable bodies. 27 Cf Russell v. Duke of Norfolk [1949] 1 All ER 109; Calvin v. Carr [1979] 2 All ER 440. 26

(D) Dunn Ch3

25/1/00

1:38 pm

Page 33

Judicial Review of Voluntary Bodies 33 locus standi—does he have “sufficient interest” in the matter?,28 and (3) whether the applicant has an “arguable case”. Only if the judge at the leave stage is satisfied on all points will the substantive application be heard, and the three points will be considered again during the substantive application. Case law shows that any one of these three may prove a sticking point. The question whether the body concerned is a public body has already been considered in some detail. Further, case law shows very clearly that the individual applicant must show that he has locus standi in relation to the specific matter, and an arguable case in relation to that specific matter, not simply a general “interest” in that area. It is not possible to obtain a general consideration of the actions of a particular body via judicial review, but only a scrutiny of a specific decision. The law on locus standi is currently in a state of flux. There is no particular difficulty if the applicant is the person directly affected by the decision—the man whose free wheelchair batteries have been withdrawn. It is possible to obtain legal aid in respect of an application, and there is, at present, no suggestion that this will cease to be the case under the government’s proposed changes to the Legal Aid Scheme. A fairly high proportion of applications for judicial review are brought with legal aid, particularly applications relating to homelessness and benefits. In 1995–6, 5,481 legal aid certificates were issued in respect of applications for judicial review, some 3.25 per cent of the total of plaintiff certificates, considerably greater than, for example, appeals to the Employment Appeal Tribunal (214), claims under the Inheritance (Provision for Family and Dependants) Act 1975 (1,185) and claims in respect of professional negligence by lawyers.29 However, given the “poverty gap” between eligibility for legal aid and ability to finance an application from the potential applicant’s own resources, and also the need for expert knowledge in particular fields, the bringing of applications by “interest groups”, which may well be charitable bodies, seems likely to become more common.30 Currently, applications by interest groups in their own names run at around 2 per cent of total applications only,31 interest groups preferring to support individuals in their applications, for the very good reason that the granting of leave to interest groups to bring applications is very much a lottery. 28

Ord 53 r 3(7). Statistics taken from the Legal Aid Board Annual Report 1995–6, Table Civil 7. Much the largest number of civil legal aid certificates (some 54% of the total) were issued in respect of personal injury and medical negligence claims. Legal aid in relation to judicial review is considered in detail in L. Bridges, G. Meszaros and M. Sunkin, Judicial Review in Perspective (2nd edn., London, Cavendish, 1995), chap.5. 30 Lord Irvine’s consultation paper on the future of legal aid, Access to Justice with Conditional Fees (London, Lord Chancellor’s Department, March 1998) envisages (para 3.13) that legal aid will remain available in respect of applications for judicial review, but provides no further information on the Labour government’s intentions in this sphere. The Access to Justice Bill before Parliament in the 1998–9 parliamentary session does not refer to judicial review in dealing with the types of matter which may be funded by conditional fee arrangements (cl 27). 31 See Bridges et al., supra n.29, 37. 29

(D) Dunn Ch3

25/1/00

1:38 pm

Page 34

34 Ann Lyon As stated above, an applicant must show “sufficient interest” in the specific matter which is the subject of his application. In R. v. IRC, ex parte National Association of Self-Employed and Small Businesses32 the court held that an individual’s tax liability was a confidential matter between himself and the Inland Revenue, and therefore the Association, whose individual members did not have locus standi in relation to the tax affairs of any other person, did not have locus standi to challenge the Commissioners” decision to grant an amnesty to Fleet Street news workers in relation to unpaid tax. This decision was followed in R. v. Secretary of State for the Environment, ex parte Rose Theatre Trust,33 where Schiemann J stated obiter that the fact of some thousands of persons joining together in a body does not give that body “sufficient interest” where the individual members do not have sufficient interest, and, in particular, that merely to assert that one has an interest does not give one an interest. This seems to put interest groups, campaigning on a particular issue, in a vulnerable position as regards ability to pursue applications for judicial review. Case law since Rose Theatre Trust has shown some movement away from this narrow approach, but much appears to rest with the discretion of individual judges. In R. v. HM Inspectorate of Pollution, ex parte Greenpeace Ltd,34 Otton J granted leave to Greenpeace to bring an application in relation to the testing of a nuclear reprocessing plant at Sellafield in part on the basis that Greenpeace had some 2,000 of its members living in the vicinity of Sellafield, and was therefore representative of persons having a direct interest in the matter. Here, the court also had regard to the fact that Greenpeace was a responsible pressure group with expert knowledge of the scientific issues involved, and was therefore in a position to bring an application in an efficient manner, which would not be the case with those individuals living in the vicinity of Sellafield. This reasoning also appears in the later case of R. v. Secretary of State for Foreign Affairs, ex parte World Development Movement,35 concerning the government’s decision to finance the building of the Pergau Dam in Malaysia. Again, the court had regard to the public interest in bringing the matter before the courts, and the fact that if the pressure group concerned did not bring the application it was quite possible that no one would. This case differs from Greenpeace in that the World Development Movement did not, even to the court, appear to be representing persons who would, as individuals, have had locus standi in the matter. More recently still, in R. v. Somerset CC and ARC Southern Ltd, ex parte Dixon,36 Sedley J considered the Rose Theatre Trust decision to be inconsistent with both earlier and later authorities, and suggested obiter that it should be open to any person or organisation who can make out an arguable case that 32 33 34 35 36

[1982] AC 617. [1990] 1 All ER 754. [1994] 4 All ER 329. [1995] 1 All ER 611. COD 323, QBD.

(D) Dunn Ch3

25/1/00

1:38 pm

Page 35

Judicial Review of Voluntary Bodies 35 public power has been abused to bring an application for judicial review, provided that this is not done with any improper motive. Although the applicant in that case had no interest in the matter greater than that of the public at large in the granting of planning permission to extend a quarry (he was not a landowner, and had no personal right or interest which would be affected by the extension of the quarry concerned, although he was a local resident, a parish councillor and a member of various environmentally concerned bodies), Sedley J was prepared to grant him leave and proposed the following two-stage test for locus standi: (1) at the leave stage, the applicant had to show no more than that he was not merely a busybody with no legitimate concern in the subject matter of the application; (2) at the substantive hearing, the applicant’s interest was thrown into the balance with all the other factors in the court’s decision whether to grant relief. On that basis, an applicant might have sufficient interest in the matter to enable him to proceed with an application, but insufficient interest to enable him to obtain relief or relief of a particular type. However, all these decisions, like Rose Theatre Trust itself, are first-instance decisions in individual cases, and there is no definitive ruling on this issue from the Court of Appeal or House of Lords. The “public interest” factor remains at the discretion of judges, and much would seem to depend on the nature of the specific case and whether the facts are such as to allow the judge to distinguish the line of cases culminating in Rose Theatre Trust.37 Next, the applicant, whether individual or interest group, must show an “arguable case” in relation to the specific matter of the application. Leave applications are not generally reported, so that it is not easy to see how the judges hearing the applications determine what is an arguable case. Logically, one would suppose that this means that at the very least the substantive application is, on the balance of probabilities, more likely to succeed than not. This inevitably leads to a difficult area where the individual applicant seeking review of the action of a public body does not have a good case in relation to the specific matter, but his application relates to an area of public concern which ought to be put before the court, and be made the subject of a clear ruling on the state of the law. There is thus, arguably, a gap in the accountability of public bodies.

JUDICIAL DISCRETION

As stated above, judicial discretion is of vital importance in determining which applications receive a substantive hearing. It must further be stated that remedies in judicial review are discretionary, not only in terms of the specific remedy 37 The Law Commission in its Report on Remedies in Administrative Law (London, HMSO, 1994) has recommended that pressure groups be permitted to bring applications in their own names, and that leave should be granted where it is in the public interest for the matter to be aired in the courts, but as yet these recommendations have not been put into effect.

(D) Dunn Ch3

25/1/00

1:38 pm

Page 36

36 Ann Lyon granted, but whether a remedy is granted at all. This is particularly so where the applicant alleges procedural rather than substantive ultra vires.38 Case law shows that the courts are particularly reluctant to grant orders of mandamus, compelling a body to carry out its public duty, since this is seen as a usurpation of executive power in all but the most extreme cases.39 Normally the remedy which will be granted, if the court considers any remedy to be appropriate, will be an order of certiorari, quashing the original decision and referring the matter back to the body concerned for a fresh decision. In such a case there may well be nothing in law to prevent the body from coming to the same decision a second time, provided they take account of all relevant factors and only relevant factors (if the decision was quashed on the ground of failing to observe the Wednesbury requirement of relevance), or follow the procedural steps required. The Wednesbury principle of relevance is the most frequent ground on which the decision of a public body may be found to be ultra vires. If the full rigour of these principles is applied to the voluntary sector, what will be relevant considerations in relation to the actions of a charitable body? As yet, there is no specific case law in this field. Presumably, relevant considerations include the charity’s own objects, but whether the charity’s financial and other resources would be a relevant consideration is much less clear. Case law on the decisions of local authorities in exercising statutory social care functions shows that this issue depends entirely on the construction of the particular statutory power, and that decisions can differ on this point between different sections of the same statute. It is submitted that a charity’s duty under charity law to make proper and careful use of resources should be a relevant factor, and on this basis the resources of the person seeking assistance remain a relevant factor, but until there is case law the precise position will remain unclear.

CONCLUSIONS

The availability of judicial review in respect of voluntary bodies exercising public law functions has yet to be established. It seems highly likely that judicial review is available in respect both of charities acting as free standing bodies, provided their functions are sufficiently governmental in nature, and those to which statutory social care functions have been delegated by agreement. However, an applicant seeking a remedy via judicial review is faced with all the difficulties specific to judicial review. First, he must obtain leave, and in order to do so he must show that he has both locus standi and an arguable case. Further, he must have made his application within three months of the decision giving 38 See R. v. Secretary of State for Social Services, ex parte Association of Metropolitan Authorities [1986] 1 All ER 164 39 E.g. R. v. Commissioner of Police for the Metropolis, ex parte Blackburn (No.1) [1968] 2 QB 118.

(D) Dunn Ch3

25/1/00

1:38 pm

Page 37

Judicial Review of Voluntary Bodies 37 rise to it.40 On the basis of the Aga Khan and EOC cases it seems that it must also be shown that there are no alternative remedies.41 None of these requirements applies to a writ action in contract or tort. The court will concern itself only with the legality of the decision in question, not its merits, unless the decision satisfies the extremely stringent test of Wednesbury unreasonableness. Case law relating to local authorities has shown that many decisions, though perhaps harsh, are not unlawful. To extrapolate from decided cases to the one-legged gentleman and his wheelchair batteries, it seems unlikely that the court will consider the decision to withdraw the provision of free batteries to be so outrageous in its defiance of logic or accepted moral standards that no reasonable decisionmaker, properly directing himself, would have reached it. It also seems that the Royal British Legion is entitled to have regard to the limited extent of its resources in reaching its decision (unless some statutory provision states otherwise), and that, as a charity, it is under a fiduciary duty to avoid profligacy in its use of resources and to distribute these resources in an equitable fashion between different groups seeking its aid.

40

Ord 53 r 4(1). Although there seems to be some room for judicial discretion where he has not exhausted all the remedies available through the body’s own procedures. See e.g. R. v. Manchester Metropolitan University, ex parte Nolan, The Independent, 15 July 1993. 41

(D) Dunn Ch3

25/1/00

1:38 pm

Page 38

(E) Dunn Ch4

25/1/00

1:38 pm

Page 39

4

Policing the Voluntary Sector: Legal Issues and Volunteer Vetting SUSAN R. MOODY

BACKGROUND

The number and diversity of people involved in volunteering has never been greater. In spite of concerns about the “uncaring society” and the supply of services “on the cheap”, one in every three people is estimated to participate in some form of voluntary activity every month, yielding a total of 22 million volunteers valued at £25 billion a year.1 The focus of their activity ranges across a continuum from informal voluntary endeavour within families and neighbourhoods to formal involvement in public-sector agencies and voluntary organisations, both charitable and non-charitable.2 This resource represents a significant contribution to the Gross National Product (5 per cent), generates an annual income of approximately £20 billion and provides considerable intangible benefits to the volunteer and the recipient of the voluntary service.3 But volunteering also provides opportunities for exploitation and abuse, both by volunteers and the agencies which use them. The involvement of Thomas Hamilton in voluntary activity and the findings of the Dunblane Public Inquiry caused a major rethink in the openness and accessibility which has long been associated with volunteering, particularly in areas like youth work.4 Indeed concern had been expressed before then, prompted by other less sensational but significant cases of abuse.5 Traditionally, legal controls over volunteering have been significant by their absence. In the case of charities, the only part of the voluntary sector subject to 1 J. Davis Smith, The 1997 National Survey of Volunteering (London, Institute for Volunteering Research, 1998). 2 K. Ford, The Effective Trustee (London, Directory of Social Change, 1993); Deakin Report, Meeting the Challenge of Change, Voluntary Action into the 21st Century: Report of the Commission on the Future of the Voluntary Sector (London, NCVO, 1996). 3 L. Hems and A. Passey, The UK Voluntary Sector Almanac (London, NCVO, 1996). 4 W. D. Cullen, The Public Inquiry into the Shootings at Dunblane Primary School on 13 March 1996, Cm 3386 (Edinburgh, The Scottish Office, 1996). 5 See, e.g., Social Services Inspectorate, An Abuse of Trust; The Report of the Social Services Inspectorate Investigation into the Case of Martin Huston (Belfast, Department of Health and Social Services, 1993).

(E) Dunn Ch4

25/1/00

1:38 pm

Page 40

40 Susan R. Moody specific legal regulation, the focus has been on the protection of financial and proprietorial interests.6 While such protections are more recent in Scots law, it is certainly the case that in England, Wales and Scotland there are rules which directly restrict access to management positions within charities and indirect controls which inhibit financial wrongdoing. In the establishment of a charitable trust in England and Wales, and a public trust in Scotland, there have for centuries been some restrictions on the appointment of trustees, to prevent conflicts of interest arising and to ensure that the trustees do not normally receive any benefit from their office and are therefore “volunteers”.7 Within the last ten years such restrictions have been extended by statute to exclude certain categories of people, such as undischarged bankrupts, disqualified company directors and those with convictions for dishonesty. Section 73 of the Charities Act 1993 makes it a criminal offence for a disqualified person to act as a trustee for an English charity and section 8 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990 places the same bar on persons concerned in management or control of a Scottish charity. This criminal responsibility is personal to the disqualified trustee, and a charity which fails to check the antecedents of its trustees will not be prosecuted for such default. However, it is possible that failure on the part of the existing trustees to ascertain whether a prospective trustee is disqualified might be regarded by a court as conduct falling below the expected standard. Therefore, were a disqualified person negligently or fraudulently to cause financial loss, either to the funds of the charity or to the financial assets of a third party, it is conceivable that legal action might ensue against the trustees. The trustees may also find themselves answerable to the Charity Commissioners in England and Wales or the Lord Advocate in Scotland for such misconduct or mismanagement. Requirements contained in the 1993 Charities Act and the 1990 Law Reform (Miscellaneous Provisions) (Scotland) Act, to provide information to the public and to present annual accounts, offer additional indirect safeguards, providing a means by which the State has sought to pre-empt fraud, insolvency and financial incompetence, in line with the recommendations of the Public Accounts Committee.8 Nevertheless, although the Charity Commissioners and the Lord Advocate have extensive investigatory and regulatory powers their role is primarily to address issues relating to maladministration in managing the charity rather than failures in service delivery. Much less attention has been paid to the subject of this essay, namely the protection of service-users from harm, whether intentional or unintentional, by volunteers providing that service, and, in particular, the circumstances in which a charity using volunteers may be under a legal

6 M. Chesterman, Charities, Trusts and Social Welfare (London, Weidenfeld and Nicolson, 1979). 7 Magistrates of Aberdeen v. University of Aberdeen (1877) 4 R (HL) 48; Re French Protestant Hospital [1951] Ch 567. 8 P. Woodfield, Efficiency Scrutiny of the Supervision of Charities (London, HMSO, 1987).

(E) Dunn Ch4

25/1/00

1:38 pm

Page 41

Policing the Voluntary Sector: Legal Issues and Volunteer Vetting 41 obligation to vet them.9 There are instances of criminal conduct by, for example, charity collectors10 and breaches of trust involving fraud or gross negligence where the Charity Commissioners have used their protective powers under section 18 of the 1993 Act. However, for the most part this aspect of legal liability has been dealt with as part of the general law of tort or contract, occasionally overlaid with the requirements of the particular charity’s legal form or constituting documents. For example, there is some discussion of liability for personal injury caused by the state of property occupied by an unincorporated association11 and in the context of sports groups the courts have given some consideration to liability for personal injury sustained by competitors or spectators.12 However, for the most part there is no analysis of charities’ legal responsibilities for their volunteers’ conduct except in relation to financial dealings with the funds or assets of the charity. Increasingly gaps are opening between the practice of volunteering, with its scope for harm as well as good, and the legal regulation of it. Charities need to be aware of the dangers posed by failure to select, train and monitor volunteers and the importance of “risk” management in this area.13 With statutory duties arising side-by-side with traditional fiduciary obligations, it is not enough for charities simply to keep their financial affairs in order. Many charities providing services are expected to implement high standards of selection, training, support and supervision of their volunteers. Such expectations will inevitably colour both the public’s attitude to charities and the courts’ approach to litigation arising out of alleged negligence or wrongdoing by volunteers. Charities straddle the public/private divide since they are private institutions but yet must encompass that elusive notion of “public benefit”. They are subject to a regulatory regime which, in theory, is much stricter than that required of business under the Companies Acts and is far more restrictive than the laissez faire approach which the law adopts to unincorporated associations which are not charities. Charities are heavily funded by central and local government and the public increasingly demand accountability and transparency on the part of charities. At the same time, charities and the State should be mindful of the problems posed by demanding excessively high standards from volunteer service providers and increasing the liability of charitable trustees, as well as adding to the bureaucratisation of voluntary endeavour.14 This may have serious adverse 9 The focus of this discussion is on charities because of the central role they occupy in the provision of services and the specific legal regime which governs them. However, much of the analysis applies equally to non-charitable voluntary organisations and, to a lesser extent, to other agencies which use volunteers. 10 R. v. Wain, The Independent, 1 November 1993. 11 Prole v. Allen [1950] 1 All ER 476. 12 E.g. Brown v. Lewis (1896) 12 TLR 455. 13 National Council for Voluntary Organisations, Charity Managers and Charity Trustees: Meeting the Challenges of the 1990s (London, NCVO, 1993). 14 J. Davis Smith, “Should Volunteers be Managed?” in D. Billis and M. Harris (eds.), Voluntary Agencies. Challenges of Organisation and Management (London, Macmillan, 1996).

(E) Dunn Ch4

25/1/00

1:39 pm

Page 42

42 Susan R. Moody effects as a deterrent.15 The phenomenon of trustee flight, identified in many recent studies of charitable trustees, is a very real one for many charities.16 Although this essay focuses exclusively on volunteers it should not be regarded as merely a parochial look at an issue of marginal importance to charities. Apart from the significant role played by volunteers in managing virtually every charity and in providing services on behalf of many charities, the global factors identified here recur as common themes throughout this book. The inherent tension between regulation by the State and independence from government, the impact of increasing professionalisation and the contract culture and the key issue of cost are all central to current debates about the voluntary sector, the State and the law. This essay considers, in a United Kingdom context, how volunteers are defined in law; the circumstances in which a legal obligation to vet volunteers working for a Scottish or English charity may arise; the parties to an action where failure to vet is a key issue and the different forms of legal liability; the implications of Part V of the Police Act 1997 for volunteer vetting; and the difficulties which charities may face in meeting the more exacting requirements increasingly demanded of them in relation to vetting.

DEFINITIONS OF VOLUNTEERS

Traditionally the law has not regarded the volunteer as a person of any great legal moment. A search through legal material yields only references to volunteers for military service, as in the Volunteer Act 1916. There are two other areas where the term “volunteer” has been of some legal significance, namely in determining the standard of care in negligence actions and for the purposes of benefits entitlement. More recently new arenas within which volunteering has assumed legal importance have emerged, in relation to the National Minimum Wage Act 1998 and in establishing standing to bring an action for breach of employment rights before an employment tribunal. These areas will be discussed in more detail below.

The “Volunteer” and Negligence Actions First, in establishing breach of duty in negligence the term “volunteer” has been used. Here, however, the distinction is rather between a professional and an amateur than between paid and unpaid workers. For instance, a doctor who intervenes as a Good Samaritan will nevertheless be judged by the standards of a reasonably competent doctor placed in an unexpected emergency situation in 15 16

K. Ford, On Trust: Trustee Training and Support Needs (London, NCVO, 1992). Deakin Report, supra n.2; NCVO, The Good Trustee Guide (London, NCVO, 1994).

(E) Dunn Ch4

25/1/00

1:39 pm

Page 43

Policing the Voluntary Sector: Legal Issues and Volunteer Vetting 43 spite of the fact that services are given unpaid. On the other hand, members of the Saint John Ambulance Service will not be expected to reach the same standard as qualified nursing staff.17 So the status of volunteer is only important in so far as it may carry with it expectations of a standard of care which is lower than would normally be expected of a person who has undergone specialist training. Indeed, in some cases service recipients may be entitled to expect an equivalent level of care from volunteers as from qualified paid staff, particularly where those volunteers are held out as offering a comparable service.

Volunteers, Tax and Benefits The second area where the term “volunteer” is of legal importance is in social security legislation. The level of financial benefits which people may receive when they undertake voluntary work, while remaining eligible for social security benefits and, where appropriate, meeting the availability for paid employment criterion, are key issues for some prospective volunteers. The Job Seekers Allowance Regulations 1996 (SI 1996 No. 207) state that not simply remuneration from employment, but also expenses which are not wholly, exclusively and necessarily incurred in carrying out work are counted as earnings. Even where a person undertaking voluntary work does not get paid, the Benefits Agency may assume that earnings are accruing where this is a reasonable assumption to make and will deduct benefit accordingly. Earnings may include honoraria, pocket money or sessional payments. Such “earnings” may also affect tax liability both for the volunteer and for the agency employing the volunteer. Even payments in kind may adversely affect benefits although they are not defined as earnings. Those who undertake voluntary work only will not qualify for Family Credit or Disability Working Allowance since such work is not defined as remunerative employment.

Volunteers and the National Minimum Wage Act 1998 The passage of the National Minimum Wage Bill through Parliament provided a very useful opportunity for debate on the role and definition of volunteering. Concern was expressed by a number of voluntary organisations and MPs about the application for the purposes of the Act of a very broad definition of worker which might discourage altruism and impose substantial and unnecessary costs on the Third Sector. There was some tension between those who feared that any exemption for the voluntary sector from the National Minimum Wage provisions would encourage bad practice and exploitation, labelling low-paid 17 Cattley v. St John’s Ambulance Brigade, unreported (QBD), 25 November 1988; G. LL. H. Griffiths, “The Standard of Care Expected of a First-Aider” (1990) 53 MLR 255.

(E) Dunn Ch4

25/1/00

1:39 pm

Page 44

44 Susan R. Moody workers “volunteers” to avoid the legislative requirements, and those who saw a strict definition as detrimental to voluntary activity where people might be willing to work beyond their stipulated hours as “volunteers”. In the end, section 44 of the Act represents something of a victory for those seeking to reduce the number of exempt categories, since voluntary workers are limited to those who obtain “no monetary payments except . . . expenses actually incurred in the performance of duties or reasonably estimated as likely to be or to have been so incurred”. In addition, no benefits in kind are permitted except the provision of reasonable subsistence or accommodation for those involved in voluntary work. Monetary payments of subsistence are exempted in certain limited circumstances.18 Further, training may be regarded as payment in kind for the purposes of the legislation unless it is on-the-job, or its sole or main purpose is to improve the worker’s ability to perform the voluntary work.

Volunteers taking Cases to Employment Tribunals It may seem obvious that volunteers, by the fact that they give their time freely, cannot be defined as workers for the purposes of employment rights. However, this view has been challenged, particularly in relation to rights arising from sex, race and disability discrimination legislation. A question also arises about the scope of some regulations governing health and safety at work and whether they can be relied upon by volunteers.19 In seeking to establish sufficient legal nexus between themselves and the charity concerned to ground legal proceedings, many volunteers will fall at the first hurdle, in that there will be no intention to create legal relations and therefore no contract of any kind. However, with the growing formalisation of volunteering and the requirements laid down in service contracts there are more and more volunteers who may enter into legally enforceable contractual relations with an agency. The key question for them is whether such a contract is in essence a contract of employment or, to qualify under discrimination law, a contract personally to execute any work or labour. An analysis of ten recent Employment Tribunal decisions suggests that a clearcut distinction between paid workers and volunteers may not always be easy to draw.20 In three of these cases the volunteer was found to be a worker for the purposes of the Sex Discrimination Act 1975, and in one case the work-related discrimination provisions of the Race Relations Act 1976 were deemed to apply to a voluntary worker. The key indicators of employment in these cases appear to have 18 The latter exemption ensures that, for example, young people volunteering as community service volunteers can have their accommodation provided and subsistence reimbursed without becoming eligible for the National Minimum Wage. 19 See Health and Safety Monitor, Volunteers in the Workplace (Advice for Employers on ensuring the Safety of Volunteers and avoiding Compensation Claims) (1998), at 21(1) 8. 20 I am indebted to Muriel Robison, Legal Officer, EOC, Glasgow, for her help in accessing and analysing these cases.

(E) Dunn Ch4

25/1/00

1:39 pm

Page 45

Policing the Voluntary Sector: Legal Issues and Volunteer Vetting 45 been the payment of a wage disguised as expenses,21 the provision of free training in return for unpaid work22 and an obligation to repay training costs.23 This is a developing area of law which is still in its infancy with, as yet, no authoritative decisions.24 The position of all volunteers will alter significantly if discrimination legislation is extended to put them in the same position as employees. The Health and Safety at Work Executive is currently reviewing the extent to which health and safety requirements which employers owe to their employees encompass duties to volunteers. While clearly many of the regulations stipulate that duties arise only in relation to paid employees, there appears to be some ambiguity in certain cases. A recent case involving the criminal prosecution for breaches of health and safety of a charity, the Prince’s Trust, following the death of two volunteers working on a construction project, demonstrates that charities may also be criminally liable under the Health and Safety at Work Act 1974.25 Finally, there has been some limited debate within the employment law field at European level and in other jurisdictions about the precise meaning of “work” and whether people who do not fit into normal employment categories may nevertheless be defined as workers and enjoy certain rights. In 1989 a German national, Herr Bettray, undergoing treatment in the Netherlands for drug addiction, sought a residence permit on the ground that he was a worker within the meaning of Article 48 of the EEC Treaty (see now Art 39 of the Consolidated Treaty). As part of his rehabilitation programme he was engaged in retraining for which he received very limited remuneration. It was held that this “employment” could not be regarded as real and effective economic activity for the purposes of Article 48.26 In a Canadian case a patient at a psychiatric health care facility participated in a “work therapy” programme and was paid a “gratuity” ranging from $1.50 to $15.50 a day. The plaintiff brought an action against the psychiatric authorities, claiming that patients were “employees” within the meaning of the employment standards legislation, and should therefore be paid the minimum wage. On appeal a similar test was applied to that in the Bettray case, that is, did any real economic benefit flow to the institution from the work programmes? The Appeal Court held that because the cost of running the programme was greater than the financial return there was no real economic benefit and the patients were therefore not employees.27 It is interesting to consider how many volunteers might be accorded the status of a worker 21 Rodney v. Harambee Organisation (IT Case No. 36684/86); Chaudri v. Migrant Advisory Service (IT Case No. 2201678/96). 22 Daniels and Spencer v. Dr Most Abdelaal (IT Case No. 24942/93). 23 Armitage v. Relate (IT Case No. 43538/94). 24 Only two of the ten cases were taken on appeal to an Employment Appeal Tribunal. 25 “Crown Reaches Decision on North Ronaldsay Deaths”, Press Release, 12 August 1998 (Edinburgh, The Scottish Office, 1998). 26 Case 344/87 Bettray v. Staatsecretaris van Justitie, The Times, 16 June 1989 (ECJ). 27 Fenton v. Forensic Psychiatric Services Commission (1991) 5 WWR 600.

(E) Dunn Ch4

25/1/00

1:39 pm

Page 46

46 Susan R. Moody if the main criterion for such inclusion was to be their net contribution to economic activity.

IS THERE A LEGAL OBLIGATION TO VET VOLUNTEERS ?

Acknowledging the difficulties which the law has in defining a volunteer is only one facet of the wider and more complex question which service-providing charities increasingly face, namely is there a legal obligation to vet volunteers? Vetting for the purposes of this discussion is defined as investigating the suitability of a candidate for a post requiring particular loyalty and trustworthiness. This should not be taken simply to imply intervention only at the initial stages of the volunteer’s involvement with the agency, since it is important to emphasise the vital role played by ongoing monitoring and supervision. There is a tendency to focus on the point of entry without considering what happens to volunteers thereafter. This has been noted with concern by both the Home Office and the Scottish Office.28 In response to these concerns many charities have extended their definition of vetting, for example in an excellent Code of Practice produced by Volunteer Development Scotland.29 In fact, under the current law, there is no general obligation on charities to vet prospective volunteers. Legal responsibility may arise, but only in the specific circumstances outlined below.

Requirements of the Constituting Documents It may be that the constitution (in the case of an unincorporated association), trust deed (where the agency is a trust) or memorandum and articles of association (in the case of a company) expressly states that volunteers must be vetted. Express provisions are rare, but in such a case failure to vet could render those managing the charity liable to an action for breach of trust, regardless of whether harm had resulted from this failure. This action could be brought by another trustee for breach of a fiduciary duty at common law or by the Charity Commissioners or Lord Advocate as conduct amounting to misconduct or mismanagement under charities legislation.30 In addition, where the charity in question is an unincorporated association other trustees or members of the 28 The Home Office, On the Record: The Government’s Proposals for Access to Criminal Records for Employment and Related Purposes in England and Wales, Cm 3308 (London, HMSO, 1996); The Scottish Office, On the Record on Scotland. A Consultation Paper (Edinburgh, The Scottish Office, 1996). 29 Volunteer Development Scotland, Protecting Children: A Code of Good Practice for Voluntary Organisations in Scotland working with Children and Young People (Stirling, VDS, 1995). 30 See ss.8. et seq. of the Charities Act 1993; s.6 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990.

(E) Dunn Ch4

25/1/00

1:39 pm

Page 47

Policing the Voluntary Sector: Legal Issues and Volunteer Vetting 47 charity who are not themselves been at fault could bring an action for breach of contract against those who have failed to carry out the requisite vetting procedures. Similarly, in the case of companies which are also charitable, proceedings could be brought under the Companies Acts for breaches of the company’s articles. The only difficulty which might arise in such circumstances is that of establishing that the disaffected trustee was not a party to the failure and could therefore disown the other trustees’ nonfeasance.31 A more important issue, and one which is considered in detail below, is the question of third parties’ title and interest to sue in cases where no harm has resulted from the failure to vet.

Codes of Practice and Guidelines What if the charity adopts a code of practice or guidelines which stipulate that volunteers must be vetted? Such documents may be regarded as so central to the fulfilment by a charity of its objects that failure to follow them may be actionable. This will be pertinent where the constituting document explicitly refers to other documents and incorporates them within its ambit, and where codes or guidelines are adopted at an AGM by the members. An action for breach of trust, breach of contract or proceedings under the Companies Acts could be brought by a member or the regulatory bodies in each jurisdiction could intervene. It is also open to members of a charity which does not follow its own rules to put a motion or a special resolution to an AGM or EGM censuring such conduct. It is not unusual for charities to adopt a code of practice which makes the vetting of volunteers mandatory, sometimes going so far as to include the details of the required procedures in the Code itself. It is also commonplace for such codes to be put to the members for adoption at an AGM or EGM. This is a much more likely scenario than explicit reference within the constituting document (which in any case would be very unlikely to spell out precisely the vetting requirements) and is one which charities would do well to consider carefully. The implications of adopting a very demanding and rigorous vetting procedure should be clearly understood. Failure to implement such procedures, even where failure results from unanticipated cost or resource constraints and not wilful neglect, may be actionable and could lead to investigations by the regulatory bodies. Action may be taken either by the regulators or by other members even where no damage has occurred. In cases where there has been no actual harm it is likely that the regulators will seek compliance privately rather than pursue formal legal proceedings.

31 R. Flannigan, “The Liability Structure of Nonprofit Associations: Tort and Fiduciary Assignments” (1998) 77 CBR 73; J. F. Keeler, “Contractual Actions for Damages against Unincorporated Bodies” (1971) 34 MLR 615.

(E) Dunn Ch4

25/1/00

1:39 pm

Page 48

48 Susan R. Moody

Contract Terms: The Influence of the Contract Culture Increasingly charities are part of the “contract culture”.32 Service agreements with funders, contracts with clients of the service and contracts with volunteers are becoming more common, following moves away from the State as provider to the State as procurer of services.33 It is estimated that local authorities in England and Wales provide over £600 million a year to fund voluntary organisations and that increasingly this is given through a contract rather than a grant.34 In such circumstances failure to vet where the contract specifies this as a requirement would be actionable as breach of contract by the parties to the contract.35 Surprisingly, funders only rarely appear to include such provisions in a service agreement, although they may be specified in service standards36 and thereby incorporated into the service contract. However, even where such provisions exist they may be silent about the requirements of an acceptable vetting procedure, regarding it as sufficient to meet the contractual requirements that the charity has some form of vetting, however minimal. There are clearly arguments in favour of including contract terms about standards of volunteer vetting. However there are drawbacks in so doing, particularly if the implications of such terms are not clearly acknowledged by all parties. First, charities may not have the resources or the expertise to meet these requirements, which should be costed into the contract price.37 Secondly, a contract term may be framed very generally and is unlikely to provide sufficiently detailed guidance. This is where service standards are preferable. Thirdly, the contract between the service provider and procurer may ignore the key party: the volunteer! It is important that any contractual requirements or standards be reflected in contracts or arrangements with individual volunteers, otherwise there is the danger of binding volunteers to something to which they have not agreed. In addition, there is the danger of excessive legalism which could hamper flexibility in service delivery. There are also issues about the client’s rights to privacy and confidentiality, which may be in question if funders are permitted unlimited access to the service for vetting and monitoring purposes. Finally, accountability becomes a more complex matter when there 32 J. Warburton and D. Morris, “Charities and the Contract Culture” (1991) 55 Conv 419; J. Lewis, “Voluntary Organisations in ‘New Partnership’ with Local Authorities: The Anatomy of a Contract” (1994) 28 Social Policy and Administration 206. 33 R. Griffiths, Caring for People—Community Care in the Next Decade and Beyond, Cm. 849 (London, HMSO, 1989). 34 CAF, Dimensions of the Voluntary Sector (London, CAF, 1998). 35 Although note the existence in Scots law of a ius quaesitum tertio, giving title and interest to sue to third parties for whose benefit the contractual arrangements are made. See also the constructive trust in English law and text to nn.50–52 infra. 36 C. McKay, “Charities and the Contract Culture” in C. Barker et al., Charity Law in Scotland (Edinburgh, W. Green, 1996). 37 L. Russell and D. Scott, Very Active Citizens? (Manchester, University of Manchester, 1997).

(E) Dunn Ch4

25/1/00

1:39 pm

Page 49

Policing the Voluntary Sector: Legal Issues and Volunteer Vetting 49 is no longer a direct linear relationship between the citizen and the State as direct service provider.38 Research on the impact of contracting on the role, status and participation of volunteers suggests that increased reliance on service contracts as their main source of income has led to significant changes within charities, both in the skills required of voluntary management and in the workload and responsibility falling on volunteer service providers.39 A recent empirical analysis of the impact of contracts on volunteers concluded that the role of service volunteers had become more formal and closely scrutinised.40 Nevertheless the authors state that volunteers remain “(almost) invisible in contract specifications” and that many volunteers are unaware of the shift to contracts and have not been consulted. The study goes so far as to suggest that this may have been deliberate in some cases, so as to ensure that volunteers remain ignorant of the contractual obligations taken on by the charity for which they are working.

Vetting as Common Practice If the charity has a practice of vetting volunteers but fails to do so in relation to one or more volunteers it may be that the common practice of the charity has not been met and such a failure may be actionable. It is arguable whether this could be used by the Charity Commissioners as a legitimate reason for intervention under section 8 of the Charities Act 1993 (or for the Lord Advocate to investigate the Scottish charity under section 6 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990) but certainly a service recipient who claimed to have been harmed by a volunteer who had not been vetted might be able to sue in tort or delict, provided a causal link could be proved between the harm and the failure to vet. The existence of a common practice which had not been followed would usually be of evidential value in establishing breach of duty.41 It would not, of course, be conclusive.42 Charities which use volunteers in service provision are, therefore, under no general obligation to vet them. However, charities may, through their founding documents, contractual obligations or common practice, be placed under a legal duty to implement vetting procedures.

38 See S. Kumar, Accountability and the Contract State (York, Joseph Rowntree Foundation, 1997) for fuller discussion. 39 Lewis, supra n.32. 40 Russell and Scott, supra n.37, 42. 41 Thompson v. Smiths Shiprepairers Ltd. [1984] QB 405. 42 Cavanagh v. Ulster Weaving Co. Ltd. [1960] AC 145.

(E) Dunn Ch4

25/1/00

1:39 pm

Page 50

50 Susan R. Moody

WHO HAS TITLE AND INTEREST TO SUE ?

An important issue in the policing of charities is the question of who has title and interest to sue. To pre-empt harm to service users and to encourage charities to discharge their legal duties towards the recipients of their services it is vital that there be persons who can take legal action before harm results. In addition, charities should be protected from vexatious litigation by a person who is not seeking to further the general public interest in the effective management of charitable work. In the absence of actual harm recognised by law (arising out of either contract or tort) only certain parties can bring an action against a charity. In England and Wales those parties are the Charity Commissioners and any of the charity trustees, two or more inhabitants of the area covered by a local charity or “any person interested in the charity”.43 Case law provides a fairly restrictive definition of an “interested person”, including the fee-paying parents of children attending an independent school which was run as a charitable trust,44 but not the executors of the will of a donor to a charity.45 A local authority which had the power to appoint trustees to a charity, funded the charity and had a close relationship with the charity as service procurer was a “person interested”,46 but a contractor with the trustees who wanted to enforce a contract solely for his benefit was not.47 There is a further hurdle for would-be litigants where the defendant is a charity, namely that in England and Wales all charity proceedings must be authorised either by the Charity Commissioners or a judge of the Chancery Division.48 In a recent case against the National Trust49 an application by the members of two hunts for judicial review of a decision to prevent deer hunting on National Trust lands was rejected by the court since the appellants had not secured the requisite authorisation. It is possible for a member of the public to invite the Charity Commissioners to investigate any concerns, however, and the Commissioners have wide powers under section 8 to institute enquiries. In Scotland there is no equivalent to section 32 of the Charities Act 1993 and it is therefore unlikely that the court would permit anyone (other than the Lord Advocate) who did not have a contractual relationship with the charity or who could not show actual damage to sue a body recognised as a charity in Scotland. However, the ancient right of action known as actio popularis (an action on 43

Under ss.32–33 of the Charities Act 1993. Gunning v. Buckfast Abbey Trustees, unreported (Ch), 27 May 1994. 45 Bradshaw v. University College of Wales [1988] 1 WLR 190. 46 Richmond LBC v. Rogers [1988] 2 All ER. 761. 47 Haslemere Estates v. Baker [1982] 1 WLR 1109. 48 Charity proceedings refer to the administration of charity property or partial administration of the charitable trusts only and not to actions to enforce a common law right, whether under contract or common law: Rooke v. Dawson [1895] 1 Ch 485. 49 Ex parte Scott [1998] 1 WLR 226. 44

(E) Dunn Ch4

25/1/00

1:39 pm

Page 51

Policing the Voluntary Sector: Legal Issues and Volunteer Vetting 51 behalf of the public to enforce the execution of a public trust) is available in Scots law to any person who can show an interest in the trust, although such an interest usually requires some tangible benefit, either existing or contingent.50 In addition, under Scots law it may be possible for certain third parties, for whose benefit a contractual agreement is expressly designed, to sue as if they were actual parties to the contract. Such a ius quaesitum tertio has been established, for instance, in cases where a charity sued to obtain a subscription which had been promised by the defender although the promise had not been made to the charity itself.51 Nevertheless, this gives a right only to sue for enforcement of the contract and not for damages for defective performance.52 It appears that where no actionable harm has occurred English law permits a wider range of plaintiffs to take legal action against a charity than is the position in Scots law, while in both jurisdictions the regulators play the most significant role in instituting legal proceedings. With the growing importance of contracts between government and charities in the provision of services it seems appropriate that, in England and Wales at least, local authorities have been permitted to bring proceedings to pre-empt possible harm. Nevertheless, the key issue of maintaining the independence of charities from too much interference by the State must also be borne in mind. Further thought might be given to the value of section 32 of the Charities Act 1993 generally and whether a similar provision would prove useful in Scotland.

WHO IS LIABLE ?

Personal Liability Proceedings arising out of the implied duty to manage the charity’s affairs competently, which underpins the legislation relating to charities, are brought by the Charity Commissioners against “the persons having the general control and management of the administration of the charity”,53 or by the Lord Advocate against “persons concerned in management or control”.54 Although these terms mean different things (the scope of the Scottish term is ostensibly much wider than the English term) such persons broadly fall into three categories: trustees, directors of charitable companies, committee members with executive responsibilities; employees having management functions; professional advisers who assist in management. 50 Ross v. Governors of Heriot’s Hospital (1843) 5 D 589; Murray v. Lord Cameron, 1969 SLT (Notes) 76. 51 Morton’s Trustees v. Aged Christian Friend Society (1899) 2 F 82. 52 Robertson v. Fleming (1861) 4 Macq 167. In England and Wales the “constructive trust” may give third parties to a contract certain fiduciary rights to obtain damages: see Lloyd’s v. Harper (1880–81) 16 Ch D 290; Darlington BC v. Wiltshier Northern Ltd. [1995] 1 WLR 68. 53 S.97(1) of the Charities Act 1993. 54 S.1(6) of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990.

(E) Dunn Ch4

25/1/00

1:39 pm

Page 52

52 Susan R. Moody While the legislation has placed responsibility for misconduct and mismanagement on those concerned in running the charity, there is still room for ambiguity in defining who precisely such people are. Given the onerous responsibilities and potential legal liabilities which such people may be undertaking it is vital that they be fully aware of their position. The situation revealed in Ford’s research,55 where many charitable trustees seemed unfamiliar with their role and responsibilities and were not even clear that they were trustees of the charity, is a worrying one. A failure to vet, whether or not harm results from failure, may in some circumstances be held to constitute “misconduct or mismanagement”. This will particularly be the case where the charity concerned provides a service to children or vulnerable adults, and especially where there is likely to be substantial unsupervised access to such people. Such intervention by the regulatory agencies pierces the veil of corporate liability where the charity is a company. In addition, at common law charitable trustees have a duty to act personally, which means that while they may delegate certain functions (and may indeed be required to do so in some cases, for example under the Trustee Investment Act 1961) they will continue to be personally liable if they have failed to exercise “common prudence” in selection and supervision of volunteers or have entrusted responsibilities to volunteers which they are not competent to undertake.56 In relation to unincorporated charities, where the charity has no separate legal personality, those who have been given the responsibility of managing the charity’s affairs (usually a management board) are the defendants in any case. Provided they have not acted ultra vires or fallen sharply below the standards expected of a competent trustee they are unlikely to have to meet liabilities out of their own pockets. However, if they are found to have been incompetent they may be unable to rely on the charity’s assets to meet any claim for damages arising out of their incompetence. Members of a committee of a football club who employed an incompetent person were personally liable to people injured as a result of this appointment where a stand erected by an incompetent contractor collapsed.57 It is arguable that charity trustees who fail to vet are not, at least where they may be putting vulnerable people at risk, demonstrating due diligence and may render themselves personally liable for damage which results. Unfortunately there are no cases in point, although it may be possible to derive guidance from analogous cases in other jurisdictions. For instance, in a New Zealand case the members of a club who failed to take sufficient precautions to cope with foreseeable danger in organising a gymkana were personally liable when damage resulted.58 The directors of a charitable company do enjoy 55

Supra n.15. See, e.g., Speight v. Gaunt (1883) 9 AC 1; Re Vickery [1931] 1 Ch 572. 57 Brown v. Lewis [1896] TLR 455. 58 Evans v. Waitemata District Pony Club East Coast Bays Branch [1972] NZLR 773; J. Warburton, Unincorporated Associations (2nd edn., London, Sweet and Maxwell, 1992). 56

(E) Dunn Ch4

25/1/00

1:39 pm

Page 53

Policing the Voluntary Sector: Legal Issues and Volunteer Vetting 53 some protection from legal action, but this will not cover them for anything ultra vires the memorandum and articles, for fraud or gross negligence. The defendant charity is normally under a statutory obligation to consult the Charity Commissioners where intimation is received that proceedings may be taken against that charity. No settlement can be reached with the plaintiff which involves use of the charity’s funds unless the Charity Commissioners approve it, since otherwise such payments could be regarded as ultra vires. In a recent case a volunteer counsellor of the drugs and alcohol charity Turning Point was sacked for sexual harassment. The charity considered that it could not offer compensation to the victim because this might be construed as a misuse of the charity’s funds. The Charity Commission would have to clear any such payment, under section 27.59 The possibility that charitable trustees may be liable for harm which flows from a failure to vet a volunteer is therefore not a fanciful one. Even where such trustees are directors of a charitable company blatant disregard for the safety of vulnerable service recipients may, in certain circumstances, lead to the removal of limited liability protection. In relation to proceedings brought by the regulatory bodies, the Charity Commissioners and the Lord Advocate, the potential defendants may extend beyond the charitable trustees to include paid staff and, on occasion, even professional advisers, in those circumstances where a failure to vet may be regarded as constituting misconduct or mismanagement.

Vicarious Liability Volunteers who provide services in the name of charities to which they have a legitimate affiliation will be considered to be the agents (in legal terms) of those charities. This may render charities (the principals in the legal relationship of agency) vicariously liable for the wrongs of their volunteers (who are their agents in law), provided that the volunteers are acting within the scope of their authority when the legal wrong is committed. Most of the legal writing in this area concerns agents in a commercial setting but agency does not require financial reward. Neither does it appear necessary that there be a contract between principal and agent.60 A gratuitous agent, such as a volunteer, will be liable in tort61 unless there is a contractual basis for the agreement which includes consideration.62 It is well established that a principal may be liable for both tortious and criminal wrongs committed by the agent, provided they were carried out within the scope of the

59

Third Sector, 27 June 1997. F. Reynolds, Bowstead on Agency (15th edn., London, Sweet and Maxwell, 1995), 2. Birne v. National Sporting League [1957] CLY 409. 62 In Scotland consideration is not required so that the agency relationship may be founded on contract even where there is no remuneration or other consideration. 60 61

(E) Dunn Ch4

25/1/00

1:39 pm

Page 54

54 Susan R. Moody agent’s actual, implied, customary, ostensible or presumed authority.63 Of course the principal may also be personally liable where the wrong is specifically instigated or ratified by the principal, but this is a question of personal fault rather than vicarious liability. Principals may be estopped by their own conduct from denying authority. It is not clear whether there is a duty on the third party to enquire as to the agent’s actual authority but under section 711(a) of the Companies Act 1985 there is no such duty in the case of the agent of a company. Liability may extend to fraud64 and perhaps to assault in cases similar to those involving vicarious liability in an employment relationship.65 Academic argument differs as to whether scope of authority and course of employment are coterminous, and if the agent is to be treated in the same way as an employee for the purposes of vicarious liability. Street, for example, considers that “there has never been a time when cases on master and servant were not cited as authority in the law of principal and agent”,66 but Fridman is ambivalent about this,67 and Markesinis and Munday consider that the cases which equate scope of authority with course of employment are wrong.68 In England gratuitous agents cannot render their principals liable for nonfeasance only.69 In addition, the standard of care may be different in the case of volunteers, acting as gratuitous agents, since a higher standard may be expected of paid agents. Gratuitous agency is a relatively undeveloped area in law, but it appears that volunteers may be defined as the agents of the charities who use them. Issues such as the standard of care expected of volunteers and the degree to which voluntary work carried out in an unauthorised way may render the charity vicariously liable are difficult to determine. Nevertheless, the application of the law of agency to the relationship between volunteers and charities (or indeed any body using the services of volunteers) is a fruitful area for further consideration and one to which service recipients harmed by volunteers may look to when they seek redress.

THE IMPACT OF THE POLICE ACT

1997

ON VETTING

The vetting of prospective employees and of volunteers and the ongoing monitoring of their activities have been an acknowledged part of good practice in relation to employment and also volunteering for many years. Nevertheless, as the result of certain notorious cases and because of a heightened awareness 63 B. Markesinis and R. Munday, An Outline of the Law of Agency (London, Butterworths, 1992); Uxbridge Permanent Benefit BS v. Pickard [1939] 2 KB 248. 64 Morris v. Martin [1966] 1 QB 716; Moore v. Bresler Ltd. [1944] 2 All ER 515. 65 Stevenson v. Glasgow Corp., 1922 SLT 185; F. Rose, “Liability for an Employee’s Assaults” (1977) 40 MLR 420. 66 M. Brazier, Street on Torts (9th edn., London, Butterworths, 1993), 454. 67 G. H. L. Fridman, Fridman’s Law of Agency (London, Butterworths, 1996). 68 Supra n.63. 69 Fridman, supra n.67; Reynolds, supra n.60.

(E) Dunn Ch4

25/1/00

1:39 pm

Page 55

Policing the Voluntary Sector: Legal Issues and Volunteer Vetting 55 among the public about recidivism among offenders, especially sex offenders, concern has been expressed about access to children and vulnerable adults being obtained through paid and voluntary employment. Much of the discussion about vetting has been concerned solely with the prospective or active volunteer’s criminal record. Unfortunately, perhaps, there has been an undue focus on criminal convictions as the key to suitability. Criminal convictions are not always a conclusive test, and it is important that due weight be given to other criteria in establishing a volunteer’s suitability, and that the convictions taken into account be relevant to the voluntary activity. Additional drawbacks have been revealed in a research study on three pilot schemes in England designed to secure access for voluntary organisations to criminal records.70 The results of this study show that there are difficulties in implementation. The process of obtaining criminal record checks may be bureaucratic and slow and may deter some good potential volunteers from applying. In the United Kingdom there is no general requirement for a person to disclose criminal convictions, in contrast to most other European countries.71 However, since the Sex Offenders Act 1997 those convicted of certain sexual offences have been legally obliged to register any change of name or address with the police. Access to that register is very limited and the degree to which disclosure to other agencies, such as those in the Third Sector, may be permitted is still the subject of doubt.72 In Britain currently only a limited number of voluntary organisations have access to prospective volunteers’ criminal records, where such voluntary work involves substantial, unsupervised access to children and where the voluntary organisation is registered with the Voluntary Organisation Consultancy Service in England and Wales or the Criminal Convictions Information Scheme in Scotland. Criminal record checks on prospective volunteers within the public sector are, on the other hand, a routine matter, and in some circumstances this facility has been extended informally to voluntary organisations. However, issues about confidentiality and data protection meant that such arrangements were questionable In addition, the use of enforced subject access has been severely criticised.73 Under new arrangements contained in Part V of the Police Act 1997, which have yet to be fully implemented, whilst there is no compulsion to carry out criminal record checks, all employers of paid or unpaid staff will have access to a prospective employee’s or volunteer’s criminal record if they so choose (by 70 J. Unell, Criminal Record Checks within the Voluntary Sector: An Evaluation of the Pilot Schemes (Berkhamsted, Volunteer Centre, 1992). 71 See B. Hebenton and T. Thomas, Criminal Records: The State, Citizen and the Politics of Protection (Aldershot, Avebury, 1993). 72 Although some recent legal cases have given useful guidance about disclosure, for instance R. v. Chief Constable for North Wales Police, ex parte AB [1997] 3 WLR 724. 73 N. Louks et al., “Re-integration of Ex-offenders: Employment of People with Criminal Records in the European Union” (1998) 6 European Journal on Criminal Policy and Research 195.

(E) Dunn Ch4

25/1/00

1:39 pm

Page 56

56 Susan R. Moody means of criminal conviction certificates74). A fee will be charged for this service and the information will normally be limited to “unspent” convictions, thereby excluding certain convictions which are erased from the record through the passage of time.75 In addition, agencies requesting data will be required to indemnify the police against legal action, and will therefore need to take out insurance for this purpose. It will be possible, once the new system is operational,76 to obtain further information on subjects in certain circumstances, including where they will be working with children and elderly, sick and handicapped people. The additional information will include spent convictions and cautions, described as a criminal record certificate.77 Finally, where the subjects will have substantial access to children and young people further information in the form of an enhanced criminal record certificate may be obtained from a chief police officer.78 This information is not specified and it is a matter for the officer to decide what data are relevant in each case. They might include, for instance, reports of criminal activity where the evidence was not sufficient for prosecution. This scheme will be administered in England and Wales by a Next Steps agency, to be called the Criminal Records Bureau, established under the Act. Whilst employers of paid or voluntary labour are not required under the legislation to ask for certificates, it seems likely that prospective volunteers will be asked to produce certificates and active volunteers may be expected to update them annually. This is particularly the case where a charity is dealing with a vulnerable population of service recipients. While due consideration must be given to the nature of the voluntary activity concerned it is submitted that failure by a charity to obtain a certificate might in some circumstances be evidence of misconduct or mismanagement under charity law. Where harm results to a service recipient such failure may constitute a breach of a duty of care owed by charities to their clients. This is more likely to happen where other forms of vetting, ongoing monitoring and supervision are poor and in cases where service users are regarded as vulnerable. The provisions of the Police Act regarding vetting are therefore a very important development for charities and one which should be monitored carefully. The potential legal implications need to be clarified and appropriate advice given to charities.

CONCLUSIONS

The liability of charities for wrongs committed by their volunteers and charities’ responsibilities for vetting volunteer service providers are complex and undeveloped areas. In attempting to analyse the current uncertain situation it has 74 75 76 77 78

S.112. Under the provisions of the Rehabilitation of Offenders Act 1974. Estimated to be by December 2000. S.113. S.116.

(E) Dunn Ch4

25/1/00

1:39 pm

Page 57

Policing the Voluntary Sector: Legal Issues and Volunteer Vetting 57 been necessary to cover a variety of very diverse topics. It is difficult to derive any concrete proposition from the current confusing situation, but it is possible to put forward some tentative suggestions. First, there is currently no general obligation to vet volunteers. Secondly, the definition of volunteers is fraught with ambiguity and in some cases volunteers may be accorded the same rights as paid employees. Thirdly, the charity’s constituting documents or common practice may impose obligations on charities to vet their volunteers and obligations arising out of service agreements may also have the effect of making vetting procedures mandatory. Fourthly, the regulatory bodies have a key role in policing potential and actual wrongdoing by volunteers but the degree to which others can bring legal proceedings against a charity where they have no tortious or contractual nexus with that charity is very limited. Fifthly, it is clear that those who occupy positions of authority within a charity may incur legal liability for the wrongs of their volunteers. This may arise either because those running the charity have breached a duty of care which they owe personally to service recipients or as the result of the agency relationship which exists between them and their volunteer service providers. In particular a failure to vet such volunteers may be evidence of breach of duty by the charity and its managers. Finally the implementation of Part V of the Police Act 1997 may represent an added burden on charities in that the new arrangements will allow general access to information on the criminal records of volunteers. A charity which fails to take this opportunity to obtain information could be regarded as negligent were a service recipient to be harmed by an unvetted volunteer with a previous criminal record for analogous offences. It is important, therefore, that charities be made aware of their responsibilities and the potential for legal liability if they decide not to avail themselves of this opportunity. Otherwise the State could justly be criticised for a form of policing which may be inadequate as a protection for vulnerable service users and punitive in its impact on underresourced and ill-supported charities.

(E) Dunn Ch4

25/1/00

1:39 pm

Page 58

(F) Dunn Ch5

25/1/00

1:40 pm

Page 59

5

Board Responsibilities in the Voluntary Sector: The Case of Housing Associations ALICE BELCHER

INTRODUCTION

Government policies on housing, social services, health care and education have increasingly been operationalised through organisations in the voluntary sector. The voluntary sector is sometimes thought of as the third sector where the public sector (government organisations) and the private sector (profit-seeking businesses) are the first two. This description defines the voluntary sector in terms of what it is not. More positively, the term “voluntary sector” embraces all organisations in which volunteers have a significant part to play.1 This chapter focuses on housing associations, which have become the preferred instruments for the provision of social housing. However, the problems it raises are ones likely to be faced by all independent organisations that spend public money to provide public services and rely on volunteers serving on their boards. Reliance on volunteers is at the heart of a housing association. All housing associations have a management committee which is akin to a board of directors, in that it is the management committee, not the staff of the association or its professional advisors, which is in charge of the association’s affairs. However, members of management committees act in an entirely voluntary capacity. Under the Housing Act 1996, in England and Wales registered housing associations have become part of a theoretically larger category of providers called registered “social landlords” (although, as currently defined, all registered social landlords are housing associations within section 1 of the Housing Act 1985). However it is housing associations as such that provide the focus for the main theme of the essay which concerns board responsibility in the voluntary sector. 1 Most authors use “voluntary sector” to acknowledge a significant input by volunteers, but the term has been equated with the charitable sector on some occasions, the emphasis is then on support from donations: see R. J. Butler and D. C. Wilson, Managing Voluntary and Non-profit Organisations (London, Routledge, 1990). For a further discussion on definitions see L. Salamon and H. Anheier, In Search of the Nonprofit Sector 1: The Question of Definitions, Working Paper No. 2 (Baltimore, Johns Hopkins University, 1992).

(F) Dunn Ch5

25/1/00

1:40 pm

Page 60

60 Alice Belcher This essay first briefly traces the development of housing associations in England; secondly, it explores the meaning of accountability in the context of housing associations; thirdly, it discusses the public role of housing associations; and fourthly, it examines the standard of care that private law demands of management committee members, before drawing to a conclusion.

HOUSING ASSOCIATIONS

In England some housing associations can trace their roots back as far as the twelfth century when they existed in the form of alms houses. Others were founded in the nineteenth century to provide decent accommodation for the working classes. In the inter-war period 75 per cent of the 4,194,000 houses constructed in England were built for owner-occupation. After the Second World War, with an urgent need to increase the supply of dwellings, local authorities initially dominated housing construction. By the 1960s, however, private production was again expanding and local authority completions declining. The first of the modern type of housing associations in England were established following the Housing Acts of 1961 and 1964 to cater for groups with special needs such as the elderly, single parents and the disabled. Part 1 of the 1964 Act established the Housing Corporation for the purpose of promoting and assisting the development of housing societies.2 Initially the Housing Corporation had very limited funding powers, and in both housing and economic terms its impact was small. The contribution of the Housing Corporation in England in its first decade was small but significant. When the Housing Act 1974 expanded the Housing Corporation’s role in terms of funding and regulatory powers, its earlier successes in promoting the establishment of independent housing associations meant that there was an identifiable voluntary sector to be further developed. The 1974 Act channelled government funding for social housing in the form of Housing Association Grant (HAG) through the Housing Corporation and between 1974 and 1984 the number of houses in the care of housing associations in England doubled. The next stage in the expansion of the voluntary housing sector in England was brought about through the Housing Act 1988 and the Local Government and Housing Act 1989, which allowed the transfer of local authority housing stock to housing associations through stock transfer arrangements. The most recent development in England has been the Housing Act 1996. Under the 1996 Act, section 1, the Housing Corporation must keep a register of “social landlords”. Under section 2 existing registered housing associations qualify to be registered as social landlords and, in addition, nonprofit-making non-charitable companies can also be registered. The change has been designed to facilitate more stock transfer arrangements, in particular it will 2 The Housing Corporation is a government agency which until 1989 operated in both Scotland and England. See the text for more developments in Scotland.

(F) Dunn Ch5

25/1/00

1:40 pm

Page 61

Board Responsibilities in the Voluntary Sector: The Case of Housing 61 allow local authority housing stock to be transferred to non-charitable companies with local authority representation on the board of directors. The overall developmental picture in England is of a voluntary housing sector being established in the period from 1964 to 1974 within a housing culture where owner-occupation was dominant. For the next decade funding arrangements encouraged further expansion of housing association activity and from 1988 onwards the privatisation of local authority housing was a significant growth area. The provisions of the 1996 Act mean that an organisation can be a “social landlord” without satisfying all the criteria required of a housing association.3 Registered housing associations (now re-registered as social landlords) spend, according to one recent estimate, approximately £2 billion per annum of public (tax payers’) money.4 As providers of social housing they have moved from the periphery to centre stage.5 Because they provide public services and are publicly funded they fall within the ambit of the Nolan Committee on Standards in Public Life. Housing associations are not, however, public bodies. They are independent, “not-for-profit” organisations operating in the voluntary sector. They can take a variety of legal forms; most associations in England are constituted as Industrial and Provident Societies; many are registered as companies limited by guarantee; and the remainder are trusts. Charitable status is another variable. However, every housing association has a management committee and, in accordance with the voluntary principle, all members of the management committee act in an entirely voluntary capacity. Ultimate responsibility in housing associations has always rested with the management committee, but it is argued in this essay that recent trends have made the consideration of the exact nature of this responsibility a more pressing issue. There are at least two pressures which are operating to bring the issue of board responsibilities to a head. The first is the increasing economic and social role being played by housing associations. In housing policy, the growth in the voluntary sector has been largely at the expense of the local authority sector. By 1990 English housing associations had already overtaken local authorities as providers of new rented housing and the early 1990s saw a massive transfer of existing council housing stock to housing associations.6 In the 1990s housing associations have not only increased in numbers and the amount of housing stock they control, they have also taken on roles new to them, such as investment in the modernisation and redevelopment of local authority housing estates. Another development has been that housing associations have worked with health authorities in the “care in the community” field, thus extending the

3

The 1996 Act applies in England and Wales, but not in Scotland. D. Edmonds, “More than a Simple Inquiry” (1994) Roof, November/December 11. M. Langstaff, “Housing Associations: A Move to Centre Stage” in J. Birchall (ed.), Housing Policy in the 1990s (London, Routledge, 1992). 6 Ibid., 29. 4 5

(F) Dunn Ch5

25/1/00

1:40 pm

Page 62

62 Alice Belcher role of housing associations into the area of welfare previously the domain of statutory social services.7 The second pressure operating to bring the issue of board responsibilities to a head is the establishment of a culture of accountability. This is evident in the increasing use of the words “accountability” and “accountable”. Accountability is seen as a vital ingredient of good corporate governance in the public and private sectors. It is now one of the seven “principles of public life”. Accountability is being used as one of the charms (openness is another) that are expected to both prevent and cure the evils of sleaze and corruption. In 1995 the National Federation of Housing Associations (now the National Housing Federation, NHF)8 acknowledged that there had been a number of “mistakes and near disasters” involving housing associations. When something eventually goes wrong in a housing association there will almost certainly be a cry for someone or some body to be accountable.

THE MEANING OF ACCOUNTABILITY

Having suggested that there is a general cultural shift towards all organisations being in some way accountable to their stakeholders, it should be noted that the word accountability has been a variously defined so that its meaning very often depends on the context in which it is used. Examples of definitions include the following: A private sector definition from the corporate governance literature: “[t]he monitoring, evaluation and control of organisational agents’.9 A public law definition: “[r]equiring a person to explain and justify decisions and acts and to make amends”.10 In 1995 NHF published the results of its inquiry into housing association governance.11 The report includes an analysis of accountability in the context of housing associations, it states: Accountability is a term frequently used in many different senses. We have found following distinctions useful in our discussions. In the strict sense of the term, accountability exists where those to whom account is given can exercise direct actions. Financial accountability of associations to the Housing Corporation and of senior 7 M. Langstaff, “Housing Associations: A Move to Centre Stage” in J. Birchall (ed.), Housing Policy in the 1990s (London, Routledge, 1992), 41. Some housing associations have always taken on a caring role, but the systematic contracting out of tasks previously provided by the public sector is new. 8 The representative and negotiating body for English housing associations. 9 K. Keasey and M. Wright, “Issues in Corporate Accountability and Governance: An Editorial” (1993) 23 Accounting and Business Research 291. 10 See the reference to Marshall’s analysis in D. Oliver, “Law, Politics and Public Accountability” [1994] Public Law 246. 11 NHF, Competence and Accountability (London, NHF, 1995), 19–20.

(F) Dunn Ch5

25/1/00

1:40 pm

Page 63

Board Responsibilities in the Voluntary Sector: The Case of Housing 63 staff to their board are of this type. But the word is often used more broadly . . . where the distinctions are important, we have preferred the term “responsibility” where there is a duty to provide information and give an account but no sanctions. Some responsibilities to residents are of this type. Where these responsibilities run in both directions (as is the case between local authorities and housing associations) we have preferred the term “relationship”. Finally, we consider there is an onus on all organisations that provide key services with benefit of public or charitable funds to justify their role and stewardship. We have termed this “openness”.

The NHF analysis is a very clear statement of various degrees of accountability, and it ranks the Housing Corporation as most important because of its statutory sanctions. However, a 1994 survey of housing association committees (asked to respond as collective bodies) ranked accountability to tenants as more important than accountability to anyone else.12 Also, despite the fact that the NHF ranked accountability to tenants, local authorities and prospective tenants at a lower level than accountability to the Housing Corporation, it went on in its Report to suggest ways of strengthening accountability to these three groups. It recommended that associations should provide structures (suited to the size, nature and geographical spread of their work) which will ensure that all residents have an opportunity to participate in a recognised residents’ association which the housing association has a duty to consult on a regular basis. This duty to consult should be matched by a duty to take account of the views expressed. In relation to local authorities the NHF recommended a written agreement which clearly states each party’s obligation to consult the other about policy which should include, inter alia, a publicly available statement of the allocations policy and a complaints procedure. The allocations policy of an association will be of particular interest to prospective tenants and the NHF states that associations have a clear responsibility to prospective as well as existing tenants. I have used the word “stakeholder”. Even as the NHF was busy differentiating housing associations’ levels of accountability to different groups, the term “stakeholder” was gaining a common currency. As a concept stakeholding was receiving increasing political, academic and media attention. Those who are stakeholders are seen as connected to and involved in an organisation in a way that non-stakeholders are not. They have a role to play which involves accountability in the sense of monitoring and control, not just receiving information. This thinking could easily be applied to the relationship between housing associations and their tenants, their creditors and their local community. If these interest groups come to view themselves as stakeholders, they may also look for ways of sanctioning housing associations; that is they may demand accountability in its strong form. Whilst other stakeholders still need to establish the level and form of accountability that they can demand of housing associations, the Housing Corporation operates from a position of power derived from statutory provisions. Because 12 A. Kearns, Volunteering Views (Glasgow, Centre for Housing Research and Urban Studies, 1994), 43.

(F) Dunn Ch5

25/1/00

1:40 pm

Page 64

64 Alice Belcher the Housing Corporation has extensive powers of supervision and control of housing associations, the accountability issue here is how those powers should be exercised. Housing associations registered as social landlords are required by statute to produce accounts in a particular form and have their accounts audited. All housing associations registered as social landlords must provide the Housing Corporation with copies of their accounts accompanied by an auditor’s report. In addition to the submission of accounts, associations are also required to send to the regulatory bodies business plans, financial performance reports and responses to audit and monitoring reports. The supervisory body also requires associations to monitor their activities against their own stated expectations. The results of these monitoring processes have to take the form of a report to the management committee which must be copied to the Housing Corporation. This allows both the associations themselves and their supervisory body to see whether they are meeting their expected standards. Many associations have welcomed this move and believe they can achieve the requisite performance expectations.13 Despite a degree of pragmatic acceptance by associations, the Housing Corporation still has an ideological accountability problem. Housing associations are acclaimed as autonomous, independent organisations offering choice in the housing market. They provide an alternative to the monopoly power of local authority housing. However, the increasing powers of the regulatory body and the ways in which the body has chosen to exercise its powers have progressively eroded the autonomous, self-governing nature of housing associations. Indeed it has been argued that, in England, this process has turned housing associations into “hired agents of central government operating as branch offices of the [Housing] Corporation”.14 Another move to strengthen the accountability of housing associations was made in April 1997 when under section 51 of the 1996 Act the Housing Ombudsman Service became independent of the Housing Corporation. The Independent Housing Ombudsman is able to hear complaints concerning mismanagement (but not policy decisions) by any landlord in “the scheme” and all registered housing associations are obliged to be in the scheme. These new or enhanced attempts to ensure that there are clear channels of accountability may mean that the impending crises in the housing association movement will be averted. They may, on the other hand, intensify the pressure on housing associations by reinforcing the general culture of accountability which encourages those who feel wronged to seek redress. The ultimate way of seeking redress is through the courts and the next two sections of this essay examine the public and private law possibilities.

13 The Housing Corporation also has wide powers of removal and appointment of committee members. 14 Langstaff, supra n.5, 43

(F) Dunn Ch5

25/1/00

1:40 pm

Page 65

Board Responsibilities in the Voluntary Sector: The Case of Housing 65

THE PUBLIC ASPECT OF HOUSING ASSOCIATIONS

The 1995 NHF Report categorises the sorts of activities that a housing association may be accountable for and states that the four most relevant categories are priorities (which range from defining the association’s objectives to equity in the allocation of resources), financial matters, processes (i.e. following proper procedures) and the quality of services. In this and the next section decisions made by housing association boards are discussed in the contexts of public and private law. The above categories provide a useful summary of the sorts of decisions which may be challenged by one or other route. The Second Report of the Nolan Committee on Standards in Public Life covered “Local Public Spending Bodies” including housing associations. It is clear that the activities of housing associations have public aspects, they spend public money and provide social housing. The question to be addressed is whether housing association decisions can be subject to the judicial review procedure. The law in this area is confused and confusing. The first difficulty is the decision in O’Reilly v. Mackman15 which embodies a public/private divide. It was held in that case that judicial review was appropriate for public-law cases and ordinary civil actions should normally be used for private-law cases. However, there are also hybrid cases, described by Alder16 as chimeras, which combine features of both pubic and private law. In hybrid cases it seems that the courts will allow an application for judicial review or an ordinary action to proceed. Indeed Alder has claimed that the hybrid concept has been extended “to the point that the rule in O’Reilly v. Mackman seems to have been rendered meaningless”.17 The current position appears to be that if a case has public-law features, even if a private right may also have been infringed, the courts may allow an application for judicial review to proceed. Conversely where private rights are asserted the citizen can proceed by an ordinary civil action. The next problem is to highlight the public law features which will suffice, and the most relevant starting point in the context of housing associations (which are not public bodies) is probably the case of R. v. Panel on Take-overs and Mergers, ex parte Datafin plc.18 The Panel on Take-overs and Mergers was established to administer and the City Code on Take-overs and Mergers. Its full-time executive advises parties to a take-over how to proceed in accordance with the spirit of the Code, and the Panel itself rules on the interpretation of the Code and conducts inquiries into alleged breaches. In Datafin the court held that the Panel’s decisions were in principle subject to judicial review. Lord Donaldson MR set out a two-fold reason for the finding; first, that the Panel was performing duties in the 15 16

[1983] 1 AC 147. J. Alder, “Hunting the Chimera—the End of O’Reilly v. Mackman?” (1993) 13 Legal Studies

183. 17 18

Ibid., 183. [1987] QB 815.

(F) Dunn Ch5

25/1/00

1:40 pm

Page 66

66 Alice Belcher public interest and, secondly, that it was a body that could be linked with the government proper. The link with government could consist of a policy support or even an intention to intervene if the particular body did not exist. The reasoning in Datafin was that “but for” the existence of the Panel, the government would itself have regulated the conduct of take-overs. An argument can be made that some decisions made by housing associations might pass both the public interest and the “but for” test as set out in Datafin. Decisions which housing associations make about what sort of accommodation to build, when, where and for whom, are of public interest as they are part of government policy on social housing, and “but for” the existence of housing associations, social housing would be provided by an arm of the government.19 This argument does not mean that all housing association decisions are reviewable and it might be useful to distinguish decisions made in the place of a housing authority from decisions made purely as a landlord, especially as complaints about landlord–tenant mismanagement can be heard by the Independent Housing Ombudsman.20 The decision of a housing association providing “family” accommodation to refuse to consider lesbian or gay couples with children as “families” is one example of a potentially reviewable decision if the above reasoning is followed. There are two ways in which this sort of reasoning may fail. First, the “but for” test may be rejected, or amended, by the courts. Black has argued that it is a flawed test. She states that it: may have a superficial appeal: indeed as it was applied in Wachmann21 it seems intuitively correct. Parliament would not regulate the Jewish faith. However, on further probing the test disintegrates. The main weakness of the test is that it depends on proving a counter-factual, requiring the court to second-guess the legislature on the basis of little or no evidence as to the legislature’s intention.22

Secondly, if the courts continue to apply the “but for” test, there may be a strong argument put forward that housing association decisions do not pass the test. In R. v. Disciplinary Committee of the Jockey Club, ex parte Aga Khan23 it was held that the government would not intervene to regulate racing in the absence of the Jockey Club. Hoffmann LJ was one of two out of three judges who found that there was an insufficient link between the Jockey Club decision and government proper. He went on to state: 19 The fact that the NHF report, Competence and Accountability, supra n.11, explicitly recognises that housing associations are accountable for “processes” (i.e. the following of proper procedure) may also weigh in favour of certain association decisions being reviewable because, although judicial review may have a substantive effect, the grounds for review are procedural. 20 The Law Commission Report, Administrative Law: Judicial Review and Statutory Appeals, Cm.226 (London, HMSO, 1994) recommends that in determining whether or not an application for judicial review should proceed the judge shall consider all the circumstances, including whether alternative legal remedies have been pursued. 21 R. v. Chief Rabbi of the United Hebrew Congregation, ex parte Wachmann [1993] 2 All ER 249. 22 J. Black, “Constitutionalising Self-Regulation” (1996) 24 MLR 35. 23 [1993] 2 All ER 853.

(F) Dunn Ch5

25/1/00

1:40 pm

Page 67

Board Responsibilities in the Voluntary Sector: The Case of Housing 67 All this leaves is the fact that the Jockey Club has power. But the mere fact of power, even over a substantial area of economic activity, is not enough. In a mixed economy, power may be private as well as public. Private power may affect the public interest and livelihood of many individuals. But that does no subject it to the rules of public law.24

It is apparent from this judgment that, despite the theoretical problems of the “but for” test, it is vital that a link with government is found to exist. The fact that housing associations exercise power over a substantial area of economic activity, that they affect the public interest and that their activities generate a significant number of jobs will not be enough to make their decisions reviewable. The English law concerning access to the judicial review procedure is far from certain. As indicated above, there is a case to be made that at least some decisions of English housing associations are reviewable. There is a similar case to be made in respect of housing associations in Scotland, but it should be noted that judicial review is there very different. There are two main differences between Scotland and England concerning judicial review. First, there are important procedural differences in the way in which cases are brought. Mullen, Pick and Prosser state that the most striking ones are that in Scotland there is no requirement that leave be granted before a full hearing of a judicial review petition, and there is no distinct time limit for judicial proceedings to be brought.25 Secondly, the tests for whether a particular decision is in principle reviewable differ in Scotland and England. In Scotland there is a different line of argument about the amenability of a decision to judicial review. In West v. Secretary of State for Scotland26 the English decision in O’Reilly v. Mackman was explicitly rejected by the Outer House. Indeed, the judgment in West emphasised the differences between Scotland and England: “[t]he English approach appears to fasten upon remedies whereas the Scottish approach is based essentially upon principle”.27 In the 1990 case Tehrani v. Argyll and Clyde Health Board (No 2)28 Lord Wylie suggested that the convergence of Scottish and English practice in judicial review was desirable. Following the decision in West it seems that differences between the two countries are fundamental and Lord Wylie’s comments in Tehrani have been described as “misplaced”.29 The test propounded in West is that the court must find a tripartite relationship for a decision to be reviewable: Contractual rights and obligations, such as those between employer and employee, are not as such amenable to judicial review. The cases in which the supervisory jurisdiction 24 25

Ibid., 873. T. Mullen, K. Pick and T. Prosser, “Trends in Judicial Review in Scotland” [1995] Public Law

52. 26

1992 SLT 636. Ibid. 1990 SLT 118. 29 C. Himsworth, “Public Employment, the Supervisory Jurisdiction and Points West” 1992 SLT (News) 257. 27 28

(F) Dunn Ch5

25/1/00

1:40 pm

Page 68

68 Alice Belcher is appropriate involve a tripartite relationship, between the person or body to whom jurisdiction, power or authority has been delegated or entrusted, the person or body by whom it has been delegated or entrusted and the person or persons in respect of or for whose benefit the jurisdiction, power or authority is to be exercised.

Housing associations fit into the tripartite framework, and thus their decisions may be reviewable in Scotland. However, the application of the tripartite test to particular sets of circumstances is by no means straightforward and the test has been heavily criticised.30 In this section it has been argued that judicial review can be thought of as a type of public accountability for decision-making. It is not claimed that judicial review is the ultimate remedy, however the decision of a court may be seen as ultimate in the sense that a matter usually only reaches court when other methods of reaching a solution have failed. Having considered the principles which will be applied by the courts in England and Scotland, judicial review of a housing association decision cannot be ruled out in either jurisdiction.

THE PRIVATE - LAW RESPONSIBILITIES OF BOARD MEMBERS

It has already been pointed out that, although the management committee can delegate tasks, committee members must take ultimate responsibility for ensuring that the objectives of the association are met as efficiently as possible and for the financial management of the organisation.31 In this section the focus is on the standard of care required of committee members. At the outset it must be said that the National NHF subscribes to an insurance policy which covers all board members of NHF member associations. However, the provision of insurance cover does not remove the need for a clear expression of the test of the required standard of care, rather it demands one. In so far as board members are akin to non-executive company directors the courts may look to corporate law for a test of the standard of care to be applied to members of housing association management committees. If they do so in the UK they will find a new approach emerging which seems likely to replace the purely subjective tests applied in older cases. This may seem a rather big “if”, especially as the registered company form is adopted by relatively few housing associations. However the majority of housing associations are incorporated as industrial and provident societies and in principle the same fiduciary duties should apply.32 In the USA where the legal status of the boards of non-profit organisations also remains ambiguous, there is at least one important case 30

Mullen et al., supra n.25, 52. These two primary responsibilities have been articulated in a joint publication issued by Chartered Institute of Public Finance Accountants and NHF: P. Ginnings, An Introductory Guide to the Financial Management of Housing Associations (London, CIPFA, 1994), 14. 32 A minority of housing associations are trusts. On trustee fiduciary duties see Chap. 15 (Luxton) below. 31

(F) Dunn Ch5

25/1/00

1:40 pm

Page 69

Board Responsibilities in the Voluntary Sector: The Case of Housing 69 where a judge has to some extent applied the law of business corporations. In Stern v. Lucy Webb Haynes National Training School, commonly referred to as the Sibley Hospital case,33 patients brought a class action charging mismanagement, non-management and self-dealing by several of the hospital trustees. Judge Gerhard A. Gesell found the trustees liable for non-management because they failed to hold meetings and to supervise the management of investments by hospital employees. US law relating to business corporations states that financial management can be delegated but must be supervised. One writer has, however, claimed that the standards of supervision of financial management applied in this case were higher than those usually applied under corporate law.34 In relation to UK company directors two cases in particular have signalled a change in approach. In the case of Norman v. Theodore Goddard 35 it was submitted that the test for a director’s required standard of care was accurately stated in section 214(4) of the Insolvency Act 1986. In his judgement Hoffmann J stated that he was “willing to assume” that this submission was correct. Two years later in Re D’Jan of London Ltd Copp v. D’Jan36 a promoted Hoffmann LJ held that the duty of care that a director owed to a company at common law was equivalent to that in section 214(4) of the Insolvency Act 1986. The significance of these findings is that the standard required under section 214(4) involves both a subjective and an objective component; it is expressed as being that of a reasonably diligent person having both: (a) the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to the company, [an objective test] and (b) the general knowledge, skill and experience that that director has [a subjective test].

Where a director’s own knowledge, skill and experience are inadequate for the functions they take taken on within the company, the subjective inadequacy will no longer protect them.37 A similar development in the approach to the standard of care has occurred in Australia where, in the AWA case,38 several non-executive directors were held liable for losses incurred by persons at a relatively low level in the corporate hierarchy. Sealy notes that a majority of the court in this case were of the opinion that the directors’ liability could be founded in the tort of negligence rather than as a breach of purely equitable obligations.39 When the courts need to establish the requisite standard of care for housing association committee members, it is at least possible that they will look to 33

(1974) 381 F Supp. 1003 (DDC). See M. Middleton, “Nonprofit Boards of Directors: Beyond the Governance Function” in W. W. Powell (ed.), The Nonprofit Sector: A Research Handbook (New Haven, Conn., Yale University Press, 1987). 35 [1991] BCLC 1028. 36 [1994] BCLC 561. 37 Re DKG Contractors Ltd [1990] BCC 903. 38 Daniele v. Anderson (1995) 16 ACS R 607. 39 L. S. Sealy, Cases and Materials in Company Law (6th edn., London, Butterworths, 1996), 331. 34

(F) Dunn Ch5

25/1/00

1:40 pm

Page 70

70 Alice Belcher corporate law. Corporate law’s approach to this problem is itself changing, and section 214(4) of the Insolvency Act 1986 looks set to be the test which will be applied in the future. If the argument can be accepted so far, the next issue to examine is the likely effect of applying the section 214(4) test to housing association board members. The following are some of the results of a postal questionnaire of housing association committee members from throughout Great Britain conducted by the Centre for Housing Research and Urban Studies at the University of Glasgow: To the question “which of the following were reasons why you joined the committee?” 82.2 per cent of the respondents said that it was to contribute to society and/or help the needy.40 In making decisions at committee meetings only 53 per cent claimed to be sufficiently prepared beforehand41 with the most common reason for being under-prepared being a lack of time to digest information.42 Over 60 per cent said they had been asked to make a decision at least occasionally without being given enough supporting information.43 In their actions as committee members 93.8 per cent of the respondents relied very or quite heavily on the trust they were able to place in senior staff.44 The objective test of the required standard of care may not be passed by committee members who are under-prepared and make decisions on the basis of insufficient information, even though they are volunteers doing this work out of a desire to contribute or help. One point in favour of the less than perfectly prepared committee member is the ratio in Norman v. Theodore Goddard45 where it was held that (even assuming the relevant standard of care to be correctly expressed in section 214(4) of the Insolvency Act 1986) under the principle that “business cannot be carried on upon principles of distrust”46 men in responsible positions may be trusted until there is reason to distrust them. However, it must also be remembered that the management committee will be responsible for choosing and appointing senior members of the association’s staff and behind a bad piece of advice from a member of staff there may be a bad appointment procedure or a misjudgement for which the committee can be held responsible. It should be noted that even if a committee member is found to be personally liable they may be relieved of that liability by the court, but relief depends on the legal form of the particular housing association and on the construction of the words “honestly and reasonably”. Section 727 of the Companies Act 1985 gives the court power to grant relief from personal liability. It states: If in any proceedings for negligence, default, breach of duty or breach of trust against an officer of a company . . . it appears to the court hearing the case that that officer or person is or may be liable in respect of the negligence, and that having regard to all the 40 41 42 43 44 45 46

A. Kearns, Voluntarism, Management and Accountability (Glasgow, CHRUS, 1990), 44. Ibid., 91. Ibid. Ibid., 94. Ibid., 103. Supra n.35. Re City Equitable Fire Insurance Co. Ltd. [1925] 1 Ch 407.

(F) Dunn Ch5

25/1/00

1:40 pm

Page 71

Board Responsibilities in the Voluntary Sector: The Case of Housing 71 circumstances of the case (including those connected with his appointment) he ought fairly to be excused for the negligence, default, breach of duty or breach of trust, that court may relieve him either wholly or partly, from his liability on such terms as it thinks fit.

This particular provision applies only to committee members of housing associations constituted as companies, but a similar provision in section 61 of the Trustee Act 1925 covers trustees of associations constituted as trusts. The problem of what standard of care will be demanded and what degree of protection afforded to those who voluntarily take on the task of managing public money in private hands was one of the concerns of the Nolan Committee. It recommended that: The government should seek to ensure broad consistency and adequate protection in respect of the personal liability of all appointed or elected members, directors, trustees or others responsible for bodies providing public services.47

The problem for housing associations is that the movement on the one hand celebrates diversity, but on the other hand needs consistency. The routine use of the section 214(4) wording as the test of the standard of care could provide a way forward on consistency. Insurance schemes, with premiums allowed as legitimate expenses of the organisation being served rather than borne by the individual seeking cover, could be used to provide protection. However, one of the reasons that the issue of personal liability remains an issue for members of housing association boards, despite the availability of insurance cover, is that a finding of negligence or breach of duty can itself be damaging. The reputations of both the individuals concerned in any major crisis an the housing association movement as a whole may be at stake. The final point that needs some consideration is how an action against a director or directors for negligence will reach the court. In a company law setting this is another area of law in which reform is being considered. Actions where a member of a company seeks to enforce a claim belonging to their company are restricted by the operation of the rule in Foss v. Harbottle:48 that the proper plaintiff in an action in respect of a wrong alleged to be done to a corporation is, prima facie, the corporation.49 A minority shareholder who wishes to claim that directors are in breach of their duties to the company, and therefore liable to the company, can only initiate an actions as an exception to the rule in Foss v. Harbottle50 if the wrongdoers are in control of the company. In England proceedings can be brought by a minority shareholder as derivative 47 The Conservative government made a generally positive response to the Nolan Committee’s first and second reports in its White Paper, The Governance of Public Bodies: A Progress Report, Cm 3557 (London, HMSO, 1997). 48 (1843) 2 Hare 461. 49 This statement of the rule comes from Prudential Assurance Co. Ltd. v. Newman Industries (No 2) [1982] Ch 204, 210. 50 Under the heading of a fraud on the minority.

(F) Dunn Ch5

25/1/00

1:40 pm

Page 72

72 Alice Belcher action, but the procedure is “lengthy and costly”.51 In Scotland there is no recognised derivative action available: in no reported case has a minority shareholder raised an action in the name of a company . . . [and] no Scottish court has recognised the right of an individual shareholder to raise a derivative action to enforce a duty owed to a company.52

However, it is well established that an individual shareholder has title to sue in cases inter alia where they are alleging that there has been a fraud on the minority. The difficulty with the cases where the individual shareholder’s title to sue has been upheld is that the capacity in which the shareholder is acting is far from clear. The alternatives are: acting in a personal capacity where personal rights are infringed; exercising a residual personal right which arises where the company is powerless to remedy a wrong done to it; or taking a “form of derivative action, though not recognised as such by the courts”.53 Reform has the potential to save court costs and time in England and to aid certainty in Scotland. The Law Commission has recently published a Report on Shareholder Remedies which recommends that there should be a new derivative procedure in both England and Scotland with more modern, flexible and accessible criteria for determining whether a shareholder can pursue the action.54 The law on shareholder remedies may be relevant to a housing association constituted as a company if the wrongdoing directors are in control. The principle of the proper plaintiff may also be applied to housing associations constituted as industrial and provident societies. However, the best way to proceed in a housing association setting may be to take control from the wrongdoing directors first, thus making way for the association to decide to sue in its own name. Here the power of the Housing Corporation to remove directors from association boards and to appoint others may be crucial. If an association’s board can be “packed” by the Housing Corporation, a decision to sue the wrongdoing directors can be made directly by the new board without the need to consider a derivative action. This assumes that the Housing Corporation recognises that there has been wrongdoing and takes the initiative.

CONCLUSIONS

This aim of this essay was to open up some public and private law issues which arise when public money is put in the hands of private bodies where ultimate responsibility rests with volunteers. The focus has been on housing associations because of the increasing part they are playing, both economically and socially. 51 Law Commission Report No.246, Shareholder Remedies, Cm 3769 (London, HMSO, 1997), 2. 52 A. A. Paterson, “The Derivative Action in Scotland”, 1982 SLT (News) 206. 53 Ibid., 207. 54 Law Commission, supra n.51, 111. This Report is published by the Law Commission for England and Wales in consultation with the Scottish Law Commission.

(F) Dunn Ch5

25/1/00

1:40 pm

Page 73

Board Responsibilities in the Voluntary Sector: The Case of Housing 73 The main areas of concern have been identified as the meaning of accountability, the public law aspects of housing associations and the potential personal liability of board members as a matter of private law. All three areas have seen recent developments which make for uncertainty and leave room for the law to either advance or retreat.

(F) Dunn Ch5

25/1/00

1:40 pm

Page 74

(G) Dunn Ch6

25/1/00

1:41 pm

Page 75

6

Guarantee Companies in the Voluntary Sector JOANNA GRAY

INTRODUCTION

This essay is concerned with a consideration of one of the major legal forms available for voluntary activity: the registered company limited by guarantee. The sheer range and variety of organisational forms employed outside the territory of the dominant legal form of the company limited by shares brings home to even the most casual observer that there is no bright-line distinction between purely voluntary activity on the one hand and purely commercial activity on the other. Rather, there is a graduated continuum between the traditional donative charitable trust and the public limited company which includes self-help organisations such as housing associations, housing co-operatives and credit unions; those mutual organisations which embodied the Victorian thrift movement such as Friendly Societies and Building Societies; those co-operative business organisations incorporated under the Industrial and Provident Societies legislation which, while engaged in commercial activity, adopt a mutual approach to management and financial participation; and, last but not least, “guarantee companies”, that is companies incorporated under the Companies Act 1985, but limited by subscribers’ guarantee rather than subscription of share capital, and which offer the advantages of corporate personality and limited liability to voluntary activity.1 This essay examines the guarantee company and the framework provided by general company law for voluntary activity.

THE CORPORATE FORM IN THE VOLUNTARY SECTOR : GUARANTEE COMPANIES

Of the total number of 13,231,000 companies in Great Britain on the register of companies at Companies House as at 31 March 1998, only 44,900 are guarantee 1 For an excellent and thorough review of UK alternative forms of enterprise organisation see I. Snaith, The Law of Co-operatives (London, Waterlow, 1984). The leading work on Industrial and Provident Society law is I. Snaith, Handbook of Industrial and Provident Society Law (Manchester, Holyoake Books, 1993).

(G) Dunn Ch6

25/1/00

1:41 pm

Page 76

76 Joanna Gray companies. The form of company that comprises this 3 per cent minority group is certainly a cinderella form, remarkable by its absence in mainstream texts on company law.2 However, the trend in growth of the rate of incorporation of guarantee companies is upwards and the use of the form by both charitable and non-charitable voluntary bodies is now well established.3 It is therefore heartening to note that the Department of Trade and Industry (DTI) does not intend to overlook the interests of charitable companies in its current wide-ranging review of company law.4 It is an interesting coincidence that one of the most controversial House of Lords appeals at the beginning of this century involved the validity of incorporation of a guarantee company in the light of its objects, Bowman v. Secular Society Limited,5 and so too at the century’s close, the House of Lords turned itself inside out as the highest judicial authority in the land and set aside one of its own judgments because of the position of one of its number, Lord Hoffmann, as a director of another guarantee company (this time a charitable one), Amnesty International Charity Ltd., in the extraordinary saga of the attempted extradition of General Pinochet for alleged human rights abuses.6 One might even assert that this is in fact more than mere coincidence but is, rather, testament to the durability and adaptability of the guarantee company form.7 Formation Guarantee companies are registered companies incorporated under the Companies Act 1985 (“CA 1985”) pursuant to section 1(1). The Act defines a company limited by guarantee as: a company having the liability of its members limited by the memorandum [of association] to such amount as the members may respectively thereby undertake to contribute to the assets of the company in the event of its being wound up.8 2 Gower’s Principles of Modern Company Law (6th edn., London, Sweet & Maxwell, 1997) makes scant mention of guarantee companies and Farrar’s Company Law (4th edn., London, Butterworths, 1998), 59 includes just a couple of paras. 3 Although the Charity Commission does not hold statistics from the Register of Charities on the basis of the legal form employed by charities, many educational institutions employ the guarantee company form as do trading subsidiaries of larger charities. 4 DTI Consultation Document, Modern Company Law for a Competitive Economy, March 1998, para 6.5. 5 [1917] AC 406. 6 R. v. Bow Street Metropolitan Stipendiary Magistrate, ex parte Pinochet Ugarte (No.2) [1999] 1 All ER 577. 7 G. Moffat points out that, during the 20th century, “[w]ith regard to charitable and other nonprofit activity of a collective nature, the company limited by guarantee . . . made inroads into the trust’s dominance”: Trust Law (2nd edn., London, Butterworths, 1994), 16. 8 Section 1(2)(b) of the CA 1985. Model constitutional documents for use in the formation of guarantee companies with or without share capital are provided by Tables D and C respectively of the Companies (Tables A to F) Regs 1985 (SI 1985/805) s.8 of the CA 1985. The Charity Commission also provides model constitutional documents for the use of those setting up a charitable guarantee company.

(G) Dunn Ch6

25/1/00

1:41 pm

Page 77

Guarantee Companies in the Voluntary Sector 77 Just as with companies where liability is limited by shares, since 1992 it is possible to form a “one-person” private guarantee company whereby only one person need subscribe their name to the memorandum of association and incorporate the company.9 Prior to 22 December 1980 it had been possible to incorporate a guarantee company which also had a share capital. With this hybrid type of guarantee company it was the members’ guarantee that limited their liability, but share capital was used for other purposes such as delimiting voting rights of members on specific matters. The implementation of the Second EEC Company Law Directive10 by the 1980 Companies Act meant that this type of guarantee company could no longer be formed and so there is now a very clear dividing line between those companies where members’ liability is limited by their having given a guarantee and those companies where members’ liability is limited by their having subscribed share capital in return for shares, a limited liability company being formed nowadays must be one or the other type but cannot have elements of both.11 The Second EEC Company Law Directive only concerned itself with issues relating to the share capital of public companies and, strictly speaking, it would have been open to the UK to continue to allow private guarantee companies to have share capital after 22 December 1980. Therefore, it is interesting to note how the legislature decided on a uniform approach to private and public guarantee companies and prohibited both types from having a share capital.12 However the mandatory polarisation of all limited liability companies into guarantee or share-capital companies is a logical extension of the thinking behind the Second Directive and indeed the whole doctrine of capital maintenance, for allowing a guarantee company to continue to employ share capital would be to send out potentially confusing messages to creditors and third parties dealing with the company about its true value and the amount of funds available to satisfy claims against the company in the event of its failure.13 That potential for third party confusion is arguably even greater in the voluntary and charitable sectors where guarantee companies are found, and so the clarity introduced by the polarisation of the two types of company is to be welcomed. The nature and extent of the members’ guarantee that underwrites the limitation of liability in a guarantee company is detailed in section 2(4) of the CA 1985 and it is common practice for the specified amount up to which the members’ guarantee for the company’s debts extends to be a nominal amount only.

9

S.1(3A) of the CA 1985. No 77/9/EEC. S.1(4) of the CA 1985. 12 Since a guarantee company cannot be a public company unless it also has a share capital (s.1(3) of the CA 1985) the effect of the prohibition in s.1(4) of the CA 1985 is such that it is no longer possible to form a public guarantee company. Any that exist will have been formed prior to 22 Dec 1980. 13 See Company Law Reform Steering Group and DTI Consultation Document, Modern Company Law: The Strategic Framework (London, HMSO, February 1999). 10 11

(G) Dunn Ch6

25/1/00

1:41 pm

Page 78

78 Joanna Gray

Restrictions on Profit Participation The essence of a guarantee company, and certainly of lay perceptions of charitable guarantee companies, is their “not-for-profit” element. The statutory basis for this is found in sections 15 and 30 of the CA 1985 which combine in effect to limit the ability of most guarantee companies to distribute profits amongst their membership or any other class of persons. Section 15(1) renders void any attempt in the memorandum or articles of association or any resolution of the company to “give any person a right to participate in the divisible profits of the company otherwise than as a member” and section 15(2) ensures that share capital or anything resembling it cannot be introduced into a guarantee company by the back door. Inasmuch as Section 15 deems it to be share capital, any attempted division of the company’s undertaking into shares or interests (even if no nominal or total amount for such interests is specified) would be offensive to the prohibition in section 1(4). So far, however, section 15 taken alone would allow for the possibility of distribution of “divisible profits”14 made by the guarantee company to its members. However such a company would not be capable of being charitable as its purposes would no longer be wholly and exclusively charitable and, in addition, the vast majority of non-charitable guarantee companies too contain restrictions on profit distribution to members by virtue of their compliance with section 30 of the CA 1985. It is a quid pro quo of the attainment of corporate status with limited liability that a company’s name ends with the word “limited” (or public limited company if a public company but, as explained above this is of increasingly limited relevance to guarantee companies).15 This is more than mere technicality but is an important disclosure requirement that underlies company law and practice. It is legal shorthand for spelling out the important commercial fact of limited liability to all those with whom a company may come into contact and who may extend credit to it. However the requirement to have the word “limited” as part of the company name is waived in the case of those guarantee companies which satisfy the requirements contained in section 30 of the CA 1985. Broadly these are that: the company’s objects are the promotion of commerce, art, science, education, religion, charity or any profession, and anything incidental or conducive to those objects; the profits or other income of the company are applied in promoting its objects; dividends may not be paid to members; and assets which would, in a winding up, be otherwise available to members generally, instead be subject to transfer on a winding up to another body with similar objects or to another body which has the promotion of charity as its objects, whether or not that other body is a member of the company or not. 14 The concept of “divisible profits” is nowhere defined in the CA 1985, unlike the definition of “distributable profits” in s.263. However for most practical purposes the two concepts are likely to be broadly equivalent. 15 S.25 of the CA 1985.

(G) Dunn Ch6

25/1/00

1:41 pm

Page 79

Guarantee Companies in the Voluntary Sector 79 Meeting the requirements of section 30 of the CA 1985 provides a guarantee company with far more than a technical exemption. The word “limited” in a company’s name connotes commerciality and negates any flavour of voluntarism, charity or altruism. Guarantee companies that are either charitable or voluntary in the sense that profits made are ploughed towards objects deemed socially desirable (namely those outlined in section 30(3)) may find themselves with a distinct image problem and at a marketing disadvantage in fund-raising and gift solicitation if forced to describe themselves as “limited” companies. Of course the liability of the members is still limited at law, section 30 does not change that, but this small but significant difference in nomenclature is designed to try to capture the essential difference between guarantee companies which seek to make profits to be applied to the general good (that is, the section 30 objects) and all those other companies whose sole goal is to make profits for their members. In Bell Concord Educational Trust Ltd. v. Commissioners of Customs and Excise,16 a VAT assessment appeal concerning a company limited by guarantee with charitable objects for the advancement of education, the Chairman of the Manchester VAT Tribunal summed up the relationship between charity and commerce as follows: Many charities . . . offer goods for sale to the general public through shops or mail order catalogues; the profits from those activities are used by the charities for their charitable purposes. The ordinary man might well say that such charities were selling their goods “for profit”, and he might well add that if the charities did not make a profit out of the sales there would be little point in selling the goods at all . . . In our judgment the question whether a person supplies goods or services at a profit and the question whether he supplies those goods or services for profit are two different things. In the case of a commercial undertaking profit is the ultimate aim. That is not so in the case of a charity, where the ultimate aim is the charitable purpose for which the charity exists.

It is that essential difference between the motivation behind commercial profit making that section 30 attempts to encapsulate. An additional benefit for these guarantee companies is found in section 30(7) which expressly disapplies the legislative requirements for publicity of the company’s name and releases the company from the obligation to file lists of its membership to the Companies Registrar. However, since the 1993 Charities Act requires all charitable companies to put their company name on all business documentation such as cheques, correspondence, and invoices, this exemption is now only of relevance to noncharitable guarantee companies. Finally it is interesting to note that the Companies Registrar is given, by section 31, a specific policing and enforcement role in respect to those guarantee companies which claim the privilege of exemption from use of the word “limited” in their name under section 30 of the CA 1985. 16

[1986] VATTR 165.

(G) Dunn Ch6

25/1/00

1:41 pm

Page 80

80 Joanna Gray

Corporate Personality and Ownership of Guarantee Companies’ Assets The major advantages of using the guarantee company vehicle are the twin linked benefits of corporate personality and limited liability.17 The fact that the company is a legal entity separate from its members and officers means that questions of property ownership, capacity to contract, succession to property devolved on the company by gift or will, are all rendered much clearer by the simple legal fact that the company owns all the property of the undertaking absolutely, is responsible for the liabilities of the undertaking (its business being the business of the company, not of individual members or officers) and has a continuing independent existence beyond that of its members and officers.18 However these questions were not always so readily answered for, when modern company law was in its infancy at the turn of the century there was considerable judicial scepticism and suspicion about the exact legal status of this fledgling legal form. Nowhere was this more evident than in the hostility shown by the lower courts prior to Mr Salomon’s successful appeal to the House of Lords in Salomon v. A Salomon Co. Ltd.19 That case firmly established that A. Salomon Co. Ltd. was a real legal person, absolute owner of the business undertaking with sole responsibility for its debts and obligations. Similar uncertainty manifested itself in the courts’ first dealings with guarantee companies, and the question of the nature of a guarantee company’s ownership of its assets has triggered particular judicial attention inasmuch as the trust analogy is especially apparent in the case of guarantee companies.20 The majority judgments in Bowman v. Secular Society Ltd., however, were adamant in their refusal to characterise a bequest expressed to be “upon trust for the Secular Society Ltd.” as anything other than an absolute beneficial gift to a validly constituted corporate body with full legal personality. According to Lord Parker21: The Secular Society Ltd, was incorporated as a company limited by guarantee under the Companies Acts, 1862 to 1893 and a company so incorporated is by s.17 of the Act of 1862 capable of exercising all the functions of an incorporated company. Prima 17 Trustees of charitable trusts may now take advantage of corporate status and form themselves into a corporate body for the purpose of ease and simplification of their charity property and asset holding, thanks to Part VII of the Charities Act 1993 which consolidates the amendments made to the Charitable Trustees Incorporation Act 1872 by s.48 and Sched. 4 to the Charities Act 1992. See further Charity Commission, Incorporation of Charity Trustees, Leaflet CC43 (London, TSO, 1995). 18 The Charity Commission outlines these advantages in Choosing and Preparing a Governing Document, Leaflet CC22 (London, TSO, 1997), para 38 where it enumerates the factors that would militate towards choice of the guarantee company form for a charity. These are: the organisation is to be quite large; it will employ a lot of staff; it will deliver charitable services under contractual agreements; it will regularly enter into commercial contracts; it will be a substantial owner of freehold or leasehold property. 19 [1897] AC 22. 20 See the minority judgments of Lord Finlay and Lord Buckmaster LC in Bowman v. Secular Society Ltd., supra n.5. 21 Supra n.5, 438 and 441.

(G) Dunn Ch6

25/1/00

1:41 pm

Page 81

Guarantee Companies in the Voluntary Sector 81 facie, therefore the society is a corporate body created by virtue of a statute of the realm, with statutory power to acquire property by gift, whether inter vivos or by will.

Further: If I give property to a limited company to be applied at its discretion for any of the purposes authorised by its memorandum and articles, the company takes the gift as would a natural person to whom I gave a gift to be applied by him at his discretion for any lawful purpose . . . The [contrary] argument . . . involves the proposition that no limited company can take a gift otherwise than as trustee. I am of opinion, therefore that the society, being capable of acquiring property by gift, takes what has been given to it in the present case, and takes it as absolute beneficial owner and not as trustee.

However, in the case of charitable guarantee companies the courts have shown themselves willing to employ the language of trust and trusteeship in respect of the charitable company’s assets, in order to prevent the company members from claiming the assets on dissolution of the company. The problem for company law is that, despite the fact that section 30 of the CA 1985 clearly envisages binding restrictions on asset distribution to members of voluntary (and especially charitable) guarantee companies, nowhere does the legislation specifically exempt such companies from the order of distribution dictated by the statutory scheme for distribution of assets in a winding-up.22 The mandatory statutory scheme of distribution in the Insolvency Act 1986 can only be set aside if the articles of the company provide for ultimate distribution of the company’s assets other than to the company’s members. Since section 30(3) of the CA 1985 permits either the company’s articles or memorandum to contain the conditions demanded by that section (which include a tailor made cy près-type distribution of the company’s assets to another similar body or to charity) a problem arises if the company has chosen to use its memorandum rather than its articles to enshrine the restricting factors that make it a non-profit distributing (and, where relevant, charitable) guarantee company. Indeed the memorandum is the more logical choice for the draftsman as it is occupies a superior position in the hierarchy of a company’s constitutional documents and alteration procedures are, on the whole, more closely prescribed.23 This question was resolved, at least in the case of guarantee companies that are also charitable, by Slade J in Liverpool and District Hospital for Diseases of the Heart v. Attorney-General24 where the hospital, a charitable guarantee 22 S.107 of the Insolvency Act 1986 details the order of distribution of a company’s property on a voluntary winding up and states: “[s]ubject to the provisions of this Act as to preferential payments, the company’s property in a voluntary winding-up shall on the winding up be applied in satisfaction of the company’s liabilities pari passu and, subject to that application, shall (unless the articles otherwise provide) be distributed among the members according to their rights and interests”. 23 Of course, the 1993 Charities Act now requires that all charitable companies must obtain prior written consent of the Charity Commission to alterations of their objects and any alteration of provisions in memorandum or articles of association relating to the potential application of the company’s assets and property. 24 [1981] 1 All ER 994.

(G) Dunn Ch6

25/1/00

1:41 pm

Page 82

82 Joanna Gray company in the course of being wound up at the instance of the Attorney General,25 had provided in its memorandum that upon the company’s being wound up or dissolved no property should be paid to or distributed to the company’s members but, instead, it should be transferred to another institution having similar objects. The liquidator of the hospital argued on behalf of the company members that, since the company’s articles did not contain any provision equivalent to that contained in its memorandum they could not be said to displace the operation of the companies legislation which governed the distribution of a company’s assets on a winding up. Since it was now well established that a company owned its assets absolutely and did not hold them on trust, the court had no jurisdiction here to intervene and order an application of the company’s assets cy-près as they could not be said to be held on any charitable trust. Slade J cut through the formalism of this argument and decided that, although it was true that a charitable company did not hold its assets on trust in the strict sense it must be viewed as in an analogous position to a trustee inasmuch as it was bound to apply its assets only for the purposes set out in its memorandum. The fact remained that the company, and only the company, was entitled to its assets beneficially and the members of such a company could not be said to have any “rights or interests” in it within the meaning of those words as they were used in sections 265 and 302 of the CA 1948 (which were the companies legislation provisions at issue in this case and which are now contained in section 107 of the Insolvency Act 1986). The members of the company could not be said to have any such interests in the light of the clear contrary statement in the memorandum which, for the purposes of applying section 265 of the CA 1948, was deemed to be incorporated in the company’s articles by virtue of the fact that the members had subscribed to membership of the company on the basis of the memorandum. Finally, despite the lack of a charitable trust of the company’s assets in any strict sense the court still had jurisdiction to order a cy-près scheme since the company was bound, under the terms of its constitution, to apply its assets exclusively for charitable purposes and that was sufficient to ground the jurisdiction to intervene in its affairs. Company law was not allowed to displace charity law in this case. However it would have been a harder case to decide had the guarantee company not been a charity but instead had been set up for one of the non-charitable objects laid down in section 30(3) of the CA 1985. Presumably the court would add the same gloss to section 107 of the Insolvency Act 1986 and simply deem the articles in the phrase “unless the articles otherwise provide” to incorporate any asset distribution restrictions contained in the company’s memorandum. It is to be hoped this is one area of uncertainty that the Company Law Review can help clarify for non-profit companies that do not fall within the extra umbrella protections of the general law of charity.

25

Pursuant to s.30(1) of the Charities Act 1960.

(G) Dunn Ch6

25/1/00

1:41 pm

Page 83

Guarantee Companies in the Voluntary Sector 83

Directors of Guarantee Companies As the Charity Commission itself points out:26 An increasing number of charities are being set up as companies limited by guarantee. Because they are at the same time charities and companies they are subject in most respects to both charity law and company law.

This is particularly important for the directors27 of charitable and, indeed, other non-commercial guarantee companies28 to remember. The level of legal responsibility in their case is not directly proportionate to financial reward, and so it would be erroneous to assume that the ever-growing body of company law governing directors’ duties and responsibilities takes cognisance of the pro bono nature of their office and expects lower standards of care, skill, competence and probity of them than it does of directors of profit-distributing, companies limited by shares. Company law draws no distinction between commercial and noncommercial companies where directors’ duties and responsibilities are concerned, as wherever the corporate form is used then, despite the fact that a guarantee company may not have a commercial objective, it will still acquire creditors and debtors, obligations and liabilities. That is for the very good reason that well-meaning but incompetent amateurs running a charitable company’s business out of altruistic motives can do just as much damage to others’ economic and social interests, and ultimately even to the interests of the beneficiaries of the objects of that company, than can deliberately reckless or dishonest career directors of a commercial company. Company law adopts the perspective of those third parties dealing with the company and, in the interests of sending them a consistent message as to what they can legitimately expect from those charged with running a company’s business (whatever form of company it may be), it applies consistent and uniform expectations of standards of conduct to all directors of all companies. Obviously the factual application of these standards will differ according to whether the company in question is a tiny local charitable guarantee company with only one main activity, or a large diverse public limited company listed on the Stock Exchange with many different lines and territories of business activity. But the core content of the general duties and potential responsibilities of the directors of both companies remains the same. Broadly these are as follows. First, the directors must act in good faith in the best interests of the company. They must exercise powers conferred on them for the purpose for which they 26

Charity Commission, Booklet on Charities Acts 1992 and 1993 (London, TSO 1993), para

11.1. 27

Directors of non-profit distributing companies are often referred to as members of the council of management or management committee. 28 Although obviously charity law is of no relevance to them.

(G) Dunn Ch6

25/1/00

1:41 pm

Page 84

84 Joanna Gray were conferred. Each one must exercise his or her own independent judgement and avoid conflicts of interest with the company.29 Secondly, there is a common law duty of skill and care owed by all directors. The level of skill and care expected from a director will depend to an extent on the knowledge, experience and professional background of the particular individual30 but no distinction is drawn between the level of skill and care owed by the executive and non-executive director.31 There is therefore no safe harbour from liability for the honest fool, the grandee or the celebrity on the board of a charitable company who never attends board meetings and takes no interest in the company’s affairs. The standard of care required from all company directors is that which a reasonable person might be expected to take acting in the same circumstances on his own behalf. Thirdly, sections 213–14 of the Insolvency Act 1986 give the court jurisdiction to impose personal liability on company directors for fraudulent trading (essentially carrying on the business of the company with intent to defraud creditors) and for wrongful trading (carrying on the business of the company when the director knew or ought to have concluded that there was no reasonable prospect of the company going into liquidation). It is this latter potential liability, with its overtones of objective assessment, that is a real source of concern to directors of companies of all sizes and types. However, in the case of any individual director, the measurement of the director’s actual or constructive knowledge of the company’s impending insolvency is to be determined by reference to the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried out by that director in relation to that company, and the general knowledge, skill and experience that that director has.32 This should be of some comfort to those directors of non-commercial guarantee companies who lack prior business experience and training, as should the obiter statements by Hoffmann J that this test now represented the correct measure of the general duty of a director’s skill and care.33 Fourthly, under the Company Directors Disqualification Act 1986 the court has power to impose a disqualification order on an individual director on a number of grounds, including persistent breaches of the companies legislation (section 3) and, in the case of insolvent companies, of a director’s being “unfit to be concerned in the management of a company” (section 6(1)(b)).34 The courts’ 29 These duties are fiduciary duties and derive from the early analogies that late 19th century courts drew between trustees and company directors. The analogy is all the more apparent in the case of charitable companies. Part X of the CA 1985, “Enforcement of Fair Dealing”, adds further specific statutory prescriptions of directors’ conduct which serve to support the general fiduciary duties developed in case law. 30 Re City Equitable Fire Insurance Co. Ltd. [1925] Ch 407. 31 Dorchester Finance Co. Ltd. v. Stebbing [1989] BCLC 498. 32 S.214(4) of the Insolvency Act 1986. 33 In Norman v. Theodore Goddard [1991] BCLC 1028 and Re D’Jan [1994] 1 BCLC 561. 34 An order under s.3 can extend up to 5 years but under s.6 it can extend up to 15 years, a long sentence for which to be effectively banned from the corporate sector.

(G) Dunn Ch6

25/1/00

1:41 pm

Page 85

Guarantee Companies in the Voluntary Sector 85 use of this statutory jurisdiction is increasing every year and the effect of a disqualification order is wide ranging and damaging since the individual concerned is prohibited from (inter alia) acting as a director or being concerned in the formation or management of any company—not just the company in respect of whose affairs his conduct gave rise to the disqualification order. Additionally the test of “unfitness” for the purposes of making a disqualification order under section 6 can encompass a holistic view of a director’s conduct as it can “be either taken alone or taken together with his conduct as a director of any other company or companies”.35 Therefore it is particularly important for an individual invited to sit on the board of a charitable or voluntary guarantee company not to accept such an invitation unless certain that he has both the skills and time to devote to the conduct of the company’s affairs otherwise, if he accepts in the erroneous belief that he can get away with less effort on the board of a non-commercial company, he may well find that his lack of attention to its affairs could have serious consequences in other areas of his present or planned business life.

CONCLUSION

Finally it can be seen that, despite the distinctions drawn right at the beginning of the Companies Act 1985 between guarantee companies and companies where liability is limited by shares, there is very little differentiation between use of the corporate form for commercial purposes and its use for non-commercial charitable or voluntary purposes in general company law. This is in stark contrast to the ever increasing distinction between private and public limited companies and the DTI’s company law review represents an excellent opportunity for consideration of the larger question whether a sharper distinction now needs to be drawn between voluntary and commercial companies. In particular whether perhaps an entirely new form of corporate vehicle for use solely in the voluntary sector, where its particular concerns can be more specifically addressed and safeguarded than they can with a form that developed and is developing primarily for profit maximising and distributing commercial enterprise. It is to be hoped that the practical concerns of voluntary-sector companies will be canvassed and fed into that review rather than overlooked. It is very much up to the sector’s practitioners and advisers to ensure that this happens.

35

S.6(1)(b) of the Insolvency Act 1986.

(G) Dunn Ch6

25/1/00

1:41 pm

Page 86

(H) Dunn Ch7

25/1/00

1:42 pm

Page 87

7

The Regulation of Charities in Scotland CHRISTINE R. BARKER

INTRODUCTION

As we have frequently been reminded in the course of the debate on devolution, Scotland has its own legal system whose separate existence was guaranteed by the Treaty of Union in 1701. It is perhaps hardly surprising, therefore, that the regulation of charities in Scotland is differently organised from the rest of the UK and is governed by quite separate legislation. In Scotland the principal legislation regulating charities is Part I of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990 (the “1990 Act”). This Act was the first piece of legislation introduced with the specific aim of regulating charities in Scotland. This essay sets out some of the principal provisions of the 1990 Act and relevant subordinate legislation, noting where applicable areas where the regulatory regime differs significantly from that in the rest of the UK, in particular from the system which operates in England and Wales.

BACKGROUND : ACCOUNTABILITY

One of the main aims of the 1990 Act was to make Scottish charities publicly accountable. The 1987 Woodfield Report1 had described Scotland’s lack of regulation of charities as “unsafe” and the 1990 Act was introduced in order to rectify this situation. It came into effect on 27 July 1992, closely followed by the Charities Accounts (Scotland) Regulations 1992, in force on 30 September 1992. The new legislative measures introduced important provisions intended to facilitate access to information about Scottish charities and to provide a regulatory regime for bodies which either have been officially recognised as charitable for tax purposes or which improperly hold themselves out as charitable. Under the terms of the 1990 Act, bodies recognised in Scotland as charitable for tax purposes are “Scottish charities”; bodies not so recognised (and which are not 1

Efficiency Scrutiny of the Supervision of Charities (London, HMSO, 1987).

(H) Dunn Ch7

25/1/00

1:42 pm

Page 88

88 Christine R. Barker registered charities in England and Wales or not obliged to register there) are “non-recognised bodies”. The 1990 Act obliges all Scottish charities to keep accounting records which are sufficient to show and explain their financial transactions. The intention of this provision is to ensure that the charity can “disclose with reasonable accuracy” its financial position at any given time. This is, of course, an important means of checking the viability of a charity. In addition, the 1990 Act makes provision for members of the public to obtain from a charity, upon payment of a “reasonable charge”,2 a copy of its latest annual accounts and its “explanatory document” (defined in the 1990 Act as a trust deed or other constituting document3). These documents must be supplied within one month.4 This provision applies to all Scottish charities, regardless of legal form, whereas some are exempted from other provisions of the 1990 Act because the regulatory measures governing their particular type of charity are considered to be sufficient. Designated religious bodies (as defined in the Charities (Designated Religious Bodies) (Scotland) Order 1993) have privileged status under the Act, and certain of the powers of the Lord Advocate (Scotland’s chief law officer and broadly speaking equivalent of the Attorney-General in England) and Court of Session (Scotland’s principal civil law court) do not apply to them.5 Incorporated charities are also exempted from certain accounting requirements as they continue to follow the accounting régime laid down by the Companies Acts. The particular legal form which a charity adopts continues, therefore, to be of great importance. One of the most notable differences between the supervisory regime in Scotland and that operating in England and Wales is the absence of an equivalent body to the Charity Commission. The 1990 Act invests responsibility for the supervision of charities in Scotland in a number of bodies and individuals rather than all—or most—responsibilities falling within the remit of one body such as the Charity Commission, and implicitly places a greater emphasis on self-regulation. This approach may have advantages, provided that management committees, professional advisers, auditors and members of the public have full information about where the different official responsibilities lie and, equally importantly, have a clear awareness of what their own responsibilities are.

CHARITY RECOGNITION IN SCOTLAND

Although, as noted above, there was no legislation in Scotland specifically concerning the regulation of charities prior to the 1990 Act, the concept of 2

Ss.1(4) and 5(7). The charge is for photocopying and postage. Equivalent to “governing instrument” used in the England/Wales legislation. 4 Two months in England and Wales. 5 S.3. E.g., the Lord Advocate cannot exercise the power of suspension (s.6(2)) in the case of any person concerned in the management or control of a designated religious body, and the extensive powers given to the Court of Session (s.7) do not apply to designated religious bodies. 3

(H) Dunn Ch7

25/1/00

1:42 pm

Page 89

The Regulation of Charities in Scotland 89 “charitable for tax purposes” did exist under tax legislation applicable throughout the UK. In Scotland (as in Northern Ireland) the Inland Revenue is still the body to which applications for charitable status are made. Application is made under section 505 of the Income and Corporation Taxes Act 1988 and in practice is dealt with by the Financial Intermediaries and Claims Office (FICO) of the Inland Revenue in Edinburgh. Bodies applying for charitable status must supply FICO with a copy of their founding document in order that an assessment can be made whether the purposes are exclusively charitable in terms of sections 505 and 506 of the Income and Corporation Taxes Act 1988. Applicants are advised to submit draft documents in the first instance and FICO will then give an informal view on eligibility for recognition. The concept of “charity recognition”, as opposed to “registration”, came into being in Scotland because of its significance in the 1990 Act, section 1(7) of which contains a definition of a “recognised body”. It means in effect that bodies are “recognised” if the Inland Revenue has recognised them as being charitable for tax purposes and they are either established under Scots law or are managed or controlled wholly or mainly in or from Scotland. Only those organisations which are recognised by the Inland Revenue as eligible for tax relief are entitled to describe themselves as “Scottish charities”. Despite its separate legal system, the criteria for defining what is “charitable for tax purposes” in Scotland continue to be based on the technical meaning of “charitable” under English law, derived from the Charitable Uses Act 1601. This definition, in brief, incorporates four heads of charity: the relief of poverty; the advancement of education; the advancement of religion; purposes beneficial to the community not falling under the first three heads.6 Importantly, there is also an overriding requirement of public benefit. In discussions currently taking place throughout the UK on the subject of the definition of “charitable”, it has been suggested7 that “public benefit” should be the sole criterion used to determine charitable status and that bodies such as quangos and private schools, which currently qualify under the “four heads” definition, should no longer be entitled to describe themselves as charities. When referring to Scottish charities it is inappropriate to use the term “registered charity”, which is the term used in England and Wales for charities registered with the Charity Commission. Scottish charities do not undergo a “registration” process as such, since there is no statutory register of Scottish charities, and to avoid confusion the term is best avoided, particularly since section 63 of the Charities Act 1992 (applicable in England and Wales) makes it a criminal offence for an individual to solicit money or property for the benefit of an institution claiming that it is a registered charity when it is not. 6

Income Tax Special Commissioners v. Pemsel [1891] AC 531, 583 (Lord Macnaghten). See Deakin Report, Meeting the Challenge of Change, Voluntary Action into the 21st Century: Report of the Commission on the Future of the Voluntary Sector (London, NCVO, 1996); Kemp Report, Head and Heart: The Report of the Commission on the Future of the Voluntary Sector in Scotland (Edinburgh, SCVO, 1997). 7

(H) Dunn Ch7

25/1/00

1:42 pm

Page 90

90 Christine R. Barker In Scotland approval of an application for charitable status is communicated by FICO in a formal charity recognition letter, which should be retained by the charity. FICO allocates to each Scottish charity an SC (Scottish charity) number which is its identifying number on the Scottish Charities Index maintained by FICO and which should be cited by the charity in any dealings with the public and on any notepaper or publicity material (although this is not compulsory).

INFORMATION PROVISION

One of the most significant measures in the 1990 Act was to free the Inland Revenue from its obligation of confidentiality to the extent that it is able to disclose whether or not a body is recognised as a Scottish charity and to provide to any enquirer the name and address of its contact for the charity and the date of last contact. Any matter noted by FICO in pursuance of enquiries by the Lord Advocate about a Scottish charity will also be communicated to any enquirer.8 This enables members of the public to verify the charitable status of organisations and thereby to play their part in the regulatory process. The above information is stored on the Inland Revenue’s Index, compiled in 1992 when the Act came into effect and updated as new information about Scottish charities is obtained by FICO. Updates are made on an ongoing basis, but clearly the necessary amendments to the Index cannot be made if a charity does not inform FICO of changes in contact details or fails to notify FICO that the charity is being wound up. Often the named contact is an appointed agent, such as a solicitor, who has assisted the charity in the initial recognition stages but who has no long-term involvement with the organisation and is therefore unable to provide updated information. The FICO Index contains almost 27,000 records, although it is thought that some of these charities may no longer be active but have failed to inform FICO—nor are they under any legal obligation to do so. Fewer than 6,000 of the Scottish charities on the Index make claims to FICO for repayment of tax and thus have that particular incentive for maintaining regular contact. Many charitable organisations receive only untaxed income or seek charitable status in order to enhance their potential for attracting public funding or to obtain rates relief rather than to obtain tax refunds. The Scottish Charities Index was designed to enable FICO to provide, as quickly as possible, the limited information which can be supplied under the relaxation of FICO’s confidentiality obligation.9 The Index is not intended as a source of detailed information about charities and FICO is not at liberty to supply financial information about a Scottish charity. Any member of the public 8

1990 Act s.1(1)–(3). It contains the names of all charities with which FICO has been in contact since 1 Jan 1970. Information can usually be provided by telephone within seconds or by letter normally dispatched the same day. 9

(H) Dunn Ch7

25/1/00

1:42 pm

Page 91

The Regulation of Charities in Scotland 91 wishing to obtain more information about a particular Scottish charity must approach it direct for a copy of its founding document and latest set of accounts as provided for in the 1990 Act. The Index is, therefore, not comparable with the register maintained by the Charity Commissioners for England and Wales. In Scotland there is no legal obligation for charities routinely to file annual accounts and, although FICO may insist on seeing them in verification for repayment of tax, this is not always the case. This absence of a requirement for charities to file accounts with a statutory body10 contrasts with the situation in England and Wales, where registered charities must lodge their accounts and annual reports with the Charity Commission on a regular basis if their income or expenditure is over £10,000. Those whose income or expenditure does not exceed £10,000 but which exceeds £1,000 are asked to make a simplified form of annual return to the Charity Commission, although this is not a statutory requirement. It is worth noting that 70 per cent of main registered charities have an annual income of less than £10,00011 and are therefore not subject to the routine submission of accounts and returns. The National Audit Office (NAO)’s 1997 report on the Charity Commission comments: “[f]or these smaller charities, the emphasis is on encouraging good standards of management and financial control, without placing excessive burdens on them”.12 OTHER ASPECTS OF FICO ’ S REGULATORY ROLE

FICO plays a limited role in the regulatory process for Scottish charities, but one of its tasks when processing tax claims is to check that income has, in fact, been applied exclusively for charitable purposes. FICO also carries out charity audits on a cyclical basis. Following a recommendation in the recently published NAO report on the Inland Revenue’s monitoring and control of tax exemptions for charities, FICO has now adopted a new system for obtaining charity accounts which targets the full population of charities, whether or not they claim repayment of tax, and which is based on income level and risk features such as a known history of non-compliance. The NAO report further recommends that FICO should also request accounts from a small sample of low-risk cases to ensure coverage across the whole of the known charity population.13 10 Incorporated charities must continue to file accounts with Companies House under the terms of the Companies Acts. Companies House has no regulatory function other than ensuring that accounts are filed timeously and in accordance with the statutory accounting provisions. There is no subdivision of the Companies Register highlighting companies which are Scottish charities and it is not possible to say how many are covered by the requirements of company law. 11 Charity Commission, Report of the Charity Commissioners for England and Wales for the Year 1997 (London, The Stationery Office, 1998), 12. 12 NAO, Report by the Comptroller and Auditor General, Charity Commission, Regulation and Support of Charities, HC 2 Session 1997–8, 16 May 1997 (London, TSO, 1997), 19, para 1.12. 13 NAO Report by the Comptroller and Auditor General, Inland Revenue. The Monitoring and Control of Tax Exemptions for Charities, HC 575 Session 1997–8, 4 Mar 1998 (London, TSO, 1998), 4, Recommendation 5.

(H) Dunn Ch7

25/1/00

1:42 pm

Page 92

92 Christine R. Barker The 1990 Act empowers FICO to inform the Lord Advocate of apparent abuses in respect of engaging in non-charitable activities or applying funds for non-charitable purposes. It is not, however, within FICO’s remit to determine whether or not accounts satisfy the requirements of the legislative provisions, nor to check accounts for deficiencies unrelated to tax claims. Another regulatory aspect of FICO’s role is the power to withdraw recognition where it appears that a body’s purposes are no longer exclusively charitable; for example, where there has been an inappropriate alteration to the constituting document, or where the body’s actual activities do not correspond to those set out in the founding document.

REGISTER OF CHARITIES

As noted above, Scotland does not have a register of charities comparable to that held by the Charity Commission and there is no legal compulsion for Scottish charities routinely to file annual accounts with any regulatory agency. The Scottish Council for Voluntary Organisations (SCVO) has set up its own Charities Register in Scotland (CRIS) based on the Inland Revenue’s Index but containing additional updated information obtained from an on-going survey by SCVO of the Scottish charities listed. This survey involves requests for accounts and reports, and information from these documents is entered on the CRIS database. The database includes information on income size, grant expenditure, beneficiaries, nature and prime function of the organisation, field of work, geographical scope, local council area and data on the legal form of the charity. CRIS is a very useful research tool for those involved in studying the charitable sector in Scotland and its database is consulted by many institutions, in particular funding bodies. However, it has no statutory status and is not intended to fulfil a regulatory role. The absence of a statutory register in Scotland is regarded by many as a crucial omission in the regulatory process and the Kemp Report on the Scottish voluntary sector recommends inter alia that a Register of Scottish Charities should be created: Registration would be presumptive proof of charitable status, and would be so accepted by the Inland Revenue. The Register of Scottish Charities should be made available to the public by various means, including the Internet. The Registrar should collaborate closely with the Charity Commission to allow rapid and easy public access to both registers.14 A system of “registration” rather than “recognition” involving an on-going process requiring annual filing of accounts and reports by those in management or control of Scottish charities along the lines of the system which now operates in England and Wales would provide both a more systematic collection of information about charities and a means of scrutinising them on a routine basis. The 14

Supra n.7, paras 7.16.4 and 7.16.7.

(H) Dunn Ch7

25/1/00

1:42 pm

Page 93

The Regulation of Charities in Scotland 93 1997 NAO Report on the Charity Commission revealed, however, that although the Commission has asked for accounts from all registered charities since October 1990, returns were well short of the Commission’s 80 per cent minimum target.15 The highest response achieved at the time of the NAO report was in 1996 when 69 per cent of the accounts requested were received. Commenting on this, the 1998 report of the Public Accounts Committee (PAC) found the situation unacceptable and urged the Commissioners to consider a target of 100 per cent for accounts over £10,000.16 The Charities Act 1993 requires registered charities with income or expenditure of more than £10,000 to submit annual returns to the Charity Commission, which is increasing the response rate,17 and in its response to the PAC report the Charity Commission also draws attention to the centralised Monitoring Unit set up in October 1994 which is specifically responsible for ensuring that the systems for obtaining and processing the returns required by the 1993 Act are in place. The Commission also points out that, as a result of its implementation of the recommendations of the Deregulation Task Force for Charities and Voluntary Organisations,18 smaller charities, which account for most of those on the register, are not required to submit annual accounts and reports unless specifically requested to do so: The Commission’s approach reflects Parliament’s decision to avoid overburdening small charities with unnecessary bureaucracy by excluding charities with an income of £10,000 a year or less from the requirement of routine annual submissions of accounts and reports. . . . The Commission regards non-response from charities in the higher income brackets as the highest priority because of the amount of money at stake.19

As noted above, the statutory obligation in England and Wales for charities with income or expenditure over £10,000 to file accounts and reports annually applies to only 30 per cent of the total of main registered charities and only some 25 per cent of the total number of charities on the register,20 but the PAC report on the Charity Commission notes that the Commissioners are to carry out a sample survey of 1 per cent of accounts from charities with income below £10,000 for routine monitoring. It should also be noted that charities in this 15

Supra n.12, at 35. The Charity Commission: Regulation and Support of Charities, HC 408 Session 1997–8, 25 Mar 1998 (London, TSO, 1998) pp. xi and xiv. 17 The power to obtain returns from registered charities with an income or expenditure of over £10,000 only came into effect for reporting years ending after Feb 1997. 18 Charities and Voluntary Organisations Task Force, Proposals for Reform, July 1994, Deregulation Task Forces (Pub 1332/1OK/7.94/NP). 19 Response of the Charity Commissioners to the PAC report, Treasury minute on the 26th and 28th to 30th reports from the Committee of Public Accounts 1997–8, Cm 3973 (London, TSO, 1998), paras 14–15. 20 The Charity Commission recorded 187,000 charities on its register in Jan 1998. Of these 159,000 were “main” charities and 28,000 were subsidiary or branch charities. See Charities Aid Foundation (CAF), Dimensions of the Voluntary Sector 1998 Edition (West Malling, CAF, 1998), 15. 21 Charity Commissioners, supra nn.11, 12. 16

(H) Dunn Ch7

25/1/00

1:42 pm

Page 94

94 Christine R. Barker income bracket account for less than 2 per cent of the £18.4 billion charitable income received by main registered charities.21 The NAO Report points to the contrast with Companies House (in England and Wales) which obtained on average 95 per cent of registered companies’ accounts on time in 1995–6, prompted, it suggests, by the sanctions which Companies House has to encourage compliance—directors may be prosecuted and fined and the company may be struck off the register.22 However, it cannot be denied that the register maintained by the Charity Commission in England and Wales, whatever its past shortcomings, fulfils an important role both in assisting the Commissioners to carry out their regulatory functions and in providing public access to information. The Commission’s computer system enables apparent anomalies in charity accounts to be flagged automatically, and the extent of the information which charities in England and Wales are obliged to provide to the Charity Commission and which is available for public inspection also exceeds what is available in Scotland. A Scottish register of charities of this kind would almost certainly facilitate the regulatory process, although it should be pointed out that if the obligation for routine filing and monitoring of accounts extends only to charities with an income over £10,000, the proportion of Scottish charities below this level is likely to be as great, if not greater, than in England and Wales.

THE LORD ADVOCATE — REGULATORY ROLE

The 1990 Act gives the Lord Advocate wide powers to investigate abuse and to apply to the Court of Session to prevent or remedy abuse. The powers are not, as is often mistakenly stated, purely reactive in response to complaints received: enquiries may be (and are) made “either generally or for particular purposes”.23 The Lord Advocate may investigate alleged cases of misconduct or mismanagement by those “concerned in the management or control” of Scottish charities (this is the nearest equivalent of the term “charity trustee” used in the 1993 Act) and also their failure to respond to a request from members of the public for copies of annual accounts or explanatory documents. He also has the power to suspend (for up to 28 days) anyone concerned in the management or control of a Scottish charity. The Lord Advocate may direct that failure by a Scottish charity to provide a copy of its explanatory document and/or accounts/accounting reference date be noted by the Inland Revenue as part of the public information it provides and may direct that accounts be prepared and appoint someone to prepare them. The Lord Advocate’s investigative powers also extend to non-recognised bodies which represent themselves as Scottish charities, potentially important in 22 23

Supra n.12, at 35. 1990 Act, s.6(1).

(H) Dunn Ch7

25/1/00

1:42 pm

Page 95

The Regulation of Charities in Scotland 95 assisting to combat fund-raising abuse, and to English charities operating as such in Scotland24 (with the exception of the power of suspension, which applies only if the body is managed or controlled wholly or mainly from Scotland.25) Unlike the Charity Commissioners, the Lord Advocate must apply to the Court of Session to invoke most of the remedial measures contained in the 1990 Act. Although he has extensive investigative powers, his remedial powers in terms of the 1990 Act are limited.

COURT OF SESSION

The Court of Session, on the other hand, has a wide range of remedial measures in cases of misconduct or mismanagement or to protect property. The measures available to the court include interdict to prevent a body from representing itself as a charity; the suspension or removal of anyone concerned in its management or control; the appointment of a judicial factor to manage or wind up a body’s affairs; making an order requiring a bank or other person not to part with money or securities held on behalf of the body; making an order restricting transactions; the approval of a scheme presented by the Lord Advocate to transfer assets from one body to another.26 An English registered or non-registered charity managed or controlled wholly or mainly outwith Scotland but on behalf of which a bank or “other person” in Scotland holds moveable property may, on application by the Lord Advocate acting on information received from the Charity Commissioners, be ordered not to part with the property without the court’s approval. If in the opinion of the court the property in question would not be applied for the purposes of the charity, it may be transferred to a body specified by the Lord Advocate.27

SCOTTISH CHARITIES OFFICE

In practice the Lord Advocate’s powers are exercised through the Scottish Charities Office (SCO), established as a division of the Crown Office in 1992 in order to implement the provisions of the 1990 Act relating to the regulation of charities in Scotland. The SCO has a multi-disciplinary legal, accountancy and investigative staff and has brought court proceedings (in the Lord Advocate’s name) in a number of cases, leading to the suspension or removal of those in management or control.

24

Ibid. 1990 Act, s.6(2). For further detail on the powers of the Lord Advocate and Court of Session see 1990 Act, ss.6–7. 27 1990 Act, s.7(6)–(8). 25 26

(H) Dunn Ch7

25/1/00

1:42 pm

Page 96

96 Christine R. Barker The SCO fulfils some of the functions of the Charity Commissioners in England and Wales in exercising its regulatory role, but in other respects it is very different. For example, the SCO is not specifically allocated an advisory role under the 1990 Act, nor is it sufficiently resourced to provide advice to any extent, although in practice SCO staff do provide counsel and assistance in many of the cases referred to the office.28 The SCO’s principal function, however, is investigative and, by invoking the powers of the court on behalf of the Lord Advocate, the regulation of charities in Scotland is largely the responsibility of the SCO, whose remit is to look into cases of suspected misconduct or mismanagement. The resources allocated to the SCO are, however, minimal in comparison to those of the Charity Commission. While the Charity Commission has resources of £23,000 million and is able to employ 600 staff, the SCO has only two lawyers (one civil and one criminal lawyer), two investigators, two accountants employed on a consultancy basis and a full-time administrative support officer. The 1990 Act makes it an offence for an undischarged bankrupt or anyone who has an unspent conviction for an offence involving dishonesty to be involved in the management or control of a Scottish charity. The SCO, on behalf of the Lord Advocate, may consider applications for waiver of the disqualification. The disqualification applies to someone who has an unspent conviction involving dishonesty; is an undischarged bankrupt; is subject to a disqualification order under the Company Directors Disqualification Act 1986; or has been removed from a position of management or control by the Court of Session using its powers under the 1990 Act.29 Applicants for waiver of this disqualification are sent a form by the SCO and its staff will then determine first whether or not the applicant is disqualified, and secondly whether the applicant is a person concerned in the management or control of the charity. Only if these two criteria are met (which is frequently not the case) will a decision about granting a waiver be taken. The Charity Commission for England and Wales has consistently reported that a substantial number of its cases involve fund-raising abuse. Each of its recent annual reports records “problems involving fund-raising” as a major cause for concern in inquiries undertaken; the most common examples concerning fund-raising expenses or failure to comply with the 1992 Charities Act.30 The SCO’s experience hitherto has not proved to be very different. Indeed, the very first case to be heard by the Court of Session under the provisions of 28 The SCO and the Scottish Office Home Department also produced a booklet setting out the basic provisions of the 1990 Act, distributed by FICO in 1992 to the contact addresses for all the charities on the Inland Revenue’s Index. 29 1990 Act, s.8(1). 30 Charity Commissioners’ 1997 Report, supra n.11, 19. See also Report of the Charity Commissioners for the Year 1996, 25, and Report of the Charity Commissioners for the Year 1995, 13, which reveal a gradual increase in cases involving fund-raising.

(H) Dunn Ch7

25/1/00

1:42 pm

Page 97

The Regulation of Charities in Scotland 97 the 1990 Act which concerned the Leukaemia and Cancer Children’s Fund31 involved a fund-raising company whose 58 per cent share of the proceeds was described in the Lord Advocate’s petition to the court as “excessive”. The company also had control of one of the charity’s bank accounts, which the petition suggested amounted to mismanagement on the part of the charity. The court agreed, and in 1995 the charity’s managing director was removed from office and interdict was granted against the disposal of property belonging to the charity.

THE SCOTTISH CHARITIES NOMINEE

As noted above, it is thought that some of the charities on the Inland Revenue’s Index may no longer be active, although funds may still be held on their behalf in bank accounts. Prior to the 1990 Act there was no mechanism whereby these funds could be identified and put to charitable use since banks and other financial institutions were not permitted to disclose the existence of dormant accounts. Under the 1990 Act section 12 the Secretary of State for Scotland may appoint a Scottish charities nominee to whom banks and other financial institutions may supply information about dormant accounts held on behalf of Scottish charities. The banks are freed from their duty of confidentiality in cases where every account held for a Scottish charity is dormant.32 The nominee may then in the following circumstances transfer funds from such accounts to another Scottish charity. An account is deemed to be dormant if (a) there has been no transaction for ten years; and (b) the bank or other institution is unable to identify anyone concerned in the management or control of the charity concerned. This being the case the nominee may transfer the aggregate of the credit balances to another Scottish charity with similar purposes, provided the aggregate does not exceed £5,000. Where the total balances exceed £5,000 the nominee must report this to the Lord Advocate who will either take the necessary action himself or may determine that the funds be dealt with by the nominee as if they were below the £5,000 threshold. The £5,000 threshold may be varied by the Secretary of State by regulation.33 The jurisdiction of the nominee is confined to the dormant accounts of Scottish charities and does not extend either to accounts which appear to be held for charitable purposes but belong to non-recognised bodies, or to accounts held on behalf of English charities. The nominee may, then, not inform the Charity Commission about any dormant accounts belonging to English charities, but the Charity Commission has powers under section 28 of the Charities Act 1993 31 The Lord Advocate v. The Leukaemia and Cancer Children’s Fund (unreported, but see The Scotsman, 14 June 1995). 32 1990 Act, s.12(11). 33 1990 Act, s.12(10).

(H) Dunn Ch7

25/1/00

1:42 pm

Page 98

98 Christine R. Barker to transfer funds from Scotland if informed by the bank concerned. Importantly, also excluded from the jurisdiction of the nominee, under the 1990 Act section 15(1), are educational endowments, defined in the Education (Scotland) Act 1980 section 122(1) as “any endowment which has been applied or is applicable in whole or in part to educational purposes”. In his first annual report, J. R. S. Bell, the Scottish charities nominee, records that a large number of dormant accounts reported to him clearly fall into this category.34 Bell further notes that an unexpected feature of his enquiries was to discover that the vast majority of dormant accounts identified belong to well-known Scottish charities which are still in operation. He suggests that while one possible explanation may be that well-meaning people have raised funds for a charity without its knowledge, “negligent stewardship” by national charities at local level is the most likely explanation.35 He does, however, point out that the amounts of money involved are relatively small. In his first search, which covered 73 institutions, he discovered a total of £18,409 in dormant accounts during his first year in office and by the end of his third year in office, the figure had risen to £52,790 in 263 dormant accounts held by the same institutions.36 The nominee’s first report draws attention to a number of legislative and practical problems in the light of his experience in attempting to fulfil his role in the implementation of the provisions of the 1990 Act. Some of these (including the provision regarding the advertisement of proposed reallocations) were addressed in amended Regulations in 1997.37 Among those which remain to be addressed are the fact that many dormant accounts which appear to be held for charitable purposes often prove to be outwith the powers of the nominee, either because they are not “recognised bodies” under the terms of the 1990 Act or are educational endowments. The nominee also expresses the not unreasonable view that, since the majority of dormant accounts belong to active charities, it is inappropriate to continue to protect such accounts from disclosure merely on the ground that a person concerned in the management or control of the charity (as opposed to the account) may be known to the financial institution or that the charity concerned may have other accounts which are not dormant.38 In view of the practical difficulties of fulfilling his role, the nominee has instigated a voluntary system whereby the financial institutions have agreed to contact the charities and other bodies directly in connection with the dormant accounts. He has therefore not needed to exercise his powers under the 1990 Act to transfer funds. 34 Scottish Charities Nominee, Annual Report for the year ending 31 August 1996, 6. Issued by Scottish Charities Nominee’s Office, Scottish Office Home Department, Edinburgh, Date: 22 Nov 1996. 35 Ibid., 12. 36 Annual Report for the year ending 31 August 1998, 4. 24 accounts held by these institutions were still under review, and in the year ending 31 August 1998 a second search was initiated, to cover a further 55 institutions. Issued by Scottish Charities Nominee’s Office, Scottish Office Home Department, Edinburgh. Date: 19 Nov 1998. 37 The Charities (Dormant Accounts) (Scotland) Amendment Regs 1997 (SI 1997 No.964). 38 Supra n.36, 14–17.

(H) Dunn Ch7

25/1/00

1:42 pm

Page 99

The Regulation of Charities in Scotland 99 Bell has made a further suggestion for reform in the light of his unexpected discovery that most dormant accounts identified belong to active charities: that the collection of money from the public (a term to be carefully defined) should only be allowed with the written permission of the charity and that the charity should be obliged to monitor the collection process and ensure that the money collected is properly accounted for.39 This, if practicable, would clearly go some way towards meeting criticisms of the present arrangements for public collections.

THE SECRETARY OF STATE FOR SCOTLAND

It is the Secretary of State for Scotland who appoints the Scottish charities nominee and makes regulations for the procedures to be followed by the nominee.40 The Secretary of State has various other important powers under the 1990 Act, many of them filling out details in areas which the 1990 Act covers only in general terms. He prescribes the form and contents of accounting regulations for Scottish charities under the 1990 Act’s provisions and his powers include the designation of classes of Scottish charities which may elect to adopt a simpler form of accounts. He has powers regarding the exemption of certain Scottish charities from some of the accounting requirements (although not the provision of accounts to anyone requesting them) and may also designate religious bodies meeting certain criteria set out in section 3 of the 1990 Act, thereby exempting them not only from the accounting provisions but also from some other significant provisions of the Act.41

FINANCIAL ACCOUNTING

The 1990 Act obliges all Scottish charities to keep accounting records which are sufficient to enable them to “disclose with reasonable accuracy” their financial position at any given time.42 This is a crucial means of checking the viability of a charity, but it is also important that charities are not overburdened with complex requirements which are expensive to implement—a difficult balance to strike. The financial accountability now placed on all Scottish charities means that many of them require the assistance of a qualified accountant, and this may, of course, have cost implications which may be significant in terms of the charity’s income. Research conducted by Dundee University’s Charity Law Research Unit (CLRU) has revealed that smaller charities in particular found that there 39 “Dormant Charity Accounts”, speech to CLRU/SCVO “Charity Law in Scotland” Conference, Dundee University, Nov 1996. 40 1990 Act, s.12. For further details see C. R. Barker et al., Charity Law in Scotland (Edinburgh, W. Green, 1996), 118–20. 41 See ibid., 99–100 for further details. 42 S.4(1)(a).

(H) Dunn Ch7

25/1/00

1:42 pm

Page 100

100 Christine R. Barker were significant cost implications in meeting the current accounting requirements, not only because of increased accountancy fees but also in terms of the senior management time involved in preparing the accounts.43 The Charities Accounts (Scotland) Regulations 1992, as prescribed by the Secretary of State for Scotland under the terms of the 1990 Act, came into force on 30 September 1992, and were the first such regulations made for unincorporated Scottish charities. They stipulate that the accounts of all unincorporated charities must be submitted to external review, either by an “independent examiner” or by an auditor as defined in the Companies Act 1989 section 24(2).44 The latter is required where gross income or expenditure exceeds £100,000 or where either the founding document or the “trustees” (defined in the Regulations as “the persons in management or control”)45 so stipulate. Where there is no such requirement for an audit, the accounts of charities with an income under £100,000 may be reviewed by an “independent examiner”, that is “an independent person who is reasonably believed by the trustees to have the requisite ability and practical experience to carry out a competent examination of the accounts”.46 A simpler form of accounts (receipts and payments and a statement of balances) may be prepared by charities with an income of less than £25,000; thereafter income and expenditure accounts and a balance sheet are required. These Regulations are currently under review by the Scottish Office, and a consultative document was issued in 1996 with proposed amendments, in particular to the income levels for the preparation of a simpler form of accounts and the type of external review required.47 The suggested amendments do not, however, propose a reduction in the income level above which a full audit is required, i.e. £100,000. The income bands may, therefore, continue to differ from those in England and Wales, but the intention is that at least the procedure involved should be as close as possible to that operating in England and Wales. The Regulations apply only to unincorporated charities; the accounts of incorporated charities continue to be governed by the Companies Acts and require to be examined by a registered auditor only if their income exceeds £250,000, with the option of a reporting accountant available to charitable companies with an income of between £90,000 and £250,000. Incorporated charities with an income below £90,000 do not require to submit their accounts for external examination. These levels were introduced in the Companies Act 43 See C. R. Barker, “Charity Law in Scotland: The Impact of Recent Legislation on Smaller Charities” in Charity Finance Yearbook 1996 (London, Plaza Publishing, 1995) 222–5. Charity Finance Directors’ Group. 44 S.24(2) states that a “company auditor” means a person appointed as auditor under Chapter V, Part XI of the Companies Act 1985. S.25 adds that a person is eligible for appointment as a company auditor only if (a) a member of a recognised supervisory body, and (b) eligible for the appointment under the rules of that body. Scheds to the 1989 Act give the criteria for recognition and eligibility. An individual or a firm may be appointed a company auditor. 45 The Charities Accounts (Scotland) Regs 1992, reg. 2. SI 1992 No. 2165 (30th September 1992). 46 Reg. 8. 47 Accounting by Charities in Scotland. A Consultation Paper on Proposals to Revise the Charities Accounts (Scotland) Regulations 1992 (Edinburgh, The Scottish Office, 1996).

(H) Dunn Ch7

25/1/00

1:42 pm

Page 101

The Regulation of Charities in Scotland 101 1985 (Audit Exemption) Regulations 1994, SI 1994 No 1935, and it is interesting to note that charitable companies were not included in the further deregulatory measures introduced recently by the Companies Act 1985 (Audit Exemption) (Amendment) Regulations 1997, SI 1997 No 936, which provide that companies other than those with charitable status do not require an annual audit if their income is under £350,000. Accountancy bodies expressed fears that unscrupulous charity managers might elect for incorporation expressly in order to avoid external scrutiny. The point often made in favour of greater scrutiny of charity accounts is that charities receive much of their income from public money, as well as enjoying favourable tax treatment. Charities argue, however, that the accounting cost involved in the review process places them at an unfair disadvantage when competing for service contracts with other, non-charitable, companies. While the accounting requirements for incorporated charities are uniform throughout the UK since they are governed by the UK-wide Companies Acts, there are significant differences in the accounting thresholds for unincorporated charities north and south of the border. The current accounting regulations for unincorporated charities in England and Wales require an independent examination for those with an income between £10,000 and £250,000, and a “professional” audit is required only where income exceeds £250,000, on a par with incorporated charities. The absence of a body in Scotland where charity accounts must be lodged on an annual basis and which is subject to regular monitoring is one of the reasons given for retaining more rigorous accounting provisions for unincorporated Scottish charities, and this argument certainly has its merits. The difference between the requirements for unincorporated and incorporated Scottish charities is perhaps more difficult to justify. The clear distinction drawn between charitable and non-charitable companies in the Companies Act 1985 (Audit Exemption) (Amendment) Regulations 1997 underlines the fact that the regulation of charities is determined not only by legislation which has this specific aim (such as Part I of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990 and the Charities Acts 1992 and 1993 in England and Wales), but also by the legal form which they choose to adopt. I have jointly argued elsewhere that there should be a standard accounting regime for Scottish charities.48 This would mean that changes in legislation affecting specific legal forms would not impact on the accounting regime for charities, thus avoiding the cost and inconvenience of making changes imposed by other (non-charity) legislation.

48 C. R. Barker, A. Belcher and S. R. Cross, “Scottish Charities and Governance” (1997) 3 Juridical Review 176.

(H) Dunn Ch7

25/1/00

1:42 pm

Page 102

102 Christine R. Barker

REGULATORY FUNCTION OF EXTERNAL EXAMINER

The Accounting Regulations made under the 1990 Act impose a duty on the auditor or independent examiner to consider whether the accounts have been properly prepared from the charity’s records and whether the information given in the charity’s report is consistent with the accounts. The report by the auditor or independent examiner must record any shortcomings, including a failure to obtain all the information and explanation required. The regulations for England and Wales go further than this and require auditors to write to the Charity Commissioners regarding any matters the auditor or external examiner has reasonable cause to believe are of material significance to the functions of the Commissioners under section 8 (the general power to institute enquiries) or section 18 (the power to act for the protection of charities) of the Charities Act 1993. This raises the question of the precise regulatory role of the auditor or independent examiner. The provisions of the English accounting regulations imply that the person appointed to this role will need to consider whether trustees are fulfilling their duties and responsibilities and whether there have been any breaches of trust which may jeopardise the charity’s funds. In this context it is interesting to note that in at least one of the court cases brought by the Scottish Charities Office it was the accountant who raised the alarm.49 Auditors and external examiners clearly need to ask themselves to whom their principal duty of care is owed, whether to their client or to the general public in the form of the relevant regulatory agency.

INTERNAL REGULATORY STRUCTURE

Each charity should, of course, have its own regulatory structure in the form of a management committee, board of trustees or equivalent, i.e. persons who are in overall control of the charity. Indeed, the 1990 Act places ultimate responsibility for running a Scottish charity on those “concerned in management or control”. These persons are not defined in the 1990 Act, but would certainly include office bearers, executive committee members, company directors, trustees and, in certain circumstances, professional advisers (for example, where the professional adviser has the responsibility for a charity’s investments). The persons concerned in the management or control of a Scottish charity are not only responsible for ensuring that proper accounting records are kept, and for appointing (and removing) auditors and independent examiners, but must also approve and sign the accounts. It is they, and not the auditor or independent examiner, who have ultimate responsible for the accounts. Fund-raising 49

Lord Advocate v. The Care for People Appeal, unreported, First Interlocutor, 14 Sept 1994.

(H) Dunn Ch7

25/1/00

1:42 pm

Page 103

The Regulation of Charities in Scotland 103 arrangements, whatever their nature, are likewise the responsibility of those in management or control of Scottish charities and, as was demonstrated in the case of The Leukaemia and Cancer Children’s Fund, noted above,50 such arrangements require careful handling.

MEMBERS OF THE PUBLIC

The role of members of the public in regulating charities via their entitlement to receive copies of a Scottish charity’s explanatory document (i.e. its trust deed or other constituting document) and its latest set of accounts under sections 1(4) and 5(7) of the Act is potentially very significant. This entitlement means that members of the public can check the purposes and financial viability of a charity to which they may wish to make a donation or which has aroused their suspicions in some respect. The absence of an obligation to file accounts centrally increases the importance of this provision as far as Scottish charities are concerned. Failure to comply with such requests within a month can result in various legal measures being enacted by the court, on application by the Lord Advocate, including interdict of the charity concerned and any person concerned in its management or control.51 Although there is a similar legislative provision in the charity legislation for England and Wales (where charities are, however, given two months to comply), the ability of members of the public to obtain copies of accounts from a central source, i.e. the Charity Commission, upon payment of a nominal charge, means that members of the public in England and Wales can obtain them far more easily than is the case in Scotland, at least from those charities which lodge accounts with the Charity Commission. Another problem with this particular aspect of the regulation of Scottish charities is the question of the “reasonable charge” which may be made for supplying the relevant documents. As noted above, the contact for the charity is often a firm of solicitors or accountants, a number of which have made charges based on the normal feeing structure of their firm for time spent locating and copying the documents concerned. The 1990 Act states that a “reasonable charge in respect of copying and postage”52 may be made, and it is difficult to see how some of the substantial sums which have been requested in some instances can be justified. Many firms do, of course, handle large numbers of charities and it may take some time to locate the relevant documents, but the legislation does not appear to justify passing on the cost to a member of the public making a request under the terms of the 1990 Act. The alternative, if professional costs are to be met, would be for the firms concerned to pass on the extra cost to the charities they represent. This they are reluctant to do. It does, 50 51 52

Supra n.31. 1990 Act, ss.1(6) and 5(13). Ss.1(4) and 5(7).

(H) Dunn Ch7

25/1/00

1:42 pm

Page 104

104 Christine R. Barker however, undermine the concept of public accountability if the public are thereby deterred from pursuing requests for documents to which they are legally entitled. (The Kemp Report’s recommendation that there should be a Register of Scottish Charities similar to that maintained by the Charity Commission which would be made available to the public by various methods, including the Internet, would certainly address many of these problems. The assumption being that the Register would be government funded and only nominal charges, if any, would be made.)

CONCLUSION

The regulatory system for Scottish charities is both complex and multi-faceted, with various organisations and persons being responsible for discrete areas of regulation. As noted above, in addition to the principal legislation, Scottish charities also need to comply with the specific requirements of their own legal form, which adds a further layer of complexity. One of the suggestions made by the Deakin Report for English charities was the creation of a new legal form which would provide, inter alia, a legal personality and limited liability for trustees53 and which would be based on the single criterion of public benefit.54 This is something which is currently under review by Jean Warburton,55 together with the Charity Law Association and the National Council of Voluntary Organisations (NCVO), in conjunction with the Charity Commissioners for England and Wales. We await the results of their deliberations with interest. The Deakin recommendation was endorsed by the Kemp Commission in Scotland, which felt that it could be adapted for Scottish charities, and it is a question which the CLRU is also considering in the context of its comparative studies, in particular with the legal systems in France and Germany. Both Commissions recommend, however, that this new legal form should, initially at least, be optional and this does, of course, incur the risk that, instead of solving the problem, it would simply add another option to the list of legal forms available. Clearly there would need to be substantial incentives for adopting a legal form of this kind. As far as the current Scottish legislation is concerned, the measures introduced by the 1990 Act have now been in force for several years (since 1992), sufficient time for its practical effects to be evaluated, and the CLRU has been evaluating the effectiveness of the legislation on behalf of the Scottish Office. As part of this exercise the CLRU conducted a major survey of Scottish charities in 53

Supra n.7, paras 3.4.2–3.4.3. Supra n.7, para 3.2.6. 55 Reader in Law, Charity Law Unit, University of Liverpool, and part-time Charity Commissioner. 54

(H) Dunn Ch7

25/1/00

1:42 pm

Page 105

The Regulation of Charities in Scotland 105 order to assess the views of those to whom the legislation is directed, and it has also sought the views of the public officials charged with implementing the regulatory measures, as well as those of professional advisers and umbrella organisations. Our report is expected to be published in the latter part of 1999.

(H) Dunn Ch7

25/1/00

1:42 pm

Page 106

(I) Dunn Ch8

25/1/00

1:43 pm

Page 107

8

The Privatisation of Social Housing: Capture and Commercialisation of a Voluntary Sector CHRIS HANDY

INTRODUCTION

Since the late 1980s social housing has seen unprecedented change. Along with other welfare sectors it has been subjected to a barrage of radical measures which have opened up the sector to competitive forces. The social housing sector comprises local authority housing and housing associations, the latter recently regarded as registered social landlords by statute (the Housing Act 1996 (HA)). Most significantly the public housing sector has opened up to change of ownership through various sales initiatives, including Right to Buy, Rents to Mortgage and Large Scale Voluntary Transfers, change of management through CCT, competitive bench-marking through the publication of performance information, ring-fencing of Housing Revenue Accounts constraining expenditure and central government-imposed standards on customer involvement and satisfaction, including the Right to Manage. In parallel, housing associations, increasingly important providers of social housing, have also witnessed significant change. A number of the measures applying to the public housing sector have also applied to housing associations, for example, the Right to Buy. The redesigned Housing Association Grant regime following the HA 1988 required associations to raise private funding to supplement public subsidy and, through the government’s value for money initiative operated by the Housing Corporation, grant rates for capital projects have fallen whilst associations compete with each other for scarcer public resources. The regime has recently intensified with the addition of what economists call “new entrants” to the social housing marketplace. These new entrants are large-scale voluntary transfer associations and local housing companies. Reinforcing this trend there has been a further revision of the subsidy regime to recognising the widening group of registered social landlords, to engender competition on rent levels due to the growing housing benefit bill and the

(I) Dunn Ch8

25/1/00

1:43 pm

Page 108

108 Chris Handy encouragement of Housing Plus initiatives.1 This whole process of radical upheaval has been achieved through the use of a relatively modest programme of legislative change. This essay briefly examines the changing legislative framework which applies to social housing, and in particular the voluntary housing sector, comments on the capture by the state of the voluntary housing sector and the process of change that government has imposed to commercialise the sector in line with political thinking on the liberalisation of the state. It goes on to comment on the width, nature and growth of permissive legislation, on potential legal and related policy developments for the sector and on the paucity of change directed at the Achilles heel of the voluntary housing sector, its accountability. The essay goes on to criticise the regime as a crude approach, which fails to address the unique nature of the voluntary sector, and the associated lost opportunities.

BACKGROUND TO THE VOLUNTARY HOUSING SECTOR : STATE ADOPTION ?

Housing associations were effectively adopted by the State in 1974, although they had been used by government prior to that date in connection with various housing policy initiatives. The HA 1974 introduced the notion of Housing Association Grant, partly to aid in the renewal of General Improvement and Housing Action Areas. The first measures to regulate the section were introduced when the Housing Corporation’s role was extended to cover the registration of housing associations, including some basic policing. The role of the Corporation has been strengthened by each successive Act, but particularly by the Housing Acts of 1980, 1988 and 1996. The last mentioned granted the Corporation wider powers over the regulation of registered social landlords, and removed its role in promoting the housing association sector, a role it was first given in the HA 1964 and which has sat increasingly uneasily alongside its policing role. The extension of the Housing Corporation’s regulatory powers and the pressure on associations to behave like private sector organisations in raising private-sector finance and in competing against each other for government funding generates a combination of a liberated market-place and a stifling regulatory claustrophobia. This liberalisation, according to the language of privatisation, ensures competition and the injection of private-sector funding.2 Indeed in this latter respect the housing association movement has been particularly successful, raising almost £4 billion between 1988 and 1997 to supplement government 1 See C. Handy and J. Alder, “The Wider Role of Housing Associations” [1998] The Journal of Housing Law 133. 2 See generally C. Veljanovski, Selling the State (London, Weidenfeld, 1989); M. Bishop, J. Kay and C. Major, Privatisation and Economic Performance (Oxford, OUP, 1994); A. Dunsire, K. Hartley and D. Parker, “Organisational Status and Performance” (1991) 69 Public Administration 21; N. Flynn, Public Sector Management (London, Harvester Wheatsheaf, 1993).

(I) Dunn Ch8

25/1/00

1:43 pm

Page 109

The Privatisation of Social Housing 109 subsidies to regenerate run-down housing and build new homes for rent and for low-cost sale. The very success of the movement may have brought about the reduction in government subsidy, an annual figure which has reduced from a peak of £2.2 billion in 1992 to a little over £600 million during 1998, with similar base-line projections planned for next few years by The Treasury.

INDEPENDENT OR AGENTS OF GOVERNMENT ?

We have not seen the outright privatisation of housing associations. Indeed they have always been formally independent of government. The basic structure of a housing association is one of private-law using the ordinary private law vehicles of companies, industrial and provident societies and trusts. Housing associations are voluntary-sector organisations in that they are governed by volunteers and some of the smaller associations still have voluntary staff. However, larger associations have paid staff with operational responsibility. This has generated a creeping managerialism, moving the sector away from its voluntary basis to a more commercial basis. Housing associations are not, therefore, strictly speaking, creatures of government. However, as argued above, they are independent agencies which have been adopted by the State so that in practice they are subordinates of central government. As regards their relationship with the Housing Corporation, itself an agent of the central government without policy-making independence, a housing association is dependent upon negotiation rather than the assertion of legal rights. The registration process, and in particular the registration criteria, tends, except for registered charities which have wider powers, to circumscribe the functions and powers of a social landlord, the new statutory term incorporating housing associations.3 Their assets have in the main been created using government funding. There are a handful of charitable trusts which have generated housing through their endowment funds, otherwise government funding has been pivotal in developing the properties owned and managed by the sector. Housing Association Grant (now Social Housing Grant), the main subsidy available to the sector, effectively acts as a charge against an association’s assets but subordinated to other forms of funding so as to enable private finance to be raised which would not be available unless associations could offer financial institutions a first charge. Thus the subsidy, which has built up the sector to its present position of owning some 5 per cent of the nation’s housing stock, also acts as a stranglehold. In this sense the sector is not independent of government; it is used as an instrument or part of the machinery of government. Housing associations can, therefore, be seen as an example of sector capture by the State. The Housing Corporation possesses comprehensive regulatory powers to direct the activities of registered social landlords including 3

S.2 of the HA 1996.

(I) Dunn Ch8

25/1/00

1:43 pm

Page 110

110 Chris Handy control over the disposal of and charges over assets, and control over the membership of governing bodies.4 In winning new allocations of subsidy associations must meet government housing priorities. A good example of this is that there is set in each annual bidding round a target for the creation of low-cost housing for sale through the shared ownership, do-it-yourself shared ownership, improvement for sale, tenant incentive and voluntary purchase initiatives, these amounting to a raft of measures to entice people into owner occupation. However, in more recent years local authorities as the strategic housing authorities have had more say in setting local priorities. What freedoms associations experience are by virtue of permission of the Corporation and are at an operational level, although the Corporation takes an increasing interest in operational matters. An example is guidance the Corporation issued last year to associations giving guarded warning about letting accommodation to asylum-seekers and stating that associations were only able to let accommodation on a permanent basis, denying lettings to the statutory homeless who can now only be housed on a temporary basis.5 However, in practice this has since been relaxed a little. Housing Corporation rent limits6 are also a considerable fetter on the freedom of registered social landlords. Housing associations are regarded by some as “quangos”, non-governmental bodies. Indeed Lord Nolan examined the governance and accountability of housing associations in his second enquiry, along with schools and other agencies which had delegated budgets and powers.7 He in the main concluded that associations were independent of government, although high standards of probity should be achieved since they were in receipt of substantial public funding. Alder and Handy argue8 that associations fall into the confusing middle ground between public and private bodies, whose basic structure is private, but who act wholly or partly for public purposes and are regulated by central government. Whether a housing association is subject to public or private law depends upon the context and nature of activity under scrutiny. The courts have long regarded eviction decisions taken by housing associations to be private law based upon the view that the decision flows out of the ordinary law of landlord and tenant.9 The particular position of housing associations has not been tested in other respects. We can, however, look at cases in other sectors to throw some light on the position, although we must bear in mind that a body can be public for some 4

HA 1986, ss.1–50, Sched. I. See HC Circulars, and s.188 of the HA 1996. 6 Currently Retail Price Index + 1. 7 Second Report into Public Sector Life (London, HMSO, 1995). 8 J. Alder and C. Handy, Housing Associations: The Law of Registered Social Landlords (London, Sweet and Maxwell, 1997). 9 Peabody Housing Association v. Greene (1978) 38 P&CR 644 but cf R. v. Takeover Panel, ex parte Datafin Plc [1987] 2 QB 815, which takes a broader view, saying that the source of a particular power is only one factor and that the backing of or connection with government by the particular power is a further key factor, alongside the nature of the power in question and whether it derives from contract or other form of consent. 5

(I) Dunn Ch8

25/1/00

1:43 pm

Page 111

The Privatisation of Social Housing 111 purposes and not others. Under the general law there are two important contexts which are important in determining whether a housing association is subject to private or public law. The first is whether its decisions are subject to judicial review under section 31 of the Supreme Court Act 1981 and Rules of the Supreme Court (RSC) Order 53, taking into account whether the decision in question passes the “consensual test” outlined in R. v. Takeover Panel, ex parte Datafin Plc.10 A housing association fails this test since it has no powers other than powers conferred consensually by contract.11 The second context is whether a housing association is a public authority under European Union law under directives concerning public procurement, an area which is doubtful in the context of a housing association.12 Other contexts important in the future will be whether housing associations, and indeed other voluntary bodies, are public authorities for the purposes of the Human Rights Act 1998,13 and whether they are public authorities under the proposed Freedom of Information Act. Under clause 2 of the latter, the Secretary of State can designate which voluntary bodies are to count as public authorities. In the main then it is safe to assume that, at least for judicial review purposes, decisions of housing associations fall under private law, but this will depend upon the particular context and particular nature of the power in question.

INTENTIONS OF THE PRIVATISATION / COMMERCIALISATION REGIME

The White Paper published in 1987,14 and the related consultation paper on the future financing of the housing association, made it clear that government aimed to commercialise the sector. The government in its consultation paper said that it wanted: to enable and encourage associations to deliver their services in the most cost-effective manner to standards which represent value for money in meeting the needs of their tenants with minimum bureaucracy and maximum efficiency.

It similarly announced15 the intention that new developments by housing associations would be “funded by a mixture of grant and private finance”, stating that not only would that: make public money stretch further but the injection of market disciplines will itself lead to greater efficiency and make associations more independent and more 10

Ibid. But see the views expressed in R. v. Disciplinary Committee of the Jockey Club, ex parte Aga Khan [1993] 1 WLR 909 (Lord Hoffmann); cf R. v. West Kent Housing Association Ltd., ex parte Sevenoaks DC, 1994, Inside Housing, 28 October 1994 and R. v. Legal Aid Board, ex parte Donn and Co. [1996] 3 All ER 1 emphasising public importance and public funding. 12 See Alder and Handy, supra n.8, at 30, for a more detailed discussion. 13 See s.6 which refers to a body some of whose functions are of a public nature. 14 Housing: The Government’s Proposals, Cm 214 (London, HMSO, 1987), para 4.4. 15 Ibid., para 7. 11

(I) Dunn Ch8

25/1/00

1:43 pm

Page 112

112 Chris Handy responsible for the quality and effectiveness of their investment decisions and the competence of their management.

To ensure this was so, the government announced that deficit grants previously payable on revenue deficits would no longer be payable for new mixed funded projects. Capital grants would be at fixed rates so that associations would “bear their proper share of the risk of development”.16 The government was concerned that rents were too low within the sector to ensure an adequate return. Its White Paper commented that associations were heavily dependent on the Exchequer for financial support because the “fair rents” determined by the Rent Officer were “only sufficient to cover a small part of the costs of new developments or refurbishments”.17 It went on to comment about experiments by associations in using assured private-sector style tenancies and index-linked and low-start forms of finance with less public-sector and increased private-sector involvement. It said that these initiatives improved efficiency and lowered public resources to be used more effectively, saying that for: new lettings all housing associations will let on an assured tenancy basis or on a shorthold basis in the same way as the private rented sector. This should give them the essential freedom and flexibility in setting their rents to enable them to meet the requirements of private sector finance instead of relying on funding from public sources.18

The object it went on to say was: to finance an increasing part of the programme on an index-linked or low start basis, with a major share of schemes funded by private finance.19

Introducing private finance and related market disciplines, stretching public subsidy and increased efficiency were, therefore, key objectives under the new regime. Consequently, the new regime was set out in broad terms in the HA 1988 under the revised arrangements for Housing Association Grant, leaving much of the detail to be determined by the Secretary of State for the Environment.20 Underpinning these measures to create a quasi-market has been an extension of the Corporation’s regulatory powers. It now oversees the registration of all social landlords as well as housing associations.21 Chapter IV of the HA 1996 restates the Corporation’s powers but also strengthens them to include determination of standards of performance22 and the publication of information on levels of performance of registered social landlords.23 In addition the 16

Housing: The Government’s Proposals, Cm 214 (London, HMSO, 1987), para 8. Ibid., para 4.4. Ibid., para 4.5. 19 Ibid., para 4.7. 20 See the HA 1988, ss.50–53 and the Housing Association Grant for Eligible Housing Activities Determination 1989, now both repealed. 21 HA 1996, ss.1–7. 22 S.34. 23 S.35. 17 18

(I) Dunn Ch8

25/1/00

1:43 pm

Page 113

The Privatisation of Social Housing 113 Corporation has increased powers where a registered social landlord gets into difficulty.24

KEY PRIVATISATION AND COMMERCIALISATION MEASURES

The privatisation of public agencies or agencies undertaking tasks on behalf of the State can be brought about by a wide range of measures. At the hard end of the spectrum is the outright sale of public assets, for example, the sale of shares in British Gas. In the public housing sector the sale of assets has been through the Right to Buy and Large Scale Voluntary Transfer initiatives, the latter bolstered for a time by the Estate Renewal Challenge Fund. The Right to Buy initiative when introduced by the HA 1980 also applied to non-charitable housing associations. Since the majority of housing associations are charitable, the initiative has had a limited impact upon the sector compared to significant loss of homes to the public housing sector proper. Interestingly the Large Scale Voluntary Transfer initiative has led to a significant expansion of the housing association sector, since most of the housing was transferred to newly established, and to a more limited extent existing, housing associations, swelling the sector by more than a quarter of a million homes. Previous local authority tenants whose homes were transferred have kept the Right to Buy. At the soft end of the spectrum are a range of measures used to commercialise a sector or introduce market-like conditions. An example is the purchaser/supplier split in the health sector. A market-like regime, is therefore introduced at this end of the scale.25 Housing associations have themselves been subjected to a range of hard and soft measures, from the sale of homes under Right to Buy and Right to Acquire to the creation of an internal market and exposure to the disciplines of private financial institutions. This has been achieved through changes in statutory provisions, extensions to the Corporation’s regulatory powers and significant change to administrative arrangements. The key measure in this respect was the introduction of new grant provisions in the HA 1988 which enabled the Corporation, with consent of the Secretary of State and the Treasury, to make provision for payment and administration of Housing Association Grant.26 This change created substantial discretion for the Corporation, which has been exercised wholly in accordance with government policy. Paragraph 7 of the Housing Association Grant for Eligible Housing Activities Determination 1989 indicated that grant could be approved having regard to: (a) housing needs to be met and their priority within the resources available to the Corporation; and (b) value for money and effectiveness of the investment taking into 24

Ss.39–50. J. Le Grand and W. Bartlett (ed.), Quasi-Markets and the Social Policy (Basingstoke, Macmillan, 1993). 26 See now HA 1996, s.18. 25

(I) Dunn Ch8

25/1/00

1:43 pm

Page 114

114 Chris Handy account the local and type of accommodation to be provided; and (c) the economy, efficiency and effectiveness of the housing association concerned.

The Determination introduced the concept of “value for money” which has been the driving force for introducing competition to the sector. Value for money was interpreted by the Corporation as the cost of public subsidy and has led to associations reducing the public subsidy element of new housing investment projects in order to receive allocations of public subsidy, in the early years by increasing rents and more recently by injecting their own resources into projects to make them cost less to the public purse than other associations. In addition associations have raised funding from financial institutions and the finance markets and are subject to the rigours of the financial sector in meeting loan covenants, including requirements concerning gearing, interest cover and annual surpluses. Social Housing Grant works in a similar vein to its predecessor, but the definition of registered social landlords has been widened to include non-charitable companies. Indeed this intensification of competition by opening a sector to other competitors is a further privatisation mechanism that government has used in other sectors.27 Competition is a key aspect of government theory in liberalising a sector. It introduces a form of “economic Darwinism in which only the strong survive”.28 New entrants to a marketplace can increase competitive forces and in theory help to eliminate waste, bring down the overall cost of production for a sector. The extension of registered status to other social landlords, ostensibly local housing companies, is intended to open up the sector further. The sector competition has already increased as a result of the formation of large-scale voluntary transfer associations. The previous government was to go further than this in licensing private developers to receive Social Housing Grant but dropped these proposals as part of the HA 1996. Indeed the overall reduction of government funding to the sector may well help to create even further heat in the competitive process at work in the social housing sector. The appendix lists the measures applied to the voluntary housing sector having a privatisation or commercialisation effect.

PERMISSIVE LEGISLATION : THE RELENTLESS MARCH OF ADMINISTRATIVE LAW

Much of the legislation in relation to the sector is now permissive in the sense that it permits the Corporation to make detailed regulations about registration criteria,29 consent for the disposal of property,30 and grant regime,31 determin27 J. Vickers, Concepts of Competition, Oxford Economic Papers, Volume 47 (Oxford, Oxford University Press, 1995). 28 D. Wilson, A Strategy of Change (London, Routledge, 1992). 29 S.5. 30 S.9(2). 31 S.18(2).

(I) Dunn Ch8

25/1/00

1:43 pm

Page 115

The Privatisation of Social Housing 115 ing standards of performance32 and guidance on matters of housing management.33 Determinations on accounting and audit requirements, social housing grant and their recovery require approval of the Secretary of State.34 In other instances the Corporation would seem to have unfettered discretion to make determinations but subject to consultation with bodies representative of registered social landlords.35 This legislative approach ensures that law in the sector is largely administrative in character. Challenge has to be by way of judicial review, an expensive and privileged route to gain justice. There are very few legislative measures providing rights of appeal.36 This puts the law into more shadowy territory, with little by way of statutory rights of challenge spelled out. As more and more regulatory regimes are introduced and extended in different sectors, decisions are hidden amidst public obligation and largesse, increasing the need for probity and Nolan’s principles of public life to permeate all aspects of the public sector.

INTRODUCING COMPETITION : THE LEARNING CURVE

As discussed, the housing association regulator, the Housing Corporation, has since 1989 introduced competitive market-like conditions for the sector. Initially this was by way of encouraging housing associations to raise private finance to supplement public subsidy. Rents were seen as too low in the housing association and public housing sectors; increases in rent would help to fund greater elements of private finance, especially using new forms of finance which stretched the available rent further by deferring interest until later in the life of the loan, so that the loan repayment profile matched the rent profile over say a 30-year repayment period. Later, through the value for money initiative, it set associations against one another in bidding for grant during the annual scramble for a share of its Approved Development Programme. More recently with grant rates for the scheme tumbling due to competition between associations, and rents pushing relentlessly upwards to take the strain, the Corporation has introduced two further measures. The first, two years ago, was to take into account rent levels as well as grant rates in calculating a scheme’s Total Public Subsidy—the combination of capital and revenue subsidies—and, in 1998, the corporation introduced rent-capping, a form of rent control, by insisting that associations limit further rent increases on the whole of their stock to RPI plus no more than 1 per cent, thereby placing a limit on the growth of the government’s swelling housing benefit bill.

32 33 34 35 36

S.35. S.36. S.54. S.53. See, e.g., s.5 of the HA 1996, on registration.

(I) Dunn Ch8

25/1/00

1:43 pm

Page 116

116 Chris Handy This process can be seen as a learning curve, associations being just a little ahead of the game, knowing what areas of the process could be exploited, whilst the Housing Corporation had to learn to catch up, plugging any apparent gaps, not always effectively. There is now a regime which sets associations against one another on the basis of grant rates as well as rent levels, apparently for both the lower the better, whilst still meeting housing need as defined locally by the relevant local authority. The introduction of the new regime can be seen to address different objectives over the period since its advent in 1989, initially the creation of circumstances to attract private finance into the sector, later competitive mechanisms to reduce the grant rate for individual schemes and lastly the capping of total public subsidy to limit the growth of the housing benefit bill and the introduction of additional measures such as publication of performance indicators to improve efficiency of individual associations. Associations have, matching this ratcheted refinement, exploited the allocation process, initially through rent auctioning, by quality manipulation, then by using their own resources from unfettered equity and free reserves and paying for this via rent pooling by letting existing tenants pay towards the rent subsidy for new tenants—something local authorities did when they last developed new homes. The Housing Corporation refinements have at times accidentally hit the mark.

CONCLUSION

The debate on the shape of the social housing sector has concentrated on resources and largely excluded accountability of the sector. Accountability seems to be restricted to customers and the Housing Corporation with little regard for a democratic framework. The sector has constitutionally inherent poor accountability. The sector, to corrupt Larkin, has “a hunger in itself to be more serious”. It therefore commissioned its own inquiry undertaken by Sir Roy Hancock, but findings have not been enshrined in statute. The future dilemma for public housing generally, given the strict adherence to the Public Sector Borrowing Requirement rules within Britain, is how to inject badly needed resources whilst retaining a democratically accountable framework. There are a number of other key issues to address in assessing the effectiveness of the privatisation measures introduced to the housing association sector. First, effectiveness. The regime has been largely successful in bringing in private finance and stretching capital subsidy, and therefore increasing the number of homes produced from the available Approved Development Programme, but the regime has been used as a blunt instrument, an ideological bludgeon, not really geared towards unique aspects of sector, and therefore significant opportunities have been missed. One opportunity was with regard to rents. There was an unwillingness in the early stages of the regime to attempt to define the notion of affordability. This is probably due to the government wanting to see rents

(I) Dunn Ch8

25/1/00

1:43 pm

Page 117

The Privatisation of Social Housing 117 increase (definitions of affordability may well have had a limiting effect), although the National Housing Federation (NHF) did make earnest attempts to persuade a reluctant government to adopt its ideas. Thus over time there was an increasing housing benefit bill the control of which in the end had to act as a form of restraint. The regime also resulted in damaging the social objectives of associations, creating dependency, instead of liberating the poor and disadvantaged. The system has worked to trap the poor because of increased rent levels of new stock and existing housing association stock. Arguably the only people who could afford to pay the rents were those in receipt of benefits, which further restricted the pool of people housing associations were helping—hence the sort of difficulties and fears set out by Page in the two reports on building and developing communities.37 Another opportunity missed concerned hidden contributions to competition. Associations were able apparently to reduce the amount of grant needed on schemes by making contributions from reserves and using unfettered equity to raise capital. Also, the competitive process has been almost entirely developmentled, whilst partially ignoring the investment needs of existing stock and storing up future investment needs. However, by comparison with the investment need in the public sector proper, due to starvation of funding, housing association reinvestment needs in existing stock are but a Sunday school picnic. Again, the quality of new and investment in existing housing stock have been factors housing associations have been able to manipulate. Certainly in the early years of the regime there were indications that space standards fell within the sector, showing that quality was a factor which was affected. The second key issue to address is that of efficiency. Although a clear intention of government, efficiency has not been directly tackled by the competitive regime. Rent-capping measures brought in to limit growth in the housing benefit bill may well work to generate improved efficiency. To date, the system has not rewarded the operationally efficient. Many of those associations successfully navigating the allocations process for new development are the least efficient operators. The financially strong are rewarded rather than the operationally efficient, although some operationally efficient associations have made progress over the last few years in winning bigger shares of available resources. The third issue is democratic accountability. The reform within the sector has largely ignored accountability. The movement itself has done much to address this imbalance by setting out NHF guidance.38 Finally, there is the issue of complete rather than fragmented competition. What should the targets have been to ensure a genuine competitive process, as well as cost to the public purse, quality, rents at levels avoiding dependency, tenant involvement, control, democratic and other forms of accountability, 37 D. Page, Building Communities (York, Joseph Rowntree Foundation, 1993); Building Communities (Teddington, Sutton Hastoe Housing Association, 1994). 38 Competence and Accountability (London, NHF, 1995).

(I) Dunn Ch8

25/1/00

1:43 pm

Page 118

118 Chris Handy efficiency, good effective management and maintenance of existing resources and added value? The system should have been designed to generate competition against all of these objectives. Otherwise the process will work to exclude the essential and manipulate the measurable. Despite these difficulties with the lack of sophistication of the operating regime, the social housing sector does seem to have a bright future, if the analysis is simply based upon unmet and growing housing need. There is an enormous pressure on the generation of additional suitable homes. With 30 per cent of the country dependent on social housing, some one million homes will be needed by 2016, very near to the generally accepted estimate of 100,000 new homes per year. At some point the political reality of this need will become undeniably apparent, so much so that further investment must follow. Perhaps as this future role unfolds issues of accountability, efficiency, state influence and independence, rent levels and poverty resolution will be more fully addressed.

(I) Dunn Ch8

25/1/00

1:43 pm

Page 119

The Privatisation of Social Housing 119 Appendix: Privatisation/Commercialisation Measure for Voluntary Housing Sector Legislative Measure

Secondary Measures and Guidance

Assured Tenancies (ss.34–35 of the HA 1988) Tenants’ Guarantees and Guidance on Housing Management (ss.36–38 of the HA 1996)

Impact and Relevance All new tenancies since 15 Jan 1989 have been on the private sector assured basis

Code of practice on Tenure, HC Circular 36/96

RTB and Right to Acquire (ss.118–120 of the HA 1985 and ss.16–17 of the HA 1996)

Assured tenants given similar rights as those in the Charter for secure tenants and detailed guidance to ensure compliance against performance standards Some 30,000 properties lost to the sector under initiative by non-charitable associations, extended to new letters since 1996 Act

HAG/SHG (ss.50–55 of the HA 1988 and s.18–19 of the HA 1996)

Social Housing Grant (Capital) General Determination 1997, Recovery of Housing Grant (Extension of powers) General Determination 1997

Altered regime encourages private finance, bidding mechanism under value for money introduced market like conditions

Performance Standards (ss.34–35)

Performance Standards for Housing Associations, HC Circular 22/96

A combination of compliance monitoring and publication of comparative performance

Registration (ss.1–7 of the HA 1996)

De-registration Criteria for Registered Social Landlords, HC Circular 38/96

Access to public funding and fiscal privileges, but also control and regulation

Regulation and Control (ss.30–33 of the HA 1996)

The Accounting Requirements for Registered Social Landlords (General Determination 1997) Payments and Benefits Guidance Schedule 1

Main mechanism for general control and supervision

Disposals Consent (ss.8–15 of the HA 1996)

Disposals: the General Consent 1996

Control over disposals, including taking on loans— some covered by general consents

Taxation of non-charitable associations (s.54 of the HA 1988)

HC Circular 47/96 indicating Ministerial discretion to award tax relief grants would discontinue

Discretionary grant to noncharitable associations ceased treating them more like private sector agencies

(I) Dunn Ch8

25/1/00

1:43 pm

Page 120

(J) Dunn Ch9

25/1/00

1:44 pm

Page 123

9

Paying the Piper: The “Contract Culture” as Dependency Culture for Charities? DEBRA MORRIS

INTRODUCTION

There has been a gradual change, accelerated in the 1990s, in the state funding of charities providing social welfare services. There is now far less reliance on grants and instead, many social welfare charities enter into contracts, often with local authorities,1 in which the charities agree to provide services in exchange for payment. As well as this shift from grants to contracts, there has also been a move towards increased use of charities to deliver core welfare services, as the role of local authorities, especially in the field of community care, has been shifted from the traditional one of provider to that of contractor.2 This means that charities are providing more core welfare services and are being funded to provide such services by contract, rather than grant. The implementation of the National Health Service and Community Care Act 1990 exemplifies this policy in practice, with the transfer of both funds and responsibility from central to local government and the latter’s increasing withdrawal from the direct provision of care. The authorities are strategically responsible for assessing need, planning and purchasing services, and then monitoring delivery. In many instances in the “mixed economy of welfare”,3 where welfare provision should properly comprise a mixture of service providers, charities are now the providers of services under detailed service delivery agreements. This new basis of funding of social welfare has been described as the “contract culture” and this new climate is giving rise to a fundamental shift in the values and culture of the charitable sector as a whole. 1 Charities also supply services, under contract, to other bodies, including health authorities, training and enterprise councils, trust hospitals and even private companies. Throughout this essay, the purchaser will typically be referred to as the local authority. 2 The authority’s role is also sometimes described as that of “purchaser”, “enabler”, “procurer” or “commissioner”. 3 Heralded in the White Paper on Community Care, Caring for People: Community Care in the Next Decade and Beyond, Cm 849 (London, HMSO, 1989).

(J) Dunn Ch9

25/1/00

1:44 pm

Page 124

124 Debra Morris Whilst acknowledging the possible gains that may be associated with the “contract culture” (for example, in terms of increased security of funding, with its consequent impact on staff and service users, and greater clarity of role) this essay will focus on the issue of independence and consider, largely from the charities’ perspective, the extent to which charities’ autonomy has been threatened. As well as referring to some of the existing literature relating to the likely impact of contracting on charities, this essay will draw on early findings from an empirical study being undertaken at the Charity Law Unit, University of Liverpool,4 to examine the legal implications for charities entering into the “contract culture” by reference to their practical experience.5 Some of the findings from this research support the view put forward in this essay that the “contract culture” is partly responsible for the erosion of the independence of charities. In October 1998, the Charity Commission published a leaflet on charities and contracts,6 highlighting both legal and practical issues that charities should take into account before entering into contracts with public bodies to provide services.7 Publication of the leaflet will doubtless be welcomed, particularly by smaller charities which are finding themselves plunged into the “contract culture” without much support. The Commission warns8: some charities feel that entering into contracts with public bodies can lead to charities losing their independence . . . Trustees should be wary of allowing the priorities of public bodies to exert an influence over their charity’s long-term policies and direction.

Before proceeding to discuss whether these fears are well founded, the next section will argue that the new funding environment is not an entirely novel phenomenon for charities, but rather the product of a process of formalisation.

The Contract: A Cultural Change or Just a Drift? Charities and contracts are not such unfamiliar bed-fellows. Whelan9 traces the origins of the “contract culture” to the nineteenth-century practice of charities caring for delinquent and neglected children in return for payment by the 4 The project, Charities, Contracts and Legal Restrictions, is funded by the Esmée Fairbairn Charitable Trust, and is subsequently referred to as the Charity Law Unit research. See now D. Morris, Charities and the Contract Culture: Partners or Contractors? Law and Practice in Conflict (Liverpool, Charity Law Unit, 1999). 5 The author would like to thank Vicky Whitehouse for her excellent input as research assistant on this project. 6 Charity Commission, Charities and Contracts, Leaflet CC37 (London, TSO, 1998). 7 See also J. Saunders, Mutual Obligations: NCVO’s Guide to Contracts with Public Bodies (London, NCVO, 1998). 8 Charity Commission, supra n.6, para 6. 9 R. Whelan, The Corrosion of Charity: From Moral Renewal To Contract Culture (London, Institute of Economic Affairs, 1996), 56.

(J) Dunn Ch9

25/1/00

1:44 pm

Page 125

The ‘Contract Culture’ as Dependency Culture for Charities? 125 State.10 Whilst this example may have been exceptional at that time, it is now becoming commonplace for charities to be paid in order to carry out duties which otherwise fall upon the State or upon the local authority. As government funding of charities grows, the pressure to ensure efficient delivery of services and to maintain accountability over public money also increases. Local authorities, as purchasers of services, will tie funds to the achievement of outcomes by setting out standards and performance targets in contracts. Some of these demands will relate to service specification and others to financial and reporting mechanisms. Quite often, services that charities had been previously providing in return for part of their grant aid are now being subjected to contracts. In the recent past, loosely defined grants with no strings attached have been comparatively rare. Even with what may be considered to be traditional grant aid, where charities are given money for their general purposes with freedom to define what those are, market values are creeping in. Recipients are now generally asked to provide information on funded projects in respect of particular performance indicators, so that the financial relationship between (what can still be called) donor and donee is being formalised. It should not be presumed that the distinction between grants and contracts is necessarily clear cut.11 The intention of the parties to create legally enforceable rights and responsibilities will make an agreement to provide services in exchange for payment into a legally binding contract.12 The label given to a particular funding arrangement is not conclusive.13 It may be crucial to ascertain the legal status of a relationship, since, taken to its logical conclusion, under the “contract culture” accountability for charities may mean being sued by local authority purchasers for breach of contract.14 Enhanced accountability on the part of charities is an inevitable consequence of contract funding. Increased accountability per se is advantageous for all parties: local authority funders can ensure and prove value for money; charities know what must be provided in exchange for their funding; and service users are clear as to their entitlement. Whilst acknowledging these positive aspects of accountability, this essay is concerned with the negative aspects, namely the dependency of the charity on the funder, that may be a by-product of the “contract culture”. Before turning to specific issues of dependency, the next section will consider broadly the extent to which the desire for accountability, inherent in contracts, necessarily threatens the autonomy of charities. 10 See also D. Owen’s account of the Foundling Hospital, which, in 1756, received a grant of £10,000 on condition that inter alia it opened up access to all infants under a certain age. The Hospital could not cope with the demand, which led to an unacceptably high mortality rate: English Philanthropy 1660–1960 (London, OUP, 1965) 52–7. 11 E.g., S. Osborne and P. Waterston, “Defining Contracts Between the State And Charitable Organisations in National Accounts” [1994] Voluntas 291. 12 See generally G. H. Treitel, The Law of Contract (10th edn., London, Sweet & Maxwell, 1999), chaps. 1–4. 13 Only 10% of the agreements under examination in the Charity Law Unit research were entitled “contract” and yet all appear to be contracts in law. 14 A more likely consequence where there is dissatisfaction is non-renewal of the contract.

(J) Dunn Ch9

25/1/00

1:44 pm

Page 126

126 Debra Morris

“Contract Culture”: Dependency Culture? It is a natural reaction to presume that the shift from grants to contracts will affect charities’ independence, and, to some extent, empirical data tend to back up this presumption. For example, evidence given to the Deakin Commission15 revealed that the substantial growth of the “contract culture” has raised the concern that government funding will have harmful effects on the independence and overall mission of charities. On this view, dependence on government may compromise some of the traditional values of the charitable sector, including its autonomy and distinctive qualities of pioneering, flexibility and advocacy. What is independent or innovative about a charitable sector that depends largely on local authority contracts to deliver essentially public services? There is an extreme view16 that charities can only be truly independent if they distance themselves entirely from state funding and rely wholly upon private philanthropy. In a debate in the House of Lords in March 1998 on the importance of the work of charities, Lord Ponsonby commented: the single most beneficial action [the government] could take would be to reverse the trend from unrestricted funding to restricted funding, and to encourage funders to give charities whose work they value the flexibility to allocate funding where it is needed most.17

However, it is argued by some that the emergence of the “contract culture” is beneficial in that it should serve to promote a more equal relationship between charities and local authority purchasers. Some charities welcome their enhanced status, gained by way of successfully negotiating and running a contract. Kumar,18 reporting on a survey of contracts in two large national charities, found that contracts “developed through dialogue rather than being imposed”. On the other hand, in March 1999,19 a new alliance of charities was formed in order to campaign for fair contracts.20 These charities claim that many are being bullied by authorities into accepting unfair contract provisions. Evidence is emerging from the Charity Law Unit research of charities spending several years 15 Meeting the Challenge of Change, Voluntary Action into the 21st Century: Report of the Commission on the Future of the Voluntary Sector (London, NCVO, 1996). 16 See, e.g., Whelan, supra n.9, where the author laments the decline of “Christian values” and the reduced emphasis on spiritual renewal in some Christian welfare charities and blames this, to some extent, upon the “contract culture”. 17 House of Lords Debate, 4 Mar 1998, Hansard, vol 586, col. 1236. 18 S. Kumar, Accountability in the Contract State (York, YPS, 1997). 19 Third Sector, 15 Apr 1999. 20 Albeit that N. Deakin and L. Gaster present emerging evidence from their case studies that the way individual contracts are negotiated is beginning to be more co-operative and less confrontational and legalistic: “Local Government and the Voluntary Sector: Who Needs Whom—Why and What For”, Paper to the third conference of the International Society for Third Sector Research, July 1998, Geneva, Switzerland.

(J) Dunn Ch9

25/1/00

1:44 pm

Page 127

The ‘Contract Culture’ as Dependency Culture for Charities? 127 negotiating one contract. Similarly, Russell et al. refer to one contract, worth only £3,000, which took eight months to conclude.21 For charities, time spent negotiating contracts with purchasers means less time providing services to beneficiaries. It is, however, too simplistic to regard the independence issue in such polarised terms. The “contract culture” appears to affect the distribution of power in different types of charities in different ways. Clearly, much depends upon the leverage that a charity is able to exert. This can be seen from the following four examples, all of which have emerged from the Charity Law Unit research. First, those in the strongest position include charities that possess monopoly power within their service area. Where charities are in a niche market, meeting needs that would otherwise not be met, local authorities are less likely to be in a position to influence the way in which a service is provided, or to whom it is provided. The relationship in this scenario between funder and provider will be one of interdependence because the local authority needs the services of the charity as much as the latter requires income. Secondly, charities with multiple sources of funds will, for a different reason, be in a similarly comfortable position, as they are not dependent on a single government source, and this may assist their negotiating position. Thirdly, with charities that provide services readily available elsewhere, the impact of contract funding will be more pronounced. Finally, a charity that becomes highly dependent on contract funding will be extremely vulnerable, especially if it is relying on one single contract, that may or may not be renewed at the whim of the purchaser. For example, the number of staff of such a charity may have increased to cope with the demands of the contract, but income and staffing levels cannot be maintained unless the contract continues. These four examples are not mutually exclusive, so a funding scenario could exist which involves several of these elements, again highlighting the divergent levels of dependency for different charities. The Charity Law Unit research, together with other studies, has identified inter alia the following consequences of charities’ dependence upon contractual funding, and these will form the focus of the remaining part of this essay. First, and most fundamentally, this dependence upon contractual funding may change the direction in which a charity is operating. Following a general consideration of the way in which local authority purchasers are “setting the agenda” and its legal implications, a number of particular changes in direction will be considered. These are changes to charities’ selection criteria, organisational structures and campaigning. The second major consequence of the “contract culture” may be that charities are increasingly contracting to provide their services in substitution for the State, often at an undervalue. The legal consequences of this phenomenon will be discussed before concluding remarks are made.

21 L. Russell, D. Scott and P. Wilding, Mixed Fortunes: The Funding of the Voluntary Sector (Manchester, University of Manchester, 1996), 7.

(J) Dunn Ch9

25/1/00

1:44 pm

Page 128

128 Debra Morris

SETTING THE AGENDA

Charities have been characterised by their ability to respond rapidly to needs and to mobilise voluntary effort around events which were unpredictable and often changing. This was perceived to be their strategic advantage over more bureaucratic and less flexible government departments. Studies are beginning to indicate that the increasing reliance of charities on contracts means increased intrusion into the general management and goal-setting processes of charities. Purchasers may require charities to undertake activities in a manner which encroaches upon their freedom to determine the direction of their own work. This has led to concern that charities may experience a general shift in their original service mission in the process of responding to government policy. Charity trustees are the people responsible under the charity’s governing document for controlling the management and administration of the charity, regardless of whether they are actually called “trustees”.22 Charity trustees should identify and be explicit about the needs that their charity is intending to meet, and then determine the best way to meet those needs. Yet, the studies indicate that, as funding becomes scarce, trustees may choose to pursue only those projects which will qualify for contract funding. It is hard to say “no” to people in need, and it can be tempting to accept money for purposes that are not central to charities’ goals. Charity trustees may have little choice other than to “follow the money”, by responding to the priorities set, not by themselves, but by local authority purchasers.23 This may lead to a dilution of a charity’s specific charitable objectives, as laid down in its governing document, even though it may still be carrying out general charitable purposes. Even if the provision of a service is in line with a charity’s specific goals, there is still a danger that contract requirements may change the modus operandi of a service-providing charity. Apparently, no detail is beyond intervention. For example, the Family Welfare Association reported in May 199324 that it had been asked by purchasers of a service to specify which brand of bath-scouring cream would be used. More fundamentally, at the same time, the National Schizophrenia Fellowship reported that it had withdrawn from a contract because the local authority purchaser wanted a hostel to have a strict behavioural regime. Under this scenario, charities’ priorities tend to become redefined as those which local authorities will fund, according to statutory priorities set by government. In a climate in which charities cannot afford to stand rigidly by their principles, there is pressure on charities to compromise. This flexibility may generally be beneficial. However, there is a danger that other programmes, 22 23 24

Charities Act 1993, s.97. See e.g., Russell et al., supra n.21, 37. NCVO News, May 1993.

(J) Dunn Ch9

25/1/00

1:44 pm

Page 129

The ‘Contract Culture’ as Dependency Culture for Charities? 129 founded in response to community needs, may be in jeopardy, as they are pushed into the background. Bemrose and MacKeith report from one charity25: We’re in danger of being seduced by lots of opportunities. They look very attractive on the surface, but before you know it, you’ve lost your original purpose.

LEGAL IMPLICATIONS

This “mission drift” can have legal implications. First, and most serious, fulfilment of a contract may require a charity to operate outside its objects. A second and related legal problem is that fulfilment of a contract may mean that a charity is not providing a public benefit. Finally, a charity may discover that it does not have the necessary powers to carry out the contract. Before discussing these three issues in turn, it should be noted that most charities take one of three legal structures: the trust; the unincorporated association; or the company. Each structure has its own terminology to describe the trustees.26 A charity in either of the first two forms does not have legal personality and its trustees must enter into contracts on its behalf. In all three structures, in order to retain charitable status, the funds must be applicable for charitable purposes only and there must be a sufficient element of public benefit in those purposes.27 All charity trustees are obliged to use charity funds for the specific purposes set out in the charity’s governing document28 and for no other purpose.29 With unincorporated charities, trustees are also under an obligation to use any trust powers that they may have in accordance with the terms of the trust.30 Any powers of a charitable company can generally only be exercised in furtherance of the objects of the company.31 A contract may specify that a charity should provide services for a beneficial class that is wider than the charity’s objects and, thus, beyond its powers.32 For example, a charitable housing association for the elderly of Liverpool which has acquired considerable expertise in housing management cannot enter into a contract to manage a housing development for the general public in Liverpool. Similarly, a charity with specific objects for the relief of poverty in Manchester, which has developed a very efficient and costeffective way of converting houses for the disabled, cannot, without the risk of 25 C. Bemrose and J. MacKeith, Partnerships for Progress: Good Practice in the Relationship Between Local Government and Voluntary Organisations (Bristol, The Policy Press, 1996). 26 See the text to n. 22, supra. 27 See e.g., Oppenheim v. Tobacco Securities Trust [1951] AC 297. 28 That is the trust deed, constitution, memorandum and articles of association, Scheme of the Charity Commission, conveyance, will or other document describing the charity’s purposes and, usually, how it is to be administered. 29 Att.-Gen. v. Brandreth (1842) 1 Y&C Cas 200. 30 Re Hay’s ST [1981] 3 All ER 786, 792 (Megarry VC). 31 Rosemary Simmons Memorial Housing Association Ltd. v. United Dominions Trust Ltd. [1987] 1 All ER 281; J. Warburton, “Unauthorised Acts by Charities” (1987) 2 Trust L&P 46. 32 For an unincorporated charity this would be in breach of trust and for an incorporated charity it would be ultra vires.

(J) Dunn Ch9

25/1/00

1:44 pm

Page 130

130 Debra Morris personal liability for the trustees, provide a similar service in Birmingham, even though this would also be a charitable purpose. A second and related legal problem is that compliance with contract terms may mean that a charity is not providing a public benefit. Benefit must be made available to the public or a sufficient section of the public and must not be restricted to private individuals.33 It follows that a charity cannot enter into a contract to supply goods or services which will not be available to the public. For example, a contract by a London mental health charity which restricts the charity to providing community care facilities to mental patients coming from one hospital, to the exclusion of other mental patients from other hospitals who have links with that city, would be problematic. The consequences of a charity entering into a contract which is outside its objects (either because the class of beneficiaries is wider than that stated in the charity’s specific governing documents, or because the class of beneficiaries is not a section of the public, as required under general charity law) are serious and affect both the charity trustees and the charity itself. First, as regards the charity trustees, in the case of an unincorporated charity, the contract entered into in breach of trust will be enforceable by the other contracting party against the trustees in their personal capacity. The trustees will also be personally liable if any breach of the contract occurs. Any monies received by the trustees under the contract will be held by them on trust for the charity on the usual basis that a trustee cannot benefit from his trust.34 If the charity is incorporated, an ultra vires contract will be void and unenforceable except in favour of a third party who gave full consideration and who did not know that the contract was outside the objects of the charity or who did not know at the time of entering the contract that the company was a charity.35 Any monies received by the charity or its directors36 will be held for the charitable objects of the company. The directors may also be liable in damages to the other contracting party for breach of warranty of authority in respect of the void contract.37 Secondly, in relation to the charity itself, if the unauthorised contract becomes a major part of the charity’s activities, the charity may be in danger of losing its charitable status, as it is no longer established for exclusively charitable purposes. If the activity outside the charity’s objects remains a limited part of its overall activities, charitable status will not be affected, but the court may restrain the unauthorised activities by injunction at the request of the AttorneyGeneral or, with the consent of the Charity Commission, at the request of any person interested in the charity.38 Thirdly, there are adverse tax consequences for charities which enter into an unauthorised contract. The contracted activity will probably be regarded for 33 34 35 36 37 38

William’s Trustees v. IRC [1947] AC 447. Boardman v. Phipps [1967] 2 AC 67. Charities Act 1993, s.65. Regal (Hastings) Ltd. v. Gulliver [1967] 2 AC 134. Firbank’s Executors v. Humphreys (1886) 18 QBD 54. Charities Act 1993, s.33. E.g., Baldry v. Feintuck [1972] 1 WLR 552.

(J) Dunn Ch9

25/1/00

1:44 pm

Page 131

The ‘Contract Culture’ as Dependency Culture for Charities? 131 tax purposes as a trade.39 Any profits will be liable to income tax under Schedule D, Case I, as the charity will not come within the exemption for profits deriving from a trade exercised in the carrying out of a primary purpose of the charity within section 505(1)(e) of the Income and Corporation Taxes Act (ICTA) 1988. In addition, if any clearly identifiable income of the charity has been used to fund the contract, that income may be liable to tax as, depending upon the particular contract, it may not have been applied for charitable purposes only within section 505 of the 1988 Act. As such, the charity is in danger of losing part of its tax reliefs40 as sums expended in connection with the contract will probably be “non-qualifying” expenditure within section 506(1) of the 1988 Act. In certain circumstances, the objects of a charity may be altered. With unincorporated charities, the governing document may contain an express power to vary the main objects clause. This will usually be conditional on the original objects no longer being effective and should be subject to the prior written approval of the Charity Commission.41 Without such a power, the variation will require the agreement of the Charity Commission in any event. If the Commission agrees to the change of objects, a scheme will need to be made to amend the charity’s governing document.42 The changes must be justified and as near as practicable to the original purposes of the charity. A charitable company may alter its objects by special resolution43 but the prior written consent of the Charity Commission is required.44 Finally, even if a contract is within the objects of a charity, the charity will only be able to deliver services under contract if it has the necessary powers to do the particular acts demanded by the contract.45 Carrying out a contract may, for example, require the charity trustees to have the power to employ staff, to hold property and to take out insurance. They may therefore need to amend their governing document so as to broaden their powers. In the case of an unincorporated charity, unless there is a clause in the trust deed or constitution allowing alteration of the administrative provisions of the deed, this will require an application to the Charity Commission.46 The procedure to be adopted by charitable companies requiring amendment to powers is the same as for alteration of objects. If a charity proceeds to undertake a contract without having the necessary powers there are adverse legal consequences for the officers and the charity 39

E.g., Grove v. Young Men’s Christian Association (1903) 4 TC 613. ICTA 1988, s.505(3). 41 E.g., Charity Commission, Model Declaration of Trust for a Charitable Trust, Leaflet GD2 (London, HMSO, 1995), Z. 42 Charities Act 1993, s.13. 43 Companies Act 1985, s.4, amended by Companies Act 1989, s.110(2). 44 Charities Act 1993, s.64(2). 45 The Charity Law Unit research has found that the lack of specific powers to carry out a contract is a problem which arises more frequently in relation to older charities; the constitutions of new charities are usually drafted with a more comprehensive range of powers. 46 Under Charities Act 1993, s.16, the Charity Commission has wide powers to make schemes for the administration of a charity. 40

(J) Dunn Ch9

25/1/00

1:44 pm

Page 132

132 Debra Morris itself. In the case of an unincorporated charity, the particular transaction will bind the trustees personally. The charity property, however, will be protected because neither the trustees nor the third party will be entitled to an indemnity from property already held on trust in respect of an unauthorised contract.47 The property of a charitable company does not enjoy similar protection in the event of unauthorised transactions by the directors. All commercial transactions beyond the powers of the directors will bind the charity unless the third party knew that the particular act was unauthorised.48 A director who enters into a contract on behalf of a charitable company which is beyond its powers will be acting in breach of fiduciary duty and may be liable under the remedy of account. The general way in which charities may have been influenced to re-set their agendas, due to the effects the “contract culture”, has been considered. This essay will now examine of three particular areas in which “agenda setting” by local authority purchasers may be evidenced.

Selection Criteria Determining the selection criteria for recipients of a charity service is the responsibility of the charity trustees, in line with their governing documents. The governing document will usually specify that it is the trustees who must exercise powers of appointment, by choosing who the beneficiaries of the charity will be. If the trustees are allowed a discretion about the use of the charity property, the general rule is that decisions concerning the charity must be taken by the trustees personally. The office of trustee is one of personal confidence, and so, in general, cannot be delegated. This is commonly expressed in the maxim, delegatus non potest delegare.49 Trustees can always invite individuals to look into particular matters and to make recommendations, but the decision whether or not to act on the recommendations is for the trustees to take. Decisions of trustees of a charity may be taken by majority vote and need not be unanimous.50 In some cases, local authorities are changing the referral practices of charity providers who previously had the flexibility to respond to all potential service users in need who presented themselves. Contracts with local authorities may now dictate that services are only provided to those people who, having proven that they meet clear eligibility criteria, are referred by social services departments.51 The Charity Law Unit research has found examples of contracts where 47 48 49

Re Johnson (1880) 15 Ch D 548; Re Oxley [1914] 1 Ch 604. Charities Act 1993, s.65. P. V. Baker and P. St J. Langan, Snell’s Equity (29th edn., London, Sweet & Maxwell, 1990),

266. 50

Re Whiteley [1910] 1 Ch 600, 608. See e.g., J. Lewis, “Voluntary Organizations in ‘New Partnership’ with Local Authorities: The Anatomy of a Contract” (1994) 28 Social Policy and Administration 206, 212, where a prolonged battle to negotiate over client access is described. 51

(J) Dunn Ch9

25/1/00

1:44 pm

Page 133

The ‘Contract Culture’ as Dependency Culture for Charities? 133 control over the selection of users is entirely with the local authority purchaser. Whelan52 gives the example of a local authority which funded the Salvation Army on the condition that all referrals had to come from the authority’s housing department. This meant that service users could not be received out of hours—a reversal of the charity’s long-standing practice of immediate assistance for the needy. Conversely, Russell et al.53 provide an example where local authority purchasers wanted to specify longer hours of opening for a playgroup, necessitating the employment of full-time staff—even though the project had been designed partly with a view to providing part-time employment for local women. Trustees may be in breach of duty in entering into contracts with local authorities if, by doing so, they are abrogating their decision-making powers concerning selection criteria for their beneficiaries. One solution to this problem may be to suggest that the trustees are exercising their discretion by entering into the contract itself. Anything that flows from the contract (including decisions about selection of service users) is therefore within the initial exercise of their discretion. This is a grey area not settled by law. What is certain is that a charity should not allow anyone to be a service user if that person does not fall within the charity’s class of beneficial objects. This means that charities must retain a right to veto any decisions on users that do not fall within that class. The Charity Law Unit research found, however, that, in fewer than 50 per cent of the contracts examined, the final say on service users was firmly placed with the charity.

Organisational Structure A charity’s dependence on other bodies for funding also appears to have an impact on its internal structure and organisational processes. For some charities, there are clear conflicts between public accountability and organisational autonomy. Contract funding may lead to the adoption of bureaucratic structures with less user involvement in decision-making. Russell and Scott give examples where, as a result of contracting, user-led organisations have formalised their structure, from a “participative democracy” to a management hierarchy.54 Similarly, Wilson talks of voluntary bodies which grew rapidly on the basis of Manpower Services Commission (MSC) Community Programme and then became highly dependent on the MSC being “completely transformed from relative adhocracies towards centralized bureaucracies”.55 52

Supra n.9, 92. Supra n.21, 42. 54 L. Russell and D. Scott, Very Active Citizens? The Impact of the Contract Culture on Volunteers (Manchester, University of Manchester, 1997). 55 D. Wilson, “Organizational Structures” in J. Batsleer, C. Cornforth and R. Paton (eds.), Issues in Voluntary and Non-Profit Management (Wokingham, Addison-Wesley, 1993), 152. 53

(J) Dunn Ch9

25/1/00

1:44 pm

Page 134

134 Debra Morris Taylor also observes56 that the move into contracting is forcing trustees of national charities to re-examine the autonomy that they can offer branches in the light of a heightened awareness of their liability. Decentralised decisionmaking is being replaced with concentrations of power. In this way, local independence, hitherto jealously guarded, may have to give way to the minimising of liability. Even more dramatically, Todd and Ware57 report examples in their study of smaller locally-based groups merging with larger more well-established national bodies, as a result of contracting. This was partly due to pressure from local authority funders to amalgamate with larger bodies so as to offer a uniform service on a wider geographical scale.

Campaigning Many charities see advocacy and campaigning as essential to their role. They can articulate the views of their members and those with whom they have contact, publicising the difficulties faced by those who are disadvantaged and empowering them to take more control of their lives. The emergence of the “contract culture” has inevitably created a more dependent relationship between purchasers and providers, raising questions about whether charities will be deflected from their campaigning and innovative roles. Whilst acknowledging that the uniquely innovative or especially flexible characteristics of the voluntary sector have been questioned,58 it is suggested that, for a number of reasons, the “contract culture” may adversely affect charities’ developmental work outside the field of service delivery. First, larger service-providing charities are devoting increased amounts of time to the demands of contracting. Clearly, carrying out contracts which are tied to specific targets reduces the opportunity for providers to meet new needs. The risk is that charitable resources are diverted towards the support of contracted service-provision, in line with the government’s policy agenda, at the expense of a “larger social welfare vision”59 that the charitable sector traditionally projected. Any lobbying by these charities tends to be geared around issues of more contract funding, rather than broader social policy goals. Lewis60 gives an example of a charity running a contract to provide day-care services, where 56 M. Taylor, “What Are the Key Influences on the Work of Voluntary Agencies?” in D. Billis and M. Harris (eds.), Voluntary Agencies. Challenges of Organisation & Management (London, Macmillan 1996), 18. 57 M. Todd and P. Ware, “The Contractual Model in Social Care: Policy Issues for Voluntary Sector Providers”, Paper to the 6th Quasi-market seminar, University of Portsmouth, Apr 1997. 58 S. Osborne, The Once and Future Pioneers? The Role of Voluntary Organisations in Innovation in Social Welfare Services in Britain (Birmingham, Aston Business School, 1994). 59 M. Lipsky and S. Rathgeb Smith, “Nonprofit Organizations, Government and the Welfare State” (1989–90) 104 Political Science Quarterly 625, 648. 60 J. Lewis, “Developing the Mixed Economy of Care” (1993) 22 Journal of Social Policy 173, 190.

(J) Dunn Ch9

25/1/00

1:44 pm

Page 135

The ‘Contract Culture’ as Dependency Culture for Charities? 135 little time or energy remained for advocacy, innovation and research work—all set down by the national body as basic functions to be performed by all affiliated groups. The time devoted to managing contracts simply displaced this other work. For these charities, a combination of service delivery work plus advocacy work may be physically impossible, due to limited human resources. The second way in which charities’ capacity for campaigning may have been eroded appears to be that, if providing established public services becomes the dominant role for many charities, they may become so compromised by their involvement with the State, so as to have lost their distinctive character which allowed them to challenge current practices, to develop new services, to champion unpopular or controversial causes and to campaign for changes in policy and practice. For these charities, a combination of service delivery plus advocacy work may be politically impractical. The fact that most contracting takes place at a local level, with local authorities, and that this is the same local arena that has been the focus of much campaign work in the past emphasises the potential conflicts in this area. If a charity is dependent for its survival on a local authority contract, will it “bite the hand that feeds” and publicly criticise the local authority? Finally, smaller advocacy organisations, which do not have any “services to sell” may be less likely to secure financial support than previously. It should be noted, however, that Unwin and Westland61 found examples in their study of voluntary organisations receiving funding specifically to operate as advocates, developers and representative bodies. A more positive view of the relationship between advocacy and contract funding is promoted by Kramer62 who notes that some of the disadvantages of governmental funding are more than offset by the opportunity to extend and/or improve services for a larger clientele. In his review of studies outside the United Kingdom,63 many agencies believed that they had more influence on public policies because they were on the inside, not outside, and that their service programmes did not pre-empt their advocacy. It may be concluded that there is evidence to suggest that the “contract culture” may lead to increasing fragmentation within the voluntary sector, between service providers and campaigning organisations.64 In the submissions given to the Deakin Commission,65 there was evidence that some charities were ready to move from oppositional campaigning into service-provision on a larger scale. For example, Liverpool Personal Service Society commented that the changing 61 J. Unwin and P. Westland, Trends, Myths and Realities. Funding Policies and the Local Voluntary Sector (London, Association of Charitable Foundations, 1996). 62 R. Kramer, “Voluntary Organizations, Contracting and the Welfare State” in Batsleer et al., supra n.55. 63 Ibid., 187. 64 This is in line with the prediction of a split voluntary sector in the Centris report: B. Knight, Voluntary Action (London, Home Office, 1993). 65 Summary of Evidence and Selected Papers for the Report of the Commission on the Future of the Voluntary Sector (London, NCVO, 1996).

(J) Dunn Ch9

25/1/00

1:44 pm

Page 136

136 Debra Morris environment offered it the chance to take on a more mainstream service-providing role. Other organisations felt that contracts offered useful opportunities for diversification and expanded service-provision.

SUBSTITUTION FOR STATUTORY SERVICES

Traditionally, charities have played a complementary role in service-provision. When a new service pioneered by a charity became part of the mainstream, responsibility for its delivery would be handed over to the State. However, now, in a reverse scenario, charities are often placed in the position of becoming substitute providers of core services for the State. In a study of trends in respect of charities dealing with mental health and the elderly, Saxon-Harrold66 describes the new funding relationship scenario, with the voluntary sector becoming a key player in essential welfare service delivery, as charities are asked to fill the gaps left by the scaling down of state provision. Charitable funds ought not to be used to support services which the local authority is legally required to provide through public funding, and yet it is clear from both the Charity Law Unit research and other case studies67 that charities are “topping up” their services with charitable income. In order to win contracts, charities are having to underwrite their services. For example, an NCVO study68 has strongly reinforced this finding, with 69 per cent of 115 voluntary organisation contractors that responded to the survey saying that they were subsidising contracts from their own sources. Fifty-four per cent confirmed that they were being called upon to perform tasks that were previously the responsibility of local authorities.69 More specifically, the charity Scope is reported70 as saying that its contracts with local authorities have, in some cases, been under-funded by as much as 10 per cent. For example, it could cost Scope £40,000 a year to look after a physically handicapped adult on behalf of a local authority, but in drawing up the contract the authority may insist on paying £36,000 for the “basic” care needed, in the hope or expectation that the charity will pay the difference out of its funds. But this extra 10 per cent is not guaranteed. The finding of this money may be the difference between survival or death of the service. As Unwin and Westland put it71: 66 S. Saxon-Harrold, “Competition, Resources and Strategy in the British Nonprofit Sector” in H. Anheier and W. Seibel (eds.), The Third Sector: Comparative Studies of Non-Profit Organizations (Berlin, De Gruyter, 1990), 131. 67 E.g., M. Taylor and J. Lewis, “Contracting: What Does It Do to Voluntary and Non-profit Organisations?” in P. 6 and J. Kendall (eds.), The Contract Culture in Public Services (Aldershot, Arena, 1997). 68 A. Thompson, “Juggling Priorities” [1997] Community Care (Mar–Apr) 27. 69 This practice is contrary to the Charity Commission’s advice not to enter into contracts to deliver a service that a public body is required to provide unless the public body pays the full economic cost: supra n.6, para 29. 70 The Guardian, 20 Sept 1995. 71 Supra n.61, para 6.3.

(J) Dunn Ch9

25/1/00

1:44 pm

Page 137

The ‘Contract Culture’ as Dependency Culture for Charities? 137 With some services this may be acceptable: they may have a defined and limited life. With others there may be enormous social costs involved in letting a service disappear because it is no longer viable.

There may be occasions where a charity may justifiably want to subsidise services and take a loss, if there is an additional benefit. For example, the charity Help the Aged provides SeniorLink emergency telephones below cost to older people in need who are unable to afford the market price. The financial director of Help the Aged justifies this as an investment, since it enables the charity to find out the needs and concerns of elderly people and to campaign on their behalf.72 In this situation, the charity is in control, taking its own decision to subsidise a service. Ordinarily, in the “contract culture”, this is not the case. The Charity Commission has customarily taken the view that charitable funds should not be used to meet the obligations of the State.73 Is there any legal basis for this alleged “no substitution” rule? In relation to charitable trusts for the relief of poverty, Tudor on Charities states: a charity intended to benefit the poor generally is not to be so applied as to relieve persons entitled to relief from public funds. . . . This rule is well established, although it has sometimes been followed with reluctance.74

Authority for this no substitution rule can be found in certain cases concerned exclusively with gifts for the poor decided in the early nineteenth century. Earlier decisions of the Court of Chancery had been somewhat uncertain as to the impact of statutory payments to the poor (poor law relief) on trustees’ decisions to distribute doles. The question was, could trustees give money to paupers of the parish who were already in receipt of poor relief?75 Policy in the nineteenth century determined that charitable funds should be dispersed amongst the deserving poor whilst poor law relief was to be distributed amongst the undeserving poor. The courts therefore ruled that charities for the relief of need were not allowed to give money to those who were receiving state poorlaw relief.76 This is because it was never intended that charity should directly benefit “rich” ratepayers. Since the beneficiaries would no longer qualify for poor-law relief, the effect would be to benefit the ratepayers, rather than the poor, by reducing the claims on parish rates. Parochial relief no longer exists, but, since the emergence of the modern welfare state, the same issues can arise in relation to those who receive statutory welfare benefits. The Charity Commission advises trustees of charities for the relief of the poor that 72

Third Sector, 12 Nov 1998. Supra n.6, paras 20–29. See also Charity Commission, Responsibilities of Charity Trustees, Leaflet CC3 (London, TSO, 1996), para 29. 74 J. Warburton, Tudor on Charities (8th edn., London, Sweet & Maxwell, 1995), 177. 75 E.g., Att.-Gen. v. Clarke (1726) Amb 422. 76 E.g., Att.-Gen. v. Exeter Corporation (1827) 2 Russ 45; Att.-Gen. v. Wilkinson (1839) 1 Beav 370. 73

(J) Dunn Ch9

25/1/00

1:44 pm

Page 138

138 Debra Morris charitable funds should not be used as a substitute for state benefits to which a person has a statutory right.77 The early cases cited78 may or may not be correctly decided, but they do not seem to provide authority for the general proposition that charity should not substitute for statutory obligation. Furthermore, the general rule did not apply where the intention was that the gift should be applied in aid of the rates, and such gifts have been held to be charitable.79 There are also some cases that support the contrary proposition that the provision of public services which would otherwise be paid for by the taxpayer is charitable. For example, a trust to maintain a cemetery owned by a local authority was held to be charitable.80 In Newland v. Attorney-General81 in 1809, Lord Eldon LC held that a bequest of stock to the government in exoneration of the National Debt was charitable. More recently, in IRC v. Oldham Training and Enterprise Council 82 Lightman J considered it charitable for the unemployed to be found gainful activity and for the State to be relieved of the burden of providing them with unemployment and social security benefits.83 Whatever the legal authorities say, it seems sensible to suggest that charitable money should principally be used to supplement state provision, or to fill gaps in it. Trustees have an overriding obligation to put their charities’ funds to the best possible use in furtherance of their objects, and they would not be making best use of charity funds if they used them to relieve the State of its legal obligations. Consequently, a charitable body, funded through charitable donations, should not use such funds to support statutory services which are provided under a contract with a local authority. Both charitable donors and volunteers may feel that they are being exploited in order to subsidise services that should be provided by the State and may not wish to continue to contribute to or offer their services. In May 1993, the general secretary of the Leonard Cheshire Foundation was quoted as saying84: the legacies left to us are meant to help us develop or improve, not to be spent on propping up statutory services.

If this practice continues, it may mean that charities are less able in the future to raise money to support new work and to add value to existing services. It is quite often difficult to identify what core services the State must provide. For example, in many situations, authorities are given substantial discretion in determining the level of service required. Cost is a major consideration, whereas 77 Charity Commission, Charities for the Relief of the Poor, Leaflet CC4 (London, TSO, 1995), para 19. 78 Note that they are generally cy-près cases. 79 Att.-Gen. v. Blizard (1855) 21 Beav 233. 80 Re Eighmie [1935] Ch 524. 81 (1809) 3 Mer 684. 82 [1996] STC 1218, 1234. 83 See also Charity Commission, Charities for the Relief of Unemployment, Leaflet RR3 (London, TSO, 1999). 84 NCVO News, May 1993.

(J) Dunn Ch9

25/1/00

1:44 pm

Page 139

The ‘Contract Culture’ as Dependency Culture for Charities? 139 individual choice may not be. For example, under the National Health Service and Community Care Act 1990, local authorities have certain statutory duties to discharge, but these may not necessarily take into account the individual service user’s choice. The boundaries, both in terms of function and style, between public and charitable provision in the case of social welfare are rather blurred.

CONCLUSION

The relationship between the “contract culture” and the charitable sector is not a simple one. It is therefore difficult to consider the effect of the “contract culture” in isolation from other concurrent developments which have affected charities. At the same time as, and perhaps partly because of, being exposed to the “contract culture”, charities have also been exposed to legislative, financial and social changes which had led to both expansions of their roles and their becoming increasingly professionalised. As the emphasis on good management and effective organisation within the charitable world has grown, a necessary by-product may be a move away from the traditional ways in which charities operated differently from the State to a move towards operating in similar ways to the State. Several recent studies have noted that enterprising charities are now keen to learn from the commercial sector.85 It is therefore difficult to determine whether or not many of the changes described in this essay would have occurred anyway, without the emergence of the “contract culture”. In this context, 6 and Kendall talk of a “huge array of other factors that impinge upon the voluntary sector and its relationship with government”.86 Contracts may bring to the fore the issues of autonomy and dependence for charities, but these are not new issues. Batsleer and Paton conclude87: Contracts are just a particular form of deal88 and voluntary organisations have been making and managing deals as long as they have existed.

While this essay has focused discussion on the problem of charities maintaining their independence, this is not meant to imply that the contracting parties are invariably in conflict or always troubled by differences in perspectives. This essay has highlighted inherent conflicts within the “contract culture” and the places where differences in perspective are most likely to result in charities needing to compromise. Many of the findings referred to in this essay are necessarily generalisations. The charitable sector is a complex and diverse one and this 85 M. Taylor, Best of Both Worlds. The Voluntary Sector and Local Government (York, JRF, 1997), 19. 86 Supra n.67, at 7. 87 J. Batsleer and R. Paton, “Managing Voluntary Organisations in the Contract Culture” in 6 and Kendall, supra n.67, at 55. 88 See also K. Walsh, N. Deakin, P. Smith, P. Spurgeon and N. Thomas, Contracting for Change (Oxford, OUP, 1997) 100, describing funding arrangements in the health service as ‘ideals’.

(J) Dunn Ch9

25/1/00

1:44 pm

Page 140

140 Debra Morris inevitably means that different types of charities will have different futures as they react in their own way to the “contract culture”. Lewis concludes89: The position of charities in the new order will depend very largely on, first, the degree to which they are already dependent on government aid; second, the extent to which they are, or want to become, service providers; and third, the amount of control they are able to exercise over both the proportion of aid that is subject to contract . . . and the process of negotiating contracts.

Within the new funding regime, there needs to be a new understanding of the role of the charitable sector, which will allow charities safely and comfortably to carry out both their service-provision role and their traditional “advocacy” or “developmental” role. In carrying out their service-provision role, charities should work hard both to become accountable to their funders, as public interest requires, and to maintain their traditional qualities which made their delivery of service different from that provided by the State, as their beneficiaries should expect. Charity trustees require and deserve greater legal clarity within the “contract culture”. In particular, they need to know the extent to which they can legitimately compromise their independence without finding themselves in breach of trust and therefore exposed to the risk of incurring personal liability. Against the background of the “contract culture”, the new Labour government committed itself90 to the negotiation of a national “compact” between central government and the voluntary sector, along the lines proposed by the Deakin Commission.91 The Compact on Relations between Government and the Voluntary and Community Sector in England92 was published in November 1998,93 and it specifically recognises that the government and the sector fulfil complementary roles in the development and delivery of public policy and services, and that the government has a role in promoting voluntary and community activity. The government undertakes in the Compact to recognise and support the independence of the voluntary sector, including its right within the law, to campaign, to comment on government policy, and to challenge that policy, irrespective of any funding relationship that may exist, and to determine and manage its own affairs.94 In turn, the voluntary sector undertakes to maintain high standards of governance and conduct and meet reporting and accountability obligations to funders and users.95 The Compact is only a starting point. In establishing a framework of values, principles and commitments which will underpin the future relationship between government and the voluntary sector, it is suggested that value for money should not be measured by simply counting 89

Supra n.60, 176. Labour Party, Building the Future Together (London, Labour Party, 1997). 91 Supra n.15, 78. 92 Parallel compacts have also been developed in other parts of the UK. 93 Compact on Relations between Government and the Voluntary and Community Sector in England, Cm 4100 (London, Home Office, 1998). 94 Ibid., para 9.1. 95 Ibid., para 10.1. 90

(J) Dunn Ch9

25/1/00

1:44 pm

Page 141

The ‘Contract Culture’ as Dependency Culture for Charities? 141 up the number of service users that have been cared for by a particular charity in any particular reporting period. The existence of a healthy charitable sector per se, free to develop creative and inspired projects which fulfil the needs of community, should be valued and nurtured.

(J) Dunn Ch9

25/1/00

1:44 pm

Page 142

(K) Dunn Ch10

25/1/00

1:44 pm

Page 143

10

Shoots among the Grassroots: Political Activity and the Independence of the Voluntary Sector ALISON DUNN

In the United Kingdom there are a number of major voluntary sector campaigning groups.1 In addition, many voluntary organisations pursue a campaigning role as an integral part of the wider context of their purposes. The relevance of a political mandate both for the voluntary sector as a whole, and as an essential component of the work of voluntary organisations, is an issue which has become more prominent in recent years. As the work and the role of the voluntary sector adapt and develop in the wider global and political economy,2 so the need increases for groups within the sector to participate in the democratic process and to use their unique vision and experience to influence policy-making at local, regional, national, European and international levels. This essay examines broadly the initiatives that have begun in the European Union and the UK to harness the political character of voluntary organisations. These initiatives concentrate particularly upon creating partnerships between the voluntary sector and the public sector. In addition to examining the European and domestic proposals, this essay also considers some practical challenges which face both sectors in the context of their political concurrence.

EUROPEAN

“ INTERMEDIARIES ”

Voluntary organisations are making an increasingly significant contribution to the political, social, economic and cultural development of the European Union. Although there is no requirement for formal consultation with the voluntary sector in each Member State on European policy, European law or initiatives, Declaration 23, annexed to the Final Act of the Maastricht Treaty, emphasises the importance of co-operation between the European Community and 1

Three prominent examples are Charter88, Real World and Jubilee 2000. See L. Salamon, The Global Associational Revolution: The Rise of the Third Sector on the World Scene (London, DEMOS, 1995). 2

(K) Dunn Ch10

25/1/00

1:44 pm

Page 144

144 Alison Dunn charitable associations and foundations. Declaration 38 of the Amsterdam Treaty recognises the significance of the voluntary sector, stating that the Community “will encourage the European dimension of voluntary organisations with particular emphasis on the exchange of information and experiences”. Responsibility for the sector at a European level falls under the auspices of Directorate General XXIII of the European Commission, which has established a Social Economy Unit respecting not-for-profit organisations which work within the social economy, including voluntary organisations and foundations.3 In 1997, DG XXIII developed its primary series of proposals concerning the evolution of the voluntary sector’s role in Europe. These proposals were published as a “Communication” from the Commission,4 and were adopted by the Commission in June of the same year. The Communication was welcomed, inter alia, by the Committee of the Regions (COR),5 the Economic and Social Committee (ESC),6 and, in a resolution made in 1998, by the European Parliament.7 The Commission’s Communication on the role of voluntary organisations and foundations in Europe pursues two key themes: the development of the policy of the voluntary sector, and the promotion of better understanding of partnerships, training and funding across the Member States. Although aimed at general policy recommendations, the Communication also had regard, albeit secondarily, to the role and importance of the political contribution made by voluntary-sector organisations at a European level. In the Communication’s view, an acknowledgement of the public role of the sector was necessary, as too the recognition and encouragement of voluntary organisations as a “full partner in the debate on all policy and implementation matters which concern them” (paragraph 10.4). The significance of voluntary organisations as partners in the debate on policy-making and implementation was identified in the Communication as cutting across two spheres, both of which underpin the philosophy of the European Union. The first sphere is that of citizenship, and the second, democracy. In terms of citizenship, the inclusion of voluntary organisations in the policymaking process at a European level was thought to connect the individual to the European community through “strengthening a sense of citizenship and provid-

3 In addition, a Committee for Co-operatives, Mutuals, Associations and Foundations (CMAF) was set up and recognised by the European Commission in 1998. It may be consulted, and can advise the Commission on issues concerning the sector: Commission Dec 98/215/EC, OJ L 080, 18/02/1998 p0051. 4 Promoting the Role of Voluntary Organisations and Foundations in Europe, Com(97)241. See also the Resolution on the Commission Communication—The Future of Social Protection, Com(95)466. 5 Opinion of the COR [1999] OJ C180/57; CdR 306/97 fin.; see also [1998] OJ C180/49. 6 Opinion of the ESC [1998] OJ C95/99. 7 European Parliament Resolution [1998] OJ C226/66.

(K) Dunn Ch10

25/1/00

1:44 pm

Page 145

Political Activity and the Independence of the Voluntary Sector 145 ing a means for its expression” (paragraph 8).8 One of the main strengths of the voluntary sector is that, by working with and on behalf of the socially excluded, it helps foster a sense of identity and recognition, thereby bringing the marginalised back into an inclusive relationship with the State and society. Given the diversity in culture, status, social opportunities and expectations of the peoples of the European Union, the expansion of “social dialogue” through the development of a “civil dialogue”,9 inherent in citizenship, is crucial. Further, as the COR has emphasised,10 “civil society needs a variety of arenas in which citizens can bring their influence to bear”. As with most democratic political systems, the European Union has recognised mechanisms through which the individual can affect policy at a central level. However, not all these mechanisms allow the individual to feel that their concerns are attended to in the decision-making process. Voluntary organisations, in speaking on behalf of their users, beneficiaries and volunteers, provide an alternative route for the voicing of grassroots concerns. The Commission has identified this participative role as the voluntary sector’s key contribution to the furthering of European democracy, and, as pointed out by the ESC, when welcoming the Communication, this gives “substance and meaning to the concept of a citizen’s Europe”.11 Thus, in the Communication’s view: Above all, [voluntary organisations] now play an essential part as intermediaries in the exchange of information and opinion between governments and citizens, providing citizens with the means with which they may critically examine government actions or proposals, and public authorities in their turn with expert advice, guidance on popular views, and essential feedback on the effects of their policies [paragraphs 9.1–9.2].

Although recognition of the part which voluntary organisations can legitimately play in the future development of European policy initiatives and legislation is encouraging, concern arises over the Communication’s use of the descriptor “intermediary”, the connotations of which are significantly less than “partner”, and which highlights a threat to the independence of the sector, whilst also casting doubt on the reality of their current relations. The need to maintain the sector’s independence is a significant issue and was emphasised in particular by the COR, whose welcome of the Commission’s Communication was more cautionary than that of either the ESC or the European Parliament. 8 See also, Art 8 Treaty of Rome now Article 17 of the consolidated Treaty which established citizenship of the Union: I. Ward, “(Pre)conceptions in European Law” (1996) 23 Journal of Law and Society 198; N. Lewis and D. Campbell (eds.), Promoting Participation: Law or Politics (London, Cavendish, 1999). 9 P. Flynn, “The Issues as the Amsterdam Summit Approaches”, Speech to the Institute of European Affairs, Dublin, 18 Apr 1997; European Parliament Resolution, supra n.7, paras 20–26. See also Co-operation with Charitable Associations as Economic and Social Partners (98/C 73/23), adopted by the ESC on 10 Dec 1997 [1998] OJ C73/92. 10 Supra n.5, para 3.1.8. 11 Supra n.6, para 3.1.

(K) Dunn Ch10

25/1/00

1:44 pm

Page 146

146 Alison Dunn In the opinion of the COR, it is not enough to accept the need for increasing consultation with and encouragement of the voluntary sector, without also paying attention to the sector’s wider dynamics. This is a significant point. The involvement of voluntary organisations in the debate on European policy and legislation can only properly occur within a relationship which clearly defines each party’s roles and responsibilities, and which also respects their inherent nature, characteristics and independence. For its part, the COR identified three key issues to be addressed: namely, apportionment of responsibility between the public sector and the voluntary sector; preservation of the independence of the voluntary sector; and the criteria to be employed for evaluating the sector’s contribution, particularly in light of its diversity.12 In its view13: care needs to be taken to achieve a balance. Where organisations have strong links with the public sector, efforts should focus primarily on maintaining their independence. However, in the case of organisations—including radical ones—which are already independent and self-reliant, the emphasis should be on constructive dialogue and democratic working methods.

As other essays in this collection demonstrate, preserving the independence of voluntary organisations and resisting the move to shift public-sector activities and responsibilities onto the shoulders of the third sector are two themes which have characterised the tension between public authorities and voluntary organisations at a domestic level in the last few decades.14 The COR’s three key issues to be addressed at a European level would clearly not be out of place in current UK debates on the involvement of voluntary organisations with public authorities. Given the increasing importance that the European Union places upon subsidiarity15 in bolstering voluntarism and citizenship, it has to be the case that the struggle between independence and autonomy, rights and responsibilities, should first be resolved within each Member State. In many senses this is a matter of strategy. Where voluntary organisations are constrained in their independence at a domestic level, they are less likely to be in a position to forge innovative and workable partnerships either with the wider voluntary sector across Europe16 or with the European institutions. Furthermore, a strong domestic voluntary sector is more likely to be able to retain its independence at large. It is to the developments at a domestic level that this essay now turns.

12

Supra n.5, para 1.9. Supra n.5, para 2.2.1. 14 See B. Knight, Voluntary Action (London, Centris, 1993). 15 See Art 5 EC Treaty now Art 10 of the Consolidated Treaty; A. Duff (ed.), Subsidiarity within the European Community (London, Federal Trust for Education and Research, 1993). 16 For an examination of the voluntary sector in each Member State see H. Kidd, The Voluntary Sector in the European Union (London, Charities Aid Foundation, 1997); DG XXIII, The Cooperative, Mutual and Non-profit Sector in the European Union (Brussels, Eurostat, 1997). 13

(K) Dunn Ch10

25/1/00

1:44 pm

Page 147

Political Activity and the Independence of the Voluntary Sector 147

UK

“ PARTNERS ”

In 1997 the London Voluntary Service Council undertook a survey which revealed that the three main priorities of voluntary groups based in the capital were to secure greater financial security, particularly through longer term funding; to have an elected London authority; and, thirdly, to secure “a prominent role in policy and decision-making at all levels, and the opportunity to have a real stake in society”.17 This need for the voluntary sector to have the freedom to play a prominent role in the policy and decision-making at all governmental levels, and the opportunity for such organisations to become social stakeholders, was one aspect examined by the Deakin Commission in its consideration of the future of the voluntary sector in England and Wales.18 In the consultation process prior to the Commission Report, three arenas were identified as constituting the primary opportunities for voluntary organisations to contribute to the political process and to act on behalf of their users, beneficiaries and volunteers. These were, by providing services for public authorities; having a more direct role for democratic participation; and by acting as an independent scrutineer of government actions and policy.19 The political role of the voluntary sector formed only a small part of the finalised Deakin Report, albeit that the Report’s overall theme was that regulation of the sector should develop on inclusive lines, and that voluntary organisations should be allowed to be an innovative force in society.20 Similar themes underlay the Kemp Commission Report, which considered the future of the voluntary sector in Scotland,21 and which noted that whilst it appeared at present that voluntary organisations had “low political saliency and little political leverage”, it was the political role of the sector which guaranteed its independence.22 An emphasis was laid in both Commission Reports on the development of partnerships between the state and the voluntary sectors, specifically partnerships freely negotiated between equals and based upon collaboration.23 Collaborations between the voluntary and the public sectors have traditionally existed on informal bases, and have generally concerned either partnership in 17 Christine Holloway, London Voluntary Service Council, reported in NCVO News, Apr 1997, 9. 18 Meeting the Challenge of Change, Voluntary Action into the 21st Century: Report of the Commission on the Future of the Voluntary Sector (London, NCVO, 1996). 19 Ibid., ii, “Summary of Evidence”, 4. 20 Ibid., i, 7. The recommendations from the Commission covered the sector’s governance, legal framework, management, and external relations. 21 Head and Heart: The Report of the Commission on the Future of the Voluntary Sector in Scotland (Edinburgh, SCVO, 1997). 22 Ibid., paras 1.5.2, 3.3.4. 23 Deakin Report, supra n.18, part 1; Kemp Report, supra n.21, chap. 6. The Deakin Commission noted (para 2.7.1) that consultation and partnership with Europe was not put before them by the voluntary sector as a major issue. It is thus an area needing greater focus.

(K) Dunn Ch10

25/1/00

1:44 pm

Page 148

148 Alison Dunn service provision, such as health care, or partnership in policy-making.24 In terms of political involvement, both are significant for the voluntary sector. The latter, in the way in which it enables a voluntary organisation directly to contribute to policy decisions, and the former, by providing a voluntary organisation with first-hand experience on the effects of law or government policy which could then form the basis of a lobbying role. Partnership in service provision is also significant for the converse reason that it may constrain organisations from advocacy and campaigning because of fears of losing their public sector funding.25 Further, it has long been recognised that these partnerships, whilst providing significant advantages, such as economies of scale and the employment of grassroots expertise, are most often uneasy alliances.26 They are characterised particularly by pressures between the differing roles and expectations of each partner, and pressures with regard to funding and security. Taylor, for example, in a report which drew upon research undertaken by the Joseph Rowntree Foundation, identified accountability contra autonomy, and interdependence contra independence as common tensions between voluntary organisations and public bodies which were in partnership.27 In fostering collaboration through partnership, the Deakin Report emphasised that voluntary organisations should not be precluded from an advocacy role and should continue to challenge institutions within society, to “stimulate debate and provoke dissent, whether or not these activities are welcome to those in power”.28 In turn, the government “should acknowledge its own obligation to support and promote a healthy voluntary sector as a major player in the democratic process”.29 Yet ensuring that there exists respect for the distinct roles, including that of lobbying and advocacy, in voluntary-sector and publicsector partnerships which relate either to service provision or policy-making, has hitherto been difficult because of the lack of consensus and formality in such agreements. In Scotland specific guidance was developed in 1995 for partnership at a local level by the Scottish Council for Voluntary Organisations in conjunction with the Convention of Scottish Local Authorities,30 but formal guidelines were not established for England and Wales prior to the Deakin Report. Following the recommendations of that Report, a national “compact”, developed by the Home Office and the National Council for Voluntary 24

See M. Taylor, The Best of Both Worlds (York, JRF, 1997) 9. See evidence given to the Deakin and Kemp Commissions, supra nn.18 and 21, and the discussion in Chap. 9 (Morris). 26 E.g. S. Kumar, Accountability in the Contract State (York, YPS, 1997); J. Russell, D. Scott and P. Wilding, Mixed Fortunes: the Funding of the Local Voluntary Sector (Manchester, Manchester University Press, 1996); J. Russell and D. Scott, Very Active Citizens? (Manchester, University of Manchester, 1997); R. Hambleton, S. Essex, L. Mills and K. Razzaque, The Collaborative Council: A Study of Inter-Agency Working in Practice (London, LGC Communications, 1995). 27 Supra n.24, 1. 28 Supra n.18, 13–14 and paras 1.3.11, 1.3.14, 2.2.20. See also para 5.3.3. which emphasises the need for voluntary organisations to avoid the risk of becoming subsumed within government by effectively becoming government owned non-governmental organisations. 29 Supra n.18, para 2.2.20. 30 Positive Partnership (Edinburgh, Cosla & SCVO, 1995). 25

(K) Dunn Ch10

25/1/00

1:44 pm

Page 149

Political Activity and the Independence of the Voluntary Sector 149 Organisations’ Working Group on Government Relations, formalised a framework on joint working practices between the public sector and the voluntary and community sector.31 Similar compacts were also developed for Scotland32 and Northern Ireland.33 Their emphasis is upon the complementary nature of the two spheres and the need for reciprocity in working relationships. In his forward to the English compact, Tony Blair stressed the contribution made by voluntary organisations to citizenship and to the voluntary sector’s aim, common with that of the government, of providing for a “just and inclusive society”.34 This builds in particular upon the Prime Minister’s personal views on the promotion of a “third way” for the development of politics, which seeks to35: promote and reconcile the four values which are essential to a just society which maximises the freedom and potential of all our people—equal worth, opportunity for all, responsibility and community.

An “enabling government”36 which supported a strong civil society would not seek to stifle voluntary activity or voluntary activism, but would rather embrace the independence and innovation of the sector. The compacts, in providing a series of guidelines on working practices, seek to be part of that enabling process. To take the English compact as one example, its provisions are not prescriptive. It is no more than a guide set to help partners to navigate through standards of operation towards best practice (paragraph 2).37 To that end, it lays down key principles and obligations which should characterise partnerships (paragraph 4), and allows for mediation where partnerships break down (paragraph 14). It highlights the “distinctive value” of the voluntary sector and the role of voluntary organisations as advocates and “pathfinders” (paragraphs 5–6). It also emphasises the significance of retaining the independence of the sector along with the diversity of voluntary groups, the diversity of voluntary action and the freedom to campaign (paragraphs 8.2, 8.6). The government specifically undertakes in the compact not only to pursue a policy of consultation with the sector, upon which it will develop codes of practice (paragraphs 9.6, 9.9), but also: 31 Compact on Relations between Government and the Voluntary and Community Sector in England, Cm 4100 (London, Stationery Office, 1998). 32 The Scottish Compact, Cm 4083 (London, Stationery Office, 1998). 33 Building Real Partnership: Compact Between Government and The Voluntary and Community Sector in Northern Ireland, Cm 4167 (London, Stationery Office, 1998). 34 Supra n.31, forward, and see also para 5. In their 1997 election manifesto, Because Britain Deserves Better, the Labour Party stated, “[a]n independent and creative voluntary sector, committed to voluntary activity as an expression of citizenship, is central to our vision of a stakeholder society”. See further Building the Future Together (London, Labour Party, 1997). 35 T. Blair, The Third Way: New Politics for the New Century (London, Fabian Society, 1998), 3. 36 Ibid., 14. 37 The Scottish compact contains very similar provisions and divides its discussion of government and voluntary sector commitments into five issues: recognition; representation; partnership; resources and implementation.

(K) Dunn Ch10

25/1/00

1:44 pm

Page 150

150 Alison Dunn to recognise and support the independence of the sector, including its right within the law, to campaign, to comment on Government policy, and to challenge that policy, irrespective of any funding relationship that might exist, and to determine and manage its own affairs [paragraph 9.1].

For their part, the voluntary and community sectors have pledged, inter alia, to respect confidentiality, consult their members before presenting cases to government, to communicate accurately their members’ views, to remain accountable, and to respect the legal restraints on political activities (paragraphs 10.2, 10.4–5). This latter point is a specific issue for charities, which form a distinct constituent of the voluntary sector, and upon which the rules regulating advocacy and campaigning are most stringent.38 The compacts developed for England and Wales, Scotland and Northern Ireland all emphasise that their framework and provisions are no more than the initial steps in the evolution of a mutually inclusive and equal relationship between the voluntary sector and the public sector.39 Early research indicates that in order for the compact to be rooted in reality, the partnerships forged between voluntary organisations and government bodies need to be undertaken in the true spirit of commitment.40 This is a challenge which should not be underestimated. As with all initiatives which seek to put forward best practice for building effective working relationships, there is a very real danger that the guidelines, and any codes of practice developed thereunder, are only paid lip service. Furthermore, whilst the compacts may be a spur to alliances which arise in the future and help the parties thereunder to recognise and respect their complementary roles and responsibilities, the situation is quite different for existing alliances. Where voluntary organisations are already in partnerships through contracts with public authorities, the fact that a working culture, good or bad, has already been established may well mean that there is no incentive or impetus for the dynamics of the relationships to change. In these circumstances an effective political role for voluntary organisations may well remain compromised irrespective of the compact’s rhetoric, and so too the sector’s independence and autonomy. Even the briefest of readings of the compacts emphasises that without commitment or, more formally, the policing of the working reality of individual partnerships, the compacts’ idealism per se will only go so far in establishing alliances which respect each party’s values, and that any form of enforcement with regard to compliance in the day-to-day application of partnerships will be impractical if not impossible. There are further challenges to the success of the compacts and to the advocacy and campaigning potential of voluntary bodies. However, these challenges come not from within the dynamics of voluntary sector and public sector part38 See Bowman v. Secular Society Ltd. [1917] AC 406; National Anti-Vivisection Society v. IRC [1948] AC 31; McGovern v. Att.-Gen. [1982] Ch 321. 39 E.g., the English Compact, supra n.31, paras 15–17. 40 G. Craig, M. Taylor, C. Szanto and M. Wilkinson, Developing Local Compacts (York, YPS, 1999).

(K) Dunn Ch10

25/1/00

1:44 pm

Page 151

Political Activity and the Independence of the Voluntary Sector 151 nerships, but from the wider ambit of government policy and domestic law. Three challenges in particular are discussed below.

CHALLENGES TO POLITICAL INCLUSION

There are a number of positive developments in current government policy and legislation which should assist voluntary organisations to forge public-sector partnerships and to further their role in the political arena. The advent of devolution for Wales and Scotland is one example which will provide a material opportunity for voluntary organisations to lobby directly their respective decision-making bodies, and for those bodies to draw upon the expertise of the sector, particularly through consultation, in developing their policies.41 In a similar vein, proposals for regional assemblies, where they come to fruition, may offer voluntary organisations greater freedom for local action and political influence.42 More broadly, the incorporation of the European Convention on Human Rights into domestic law,43 and the proposals for freedom of information,44 provide scope for greater access to sources which may assist the voluntary sector in making a more informed political contribution, as well as securing a right to the freedoms of association and expression. However, these developments will only have a long-term effect on harnessing voluntary action where the rhetoric of recognising the independence of the voluntary sector and the contribution that it can legitimately make to decisionmaking through challenging, criticising or commenting upon government policy, translates into the day-to-day realities of service provision, the chasing of contracts and funding and the changing boundaries between the State and the voluntary sector in the welfare arena. That progress needs to be made in this context is evident from the wider challenges which exist to voluntary organisations’ political inclusion.

41

See, e.g., Government of Wales Act 1998, s.114, enabling consultation. See K. Donnelly and P. McQuail, Regional Government in England (London, The Constitution Unit, 1996). 43 Human Rights Act 1998. For comment see D. Morris, “Charities, Politics and Freedom of Speech” (1999) 5 CL&PR 219. 44 See White Paper, “Your Right to Know: The Government’s Proposals for a Freedom of Information Act”, Cm 3818 (London, HMSO, 1997). These proposal would allow members of the public, companies or other bodies (para 2.7) to see information held inter alia (para 2.2) by government departments and agencies, local authorities, nationalised industries, privatised utilities, public corporations, quangos, the NHS, local councils, local registered bodies, nationalised industries, public corporations, administrative functions of courts, tribunals, administrative functions of the police, the educational sector, and public-service broadcasters. Information held by and about the security and intelligence services, personnel files and information deemed vital to crime prevention are excluded (para 2.3.). A Draft Bill was issued in May 1999: see Consultation Document London Stationery Office, Cm 4355. 42

(K) Dunn Ch10

25/1/00

1:44 pm

Page 152

152 Alison Dunn

Affiliations and Partnerships Traditionally advanced barriers against full political inclusion tend to focus upon the problems faced by charities, which are prohibited from having political purposes and which may only pursue political activities, such as advocacy or campaigning, to the limited extent that those activities are ancillary to and in furtherance of their main charitable purpose.45 Apart from questions of policy,46 this restriction brings with it primary difficulties with regard to the ambit of an ancillary as opposed to a substantial act. This is a important issue, and the guidelines for charities developed by the Charity Commission readily acknowledge the ambiguity and fluidity in the law’s boundaries.47 Though of general concern, this is a particular issue for those charities which have affiliated to other groups within the voluntary sector which may have wider scope for a campaigning role.48 The affiliation of charities with non-charitable bodies is not prohibited under current law, even where an association is furthered with bodies which have purposes distinct from those of the charity. However, the affiliation itself must be expected to promote the charity’s purpose. Furthermore, forming part of an affiliated body will not provide a charity with greater freedom to pursue as part of a group, activities that it would not be permitted to pursue of its own accord.49 Thus, according to the Charity Commission guidelines50: if the alliance engages in such activities the charity must dissociate itself from them and take reasonable steps to ensure that its name, and any funds it has contributed, are not used to support them.

How feasible it would be in practice for a charity to dissociate itself from a campaigning alliance which edged over the line, either through its policies or activities, or even through having one common spokesperson attached to a specific body within the alliance, is not easy to discern, particularly given the wide remit of large affiliations.51 Ensuring separation of funds could also prove to be 45

See supra n.38. Discussed in Chap. 11 (Swann). 47 Charity Commission, Political Activities and Campaigning by Charities, Leaflet CC9 (London, TSO, 1995, reissued 1997), preface and para 10; Charity Commission, Political Activities and Campaigning by Local Community Charities, Leaflet CC9a (London, TSO, 1997), para 8; A. Dunn, “Charity Law—A Political Scandal?” [1996] 2 Web JCLI. 48 In 1996, certain charities (including WWF, Save the Children Fund, OXFAM and Christian Aid) were criticised by the Prime Minister for joining the Real World Coalition, an affiliated body. In a letter to the organisations involved, John Major expressed his surprise that charities “should use their time and resources to associate themselves with a largely political statement of objectives and policy proposals.” See New Statesman, Nov. 1996. 49 CC9, supra n.47, para 42. 50 Ibid. 51 E.g., in the run-up to the 1997 General Election, the Real World Coalition criticised the Conservative and Labour Parties for ignoring issues on morality, social justice and the environment. The Liberal Democrat Party was excluded from the attack: see The Times, 11 Apr 1997. It is unclear, 46

(K) Dunn Ch10

25/1/00

1:44 pm

Page 153

Political Activity and the Independence of the Voluntary Sector 153 difficult in practice and may additionally raise for the trustees liability for breach of trust and breach of fiduciary obligations.52 More broadly, whilst the joining of forces through an affiliation can provide key advantages for voluntary organisations, such as those of unity and presence, they may also include drawbacks. Just as some donors and companies do not wish to be allied to a charity or voluntary body which has overt political aims, affiliation could isolate an organisation from the funding necessary to provide for its financial security. The COR has counselled that “the public sector should not limit [voluntary] organisations’ scope for action through financial or other pressures”, and that “greater economic dependence on the public sector should not force them to tone down their distinctive profile or critical analysis”.53 As discussed above, this has proved to be a particular matter of concern for those groups within the voluntary sector which have secured contracts with government bodies for the provision of services, and was raised as an issue, both in the Deakin and the Kemp Reports.54 In advocating the formation of partnerships between the voluntary sector and government bodies, either at a domestic or European level, as the way forward to providing for civil dialogue and a more active and inclusive society, thought clearly needs to be given to supporting partnership intra-voluntary organisations. The ESC has called not just for partnership with governing institutions, but also for the promotion of co-operation between voluntary organisations.55 Informal networks and more formal affiliations are an effective means of achieving greater co-operation, a stronger, more focused voluntary sector and a more meaningful contribution to the democratic process. Greater clarity is thus required for the status and boundaries of such associations, as too should attention be paid to protecting independence and autonomy for voluntary organisations who partner the public sector but who are also affiliated to campaigning groups.

Legislation and Consultation Further, the ESC, when reviewing the European Commission’s Communication, called in particular upon Member States to “review their regulations [and] to remove any obstacles to the variety and development of [voluntary organisations]”.56 In order that specific voluntary sector initiatives, such as the Compact, are not inadvertently undermined, Member States should not just remove under present Charity Commission guidelines, whether the Coalition’s criticisms of two main political parties could be interpreted as an implied endorsement of the third, thereby amounting to an infringement of the rules on supporting political parties. 52 For discussion of conflicts of interest see Chap. 15 (Luxton). 53 Supra nn.5, para 3.1.9. 54 Supra n.18 and 21. 55 Supra n.9, para 4. 56 Supra n.6, paras 5.1 and 5.3.

(K) Dunn Ch10

25/1/00

1:44 pm

Page 154

154 Alison Dunn obvious barriers in their regulations, but should also consider the entirety of its policies. This includes the direct and indirect effect that legislation may have upon voluntary organisations and the independence of the voluntary sector, including the sector’s freedom to campaign or protest. The initial interpretation of the Protection from Harassment Act 1997 stands as one example within United Kingdom domestic legislation of the vigilance required. The Protection from Harassment Act 1997 was introduced in order to deal with the problem of stalking, but has been used in a number of cases to restrain voluntary pressure groups from protesting. A person will be guilty of an offence under this Act if they pursue a course of conduct which amounts to the harassment of another and which they know or ought to have known amounts to harassment.57 An injunction or a restraining order may be granted under the Act which, if contravened, will lead to imprisonment for a term not exceeding five years and, or a fine.58 In Huntingdon Life Sciences Ltd. v. Curtin,59 an ex parte injunction was granted under the Act following harassment at Huntingdon Life Sciences’ animal experimentation laboratory by two individuals and nine voluntary groups. One of the voluntary organisations was the British Union for the Abolition of Vivisection (BUAV) which opposes animal experimentation and which, according to its mission statement, “campaigns peacefully for effective lasting change by challenging attitudes and actions towards animals world-wide”.60 BUAV successfully brought an action before the High Court to have its name removed from the writ and injunction on the ground that the action against it was frivolous and vexatious. The evidence against BUAV was no more than that some of its members were present at the demonstration.61 Eady J dismissed this evidence and made the point that the fact that a voluntary group’s members attended a protest was insufficient to impute any wrongdoing to the organisation. He likewise dismissed the argument that where an individual and an organisation to which the individual belonged had the same purpose in view, the organisation would be taken to endorse its member’s actions. In Eady J’s view: The crucial question is not whether they have ends in common. It is whether they can show an arguable case that they have also means in common.

Thus, in these circumstances, before an organisation could be culpable under the provisions of the Protection from Harassment Act, it must be clear that the 57 S.1. A person will not be guilty of an offence under s.1, if, inter alia, they can show that in the particular circumstances the pursuit of the course of action was reasonable (s.1(3)). Harassment is defined (s.7) as alarming a person, or causing distress through a course of conduct extending over a period including at least two occasions. 58 S.3. 59 The Times, 11 Dec (the author is grateful to BUAV for providing her with a transcript of the court’s judgment). 60 BUAV, Annual Review (London, BUAV, 1996), 1. 61 Albeit that Huntingdon Life Sciences also tried to draw strength from the fact that BUAV was the “primary anti-vivisection organisation in the UK”: affidavit of Mr Dawes for HLS.

(K) Dunn Ch10

25/1/00

1:44 pm

Page 155

Political Activity and the Independence of the Voluntary Sector 155 organisation had specifically approved, authorised or encouraged its members’ actions.62 Curtin is a significant case for three reasons. First, because the judge emphasised that even though an injunction was initially granted to restrain BUAV, the Protection from Harassment Act 1997: was clearly not intended by Parliament to be used to clamp down on the discussion of matters of public interest or upon the rights of political protest and public demonstration which are so much part of our democratic tradition.

This point was emphasised in a later case by Collins J, who stated that whilst the Act covered different forms of harassment, not just stalking63: in many instances there will be a need for the court to balance the interests of the victim of the harassment against the rights of the person carrying out the course of conduct which amounts to harassment. Those rights will include, in an appropriate case, the right to protest peacefully.

Secondly, beyond the scope of individual demonstrations, protests or campaigns, there is the wider issue of the adverse effect, particularly through media coverage, on a voluntary organisation’s reputation as a result of the stigma of being associated with an injunction against harassment. This could be of concern to donors, funders and supporters of the organisation, or of the voluntary sector as a whole. It could also affect their role in policy consultations and the organisation’s ability to be taken seriously when entering into constructive dialogue with public bodies.64 In 1995, the Advertising Standards Authority was quick to point out to charities the dangers of overt political or emotive advertisements upon donors.65 Where a voluntary organisation chooses to pursue a media campaign it will take a risk of generating adverse publicity. But adverse publicity is much more of an issue where it results from litigation and not from a campaign of the organisation’s own choosing. Moreover, although BUAV was represented by Liberty, not all organisations would have the resources to fund similar actions to clear their names. Thirdly, the case of Curtin emphasises the significance of involving the voluntary sector in consultation on a wider range of issues prior to the introduction of new policies or legislation. More formal and explicit requirements for purposive consultation with voluntary organisations at a domestic and European level would assist in enabling the voluntary sector to bring its expertise and 62 The Charity Commission has emphasised that there are further issues to consider for charities which wish to organise or take part in a protest or demonstration, such as going beyond their charitable purposes and incurring financial loss or loss of public support: CC9, supra n.47, paras 57–70. 63 R. v. DPP, ex parte Moseley, 9 June 1999, unreported, in which protests were carried out at a mink farm in Northumberland by three individuals and the Newcastle Animal Rights Coalition. 64 This is a danger for direct action groups which sometimes extend beyond the boundaries of the law in their campaigning. Consider, e.g., the recent activities of Greenpeace in destroying crops involved in government GM test trials: The Independent, 27 July 1999, The Observer 1 Aug 1999. 65 ASA, Report No. 53 (London, Advertising Standards Authority, 1995), 1; Dunn, supra n.47.

(K) Dunn Ch10

25/1/00

1:44 pm

Page 156

156 Alison Dunn perspective properly into civil dialogue, and to identify the areas, overlooked by the draftsman, in which proposed legislation could affect the sector.

Single Issues Whilst the Deakin and Kemp Reports and the European Commission Communication urged a more inclusive role for the voluntary sector, they also raised question-marks over groups primarily concerned with single-issue lobbying. They recognised that such groups could be criticised as a disruptive element within the voluntary sector,66 and that they were sometimes “unjustifiably impatient”, failing to appreciate the constraints of policy decision-making.67 The Compact developed for voluntary and public-sector partnerships in Scotland specifically highlights the need for voluntary organisations to recognise the framework within which the government has to operate.68 Similarly, the English Compact emphasises that whilst the government is distinctly accountable, it has a different group of stakeholders from those of the voluntary sector.69 It is true that single-issue campaigning groups can sometimes fail to take into account the political, social and economic constraints of government. They are a challenge to the voluntary sector and its respectability. By pushing the boundaries of political dialogue they must campaign within the law and with realistic expectations of the framework of government. However, this does not preclude such organisations from pursuing an agenda which is less mainstream than some public authorities would like, but which draws attention to key economic or moral issues. It is incumbent upon government to ensure that such voluntary organisations, albeit sometimes too challenging and uncomfortable, are nevertheless permitted a forum in which to campaign and are included within constructive dialogue. Single-issue campaigning at election time came before the European Court of Human Rights in Bowman v. United Kingdom70 in which the Court held that there had been a violation of Bowman’s freedom of expression as guaranteed by Article 10 of the European Convention on Human Rights.71 This case was 66

Deakin Report, supra n.18, para 1.3.23. European Commission, supra n.4, para 9.3. 68 Supra n.32. 69 Supra n.31, para 8.5. 70 (1998) 26 EHRR 1. 71 Art 10 of the Convention states: “1. Everyone has the right to freedom of expression. This right shall include freedom to hold opinions and to receive and impart information and ideas without interference by public authority and regardless of frontiers . . . 2. The exercise of these freedoms, since it carries with it duties and responsibilities, may be subject to such formalities, conditions, restrictions or penalties as are prescribed by law and are necessary in a democratic society, in the interests of national security, territorial integrity or public safety, for the prevention of disorder or crime, for the protection of health or morals, for the protection of the reputation or rights of others, for preventing the disclosure of information received in confidence, or for maintaining the authority and impartiality of the judiciary.” 67

(K) Dunn Ch10

25/1/00

1:44 pm

Page 157

Political Activity and the Independence of the Voluntary Sector 157 brought by the executive director of the voluntary organisation the Society for the Protection of the Unborn Child (SPUC), and it successfully challenged section 75 of the Representation of the People Act 1983.72 Section 75 makes it a criminal offence for an unauthorised person to incur expenses of more than £5 during a designated election period in “promoting or procuring the election of a candidate”. Bowman had been charged under the section for distributing 25,000 leaflets in Halifax prior to the 1992 General Election which gave the constituency candidates’ voting intentions on abortion and human embryo experimentation. The question addressed by the Court was whether the restriction under section 75 on Bowman’s freedom of expression was proportionate to the legitimate aim pursued by the legislation, and whether the reasons adduced by the national authority in its justification were relevant and significant. The UK government argued that not only did section 75 promote equality between candidates at election time and ensure that candidates were independent of powerful or wealthy interest pressure groups, it also prevented such groups from hijacking debate away from general issues which were of concern to a broad range of voters. Further, it contended that, in any event, such groups could make their views known through a variety of mediums which would not infringe the section.73 These included securing media coverage or standing for election.74 For her part, Bowman had contended that at election time there was a need for moral issues to be placed on the political agenda and brought to the attention of voters.75 Further, she argued that because of genuine diversity of opinion on moral issues there was no evidence to suggest that informing the electorate of candidates’ voting records actually promoted or opposed particular candidates.76 The Court accepted Bowman’s argument. It held that whilst the legitimate aim of the Representation of the People Act 1983 was to protect the rights of others, the restriction that it entailed was not necessary in a democratic society and that, therefore, the restraint upon Bowman’s freedom of expression was not proportionate to securing the Act’s legitimate aim of protecting others.77 In the 72 Although Bowman had been successfully convicted of offences under s.75 on earlier occasions, she was acquitted in this instance because the originating summons was issued out of time. She nevertheless brought her case before the European Court of Human Rights an account of the stress, stigma and associated publicity of the prosecution. 73 Supra n.70, paras 36, 39. 74 Supra n.70, para 39. 75 Supra n.70, para 40. See also Bowman’s original submission to the European Commission (1997) 22 EHRR CD 13. 76 The Hunting Bill is a further example of the fact that public opinion can be mobilised in different directions. 77 The Court’s decision was made by 14 votes to six. The dissenting judges agreed that s.75 operated as a restriction upon Bowman’s freedom of speech, but disagreed with the view that the restriction was disproportionate to the legitimate aim of the section. The point was made in dissent that the purpose of the section was to prevent manipulation of the electoral process by pressure groups, that SPUC could have informed the electorate of their cause without promoting or opposing a particular candidate and that s.75 fell within a State’s margin of appreciation in striking a balance where freedom of expression and free elections conflict per Judges Loizou, Baka and Jambrek (para 6). See also Sir John Freedland’s similar dissent, para 13.

(K) Dunn Ch10

25/1/00

1:44 pm

Page 158

158 Alison Dunn Court’s view, other channels of communication were not open to SPUC to communicate its message.78 Moreover: free elections and freedom of expression, particularly freedom of political debate, together formed the bedrock of any democratic system . . . for this reason, it is particularly important in the period preceding an election that opinions and information of all kinds are permitted to circulate freely.79

Issues such as abortion, euthanasia, the arms trade or environmental concerns are generally contentious, and will polarise opinion in disparate and extreme directions. This is not just as between voluntary organisations and public authorities. Diversity exists within the voluntary sector itself. Of course, such pluralism lends itself to the unique make-up of the voluntary sector, and it is the fact that the sector speaks with a cacophony of voices which ensures that it is broadly representative of society. Where allowed to flourish, this dissonance is not necessarily destructive, but can be constructive. The Bowman case demonstrates that single-issue campaigning groups are a challenge both to the public sector and the voluntary sector. As the COR has emphasised80: Radical ideas should not be condemned out of hand since the specific task of a voluntary organisation is to strive for change and innovation. The paradox can be said to be that, in order to preserve, in many cases change is necessary to ensure survival and avoid stagnation.

The European Court of Human Rights properly argued that it would not always be practicable, and certainly not appropriate, that voluntary organisations should be forced to stand for election themselves in order to have the forum to present their views. For the public sector the existence of such organisations challenges strong government, which should be able to maintain democratic free speech in the light of uncomfortable questions on issues of economic, social, political, cultural and moral concern. This is true, whether or not those concerns are on the political agenda of the day, and is particularly important given that in their contribution to citizenship and democracy, it is the role of the voluntary sector to bring into public debate the issues of the socially or politically excluded.81

CONCLUSION

It is evident that despite the gloss of the European Commission’s Communication, the UK government’s search for a “third way”, and the Compact 78

Supra n.70, paras 45–47. Supra n.70, para 42, following their earlier decisions in Mathieu-Mohin and Clerfayt v. Belgium, 2 Mar 1987, Series A no. 113, 22 §47, and Lingens v. Austria, 8 July 1986, Series A no. 103–B, 26 §§41–42. 80 Supra n.5, para 2.2.1. 81 See ESC, supra n.9, para 4. 79

(K) Dunn Ch10

25/1/00

1:44 pm

Page 159

Political Activity and the Independence of the Voluntary Sector 159 developed between the public and voluntary sectors, there are as yet no satisfactory solutions to the three key issues, identified by the COR, which are to be addressed before voluntary organisations become fully fledged partners in service or policy provision.82 Those key issues, namely, apportionment of responsibility between the public sector and the voluntary sector; preservation of the independence of the voluntary sector; and the criteria to be employed for evaluating the sector’s contribution, are crucial to the voluntary sector’s participation in the democratic process and to challenging and monitoring government at whatever level. It is clear that it is in consultation, particularly on wider policy and legislative provisions, that work needs to be done. For its part, the government has begun a scheme to match MPs with voluntary organisations to foster better understanding of the sector,83 and it is hoped that new initiatives such as this one serve to increase the sector’s political prominence. The European Commission’s Communication acknowledged that the voluntary sector deserves a greater role in policy-making than single lobbying can provide, and pledged to establish dialogue and consultation in order to develop the sector’s role.84 The dearth of information concerning the voluntary sector, its composition and boundaries, dictates that the primary way forward at a European level is for the Commission to undertake further research on the sector itself,85 and therefrom to build and consolidate structures with voluntary organisations,86 and to encourage “synergies” within and beyond the voluntary sector.87 Similarly, at a domestic level, the Compact guiding relationships between voluntary organisations and public authorities must acknowledge in practice the respective roles of the two sectors. This can only be achieved in the face of an understanding of one sector by the other. It is from the standpoint of knowledge and respect, that roles and responsibilities can be properly ascribed and the independence of both parties as partners and contributors to the political arena at a domestic and European level be protected.

82

See text to n.12. NCVO News, Mar 1999, 8. 84 Supra n.4, part VI, 12–13. 85 See the comments made by the European Parliament, supra n.7, para 2; the ESC, supra n.6, paras 2.11, 5.2; and the COR, supra n.5, para 4.1. 86 European Parliament, supra n.7, paras 19, 21. 87 European Parliament, supra n.7, para 6. 83

(K) Dunn Ch10

25/1/00

1:44 pm

Page 160

(L) Dunn Ch11

25/1/00

1:45 pm

Page 161

11

Justifying the Ban on Politics in Charity STEPHEN SWANN

It is a principle of English trust law, perhaps of modern invention1 but nonetheless entrenched in the case law,2 that a political object is not a charitable object. A trust whose sole or main purposes are political is not constituted as a charity and consequently void. A purpose will be political (a) if it requires (or is intended mainly to be effected by) a change in legislation or government policy, or the maintenance of existing law or policy;3 or (b) if it promotes or opposes an opinion which is political in the sense of (a);4 or (c) if it promotes or opposes persons whose objects are political in that sense.5 Out of this tight legal kernel has grown a set of interrelated rules parasitic on the development of the legal framework for the charitable sector in the United Kingdom. The inclusion of a dominant political purpose in the objects clause of an organisation, whether incorporated or not, damns it as non-charitable and excludes it from charity’s generous tax exemptions6 as well as the special legislative and inherent judicial powers in the three jurisdictions,7 which are intended to foster a flourishing and effective sector. 1 See L. A. Sheridan, “The Political Muddle—A Charitable View?” (1977) 19 Malaya L Rev 42, 43; F. Gladstone, Charity, Law and Social Justice (London, Bedford Square Press, 1982), 98, casting doubt on Lord Parker’s emphasis in Bowman v. Secular Society Limited [1917] AC 406, 442, that a trust for the attainment of political objects has “always” been held invalid. 2 See, inter alia, Baldry v. Feintuck [1972] 1 WLR 552, 558 (Brightman J); Re Bushnell [1975] 1 WLR 1596, 1603 (Goulding J); McGovern v. Att-Gen [1982] 1 Ch 321, 340 (Slade J); Att.-Gen. v. Ross [1986] 1 WLR 252, 263 (Scott J). 3 IRC v. Temperance Council of the Christian Churches of England and Wales (1926) 136 LT 27, 28 (Rowlatt J); National Anti-Vivisection Society v. IRC [1948] AC 31, 49–50 (Lord Wright), 61–3 (Lord Simonds) and 76 (Lord Normand); Re Hopkinson [1949] 1 All ER 346, 350 (Vaisey J). 4 Baldry v. Feintuck, supra n.2. 5 Bonar Law Memorial Trust v. IRC (1933) 49 TLR 220, 221, where Finlay J held the trust to be in reality for the benefit of the Conservative Party. 6 See especially the Income and Corporation Taxes Act 1988 (ICTA), s.505, for income and corporation tax exemptions, and the Local Government Finance Act 1988, s.43(5)–(6), and the Local Government (Financial Provisions, Etc) (Scotland) Act 1962, s.4(2)(a)–(b) (as amended), for 80% mandatory relief from non-domestic rating in England and Wales and in Scotland, respectively. 7 Charities Act 1993, containing facilitative provisions in Part IV; Charities Act 1964 (Northern Ireland); Law Reform (Miscellaneous Provisions) (Scotland) Act 1990, Part I, mostly applying to “recognised bodies” defined by reference to Inland Revenue recognition of eligibility for exemption under ICTA, s.505. The Scottish position is exceptional in that, in contrast to cy-près under English

(L) Dunn Ch11

25/1/00

1:45 pm

Page 162

162 Stephen Swann This is only to state the primary aspect of the legal “ban on politics”. The exclusion of politics from charity extends beyond mere consideration of the memorandum of objects. Indeed, it is the manner in which the exclusion touches on the operation of existing charities which is of most practical import. The law’s restrictions extend, indirectly, to the manner in which a charity pursues or fulfills its objects. It is a misconception that the law prevents a charity from undertaking any political activity.8 Equally, however, a charity’s directors cannot content themselves with the sound knowledge that a means is not an end and relax in the supposition that political means may be freely deployed in furtherance of a charitable purpose. Political activity may be so substantial that the means infects the end: “the relief of poverty” has become “the relief of poverty by lobbying government for greater welfare spending”. The conduct of the charity itself may gloss the objects clause of its founding instrument and show that in reality it was always there, or at any rate is there now, for a political cause.9 It is for this reason that expenditure by a charity on substantial political activity places that organisation in an unenviable predicament. If the activity is lawful, it must be within the powers of the organisation and it follows that its objects include as one of its main objects a political purpose. On this view, the organisation is not constituted for exclusively charitable purposes. If, on the other hand, the political activity is disowned as ultra vires, the charitable status of the organisation is unimpaired, but only because the funds have been devoted to an admittedly unauthorised (and non-charitable) purpose. Questions may arise whether the charity’s trustees are personally liable to make good the sums misspent or are to be removed from office by the courts or the sector’s regulators for their mismanagement of the charity.10 There may also be a tax liability for the charity, following loss of tax exemption on the relevant income. The rule against mixing charity with politics, while not absolute, nonetheless cuts deep, restricting charities to incidental or subsidiary use of political activity in support of purposes substantially untainted by political objects. Clear in principle, it is in their application to the everyday exertions within the charitable sector that these rules lose their opacity. The necessity to observe the invisible line of degree between substantial and subisidiary political conduct is of the essence, but may be difficult to master in practice. That task is made no easier by the ties which bind charities to government. As donor of grants and as service provider, government has a role in financing welfare expenditure which numerous charities have an interest in influencing. Reporting in 1975, one House of Commons committee observed: and Northern Irish law, the judicial powers for variation of trust purposes and the statutory provisions in ss.9–11 of the 1990 Act extend to non-charitable public trusts. 8 See Charity Commission [1976] Annual Report, para 101 and [1979] Annual Report, para 20 (RSPCA able to press for legislation to prevent cruelty to animals). 9 Bonar Law Memorial Trust v. IRC (1933) 49 TLR 220, 221 (Finlay J). 10 See, inter alia, Charities Act 1993, s.18, and the Law Reform (Miscellaneous Provisions) (Scotland) Act 1990, s.7.

(L) Dunn Ch11

25/1/00

1:45 pm

Page 163

Justifying the Ban on Politics in Charity 163 It is almost impossible nowadays when Government are concerned in all spheres of human activity to pursue charitable objects without becoming politically involved.11

Since the privatisations of the 1980s and 1990s and the development of a “contract culture”, the State has become less willing to assume a hands-on position in controlling the delivery of welfare services and is less of a direct provider. In enhancing its role as financier rather than player, however, the power of government has not lost any of its gravitational attraction for charity. The reward for exerting political pressure has sometimes changed its form but has hardly given up its value, and many charities continue to campaign vigorously for political outcomes.12 The legal exclusion of political purposes and substantial political activity from charity subsists against a backdrop of perceived practical difficulty in applying the law and the enduring interconnection between charity and government. That context prompts the question which is the focus of this essay. If the application of the law is so problematic, is the restriction of political activity in the charitable sector justified? A decade ago the governmental view expressed in a White Paper on reform of the regulatory regime for charities in England and Wales was firmly in support of the existing law: “[i]t is vital in the longer term interests of the public and charities alike, that political and charitable purposes should remain distinct”.13 This forthright opinion was, however, justified by reference to a comparatively concentrated range of policy arguments. Following a change of administration to a government of an at least notionally different political hue, it may be time, ten years on, to re-examine the argument for retaining the current rules. That question could be addressed in narrow terms focusing on the arguable juridical explanations for those rules of English trust law from which the modern restrictions, governing across the spectrum of British charity law, have been derived. The aim here, by contrast, is to embark on the more fundamental task of evaluating the policy arguments which underpin those legal restrictions, since any legal rule devoid of policy justification is properly characterised as an endangered species. This is at least a first exploration of the arguments for and against the current law.

REFORM OF THE LAW : THE VIEW FROM WITHIN

It is a popular view within the voluntary sector itself that it should have more freedom to campaign14; some go so far as to assume or assert for charities a 11 Tenth Report from the Expenditure Committee, Charity Commissioners and Their Accountability (1975) HC Session 1974–5 (495–I), Vol. 1, para 40. 12 See R. v. Radio Authority, ex parte Bull [1998] QB 294, 316 and 322 (Brooke LJ). 13 Charities: A Framework for the Future, Cm 694 (London, HMSO, 1989), para 2.41. 14 See submissions to the Kemp Commission: Head and Heart. The Report of the Commission on the Future of the Voluntary Sector in Scotland (Edinburgh, SCVO, 1997) (Kemp Report), paras 3.3.4 and 3.3.7.

(L) Dunn Ch11

25/1/00

1:45 pm

Page 164

164 Stephen Swann legitimate right15—an obligation even16—to campaign. Reform of this area of the law has been widely advocated outside the sector too, predominantly in favour of some measure of liberalisation of the law. Options for improving the position of campaigning charities cluster around either possible restriction of what constitutes “a political purpose” for the purposes of the law or an enhancement of the degree of political activity which may be undertaken consistent with charitable status. In the former camp, one suggestion is that the law’s exclusion of politics should be restricted merely to exclude partisan support for political parties and candidates.17 Sheridan has described a range of options for reform, from an extreme position in which charity is allowed to embrace all political objects, to an alternative moderate position whereby political purposes would remain excluded, but deploying a main or dominant political means (which would otherwise corrupt exclusively charitable purposes) would be intra vires and without any negative fiscal effect.18 Most of these reformist agendas fail to convince for the same reason which weakens the position taken in the 1989 White Paper: the case for legal change or the status quo must be supported by a review of why the law, as a matter of policy, should keep charity out of politics. It is only in assessing the strength of the arguments for and against the current law that its proper future can be judged. In reviewing these arguments it is as well to note that the public mood seems to favour more political activity by charities.19 If public sentiment is to be appeased, reform should be generally in the direction of removing or relaxing the restraints imposed by the law. However, there is also virtually no public support for going so far as to make political parties themselves charitable20; and a 15 See the following evidence to the Kemp Commission: ibid., 135 (Alzheimers Scotland—Action on Dementia), 103 (Voluntary Organisations Regional Advisory Group (Fife)) and 144–5 (Camphill Scotland). This is probably not a recent development. The Goodman Committee noted that charities desiring to promote change felt themselves hampered by what they regarded as the restrictive provisions of the law and the practice of the Charity Commissioners: see Charity Law and Voluntary Organisations, Report of an Independent Committee of Inquiry Set Up by the National Council of Social Service under the Chairmanship of Lord Goodman (London, Bedford Square Press, 1976) (Goodman Report), para 98. 16 Ben Whitaker in his Minority Report to the Goodman Report subscribed to the view that charities have a political responsibility to act as political pressure groups: see ibid., Minority Report, paras 21–22. The Charity Commission has noted that many believe charities should be allowed to and have a duty to campaign: Political Activities and Campaigning by Charities, Leaflet CC9 (London, TSO, 1997), para 16. 17 See E. Clark, “The Limitation on Political Activities: A Discordant Note in the Law of Charities” (1960) 46 Va L Rev 439. 18 Sheridan, supra n.1, 49. 19 Kemp Report, supra n.14, paras 12.3 and 12.8 (table 2f), noting that 65% of respondents to a public opinion survey commissioned by the Lloyds TSB Foundation for Scotland in Jan 1997 agreed that charities should spend more time campaigning about the issues with which they deal. This figure includes 21% agreeing strongly, and contrasts with 16% disagreeing (including 3% disagreeing strongly). 20 Supra n.14, paras 12.4.1. and 12.8 (table 3b), noting that only 2% of respondents to the public opinion survey thought that political parties should be charitable. This is an important point because it illustrates the extremity of some positions assumed by organisations within the voluntary sector. E.g., in its evidence to the Kemp Commission, Rutherglen and Cambuslang Citizens’ Advice Bureau saw no reason why political parties should not be defined as charitable bodies: 103.

(L) Dunn Ch11

25/1/00

1:45 pm

Page 165

Justifying the Ban on Politics in Charity 165 similar view was reflected in the Goodman Report,21 where concern was also expressed that permitting charities to have main political objects would involve the danger of organisations which are identifiable with political parties.22 This seems to suggest, as a matter of practical politics at least, an upper boundary for any reformist agenda. Accommodating those two ambitions of popular sentiment in a principled way consistent with the policy concerns set out below may be no easy undertaking, and it should be unsurprising if this burdens the task of re-assessing the law with particular difficulty. As is widely recognised, the degree to which the law should constrain political campaigning by charities remains a controversial issue.23 However, given the popular clamour for reform, it may be as well to approach the debate by considering the arguments favouring change in the law. The reasons for retaining the existing law, if any, will emerge as the antithesis in this discussion.

UNJUST DISCRIMINATION AGAINST CHARITIES

A simplistic comparison can be made between charities on the one hand and individuals and private businesses on the other. The latter are free to indulge in political activity, while charity seems to be singled out for restrictive treatement.24 At its crudest, one argument is that since businesses can lobby, the exclusion of charities from political activity offends the democratic concept that the views of all interested parties should be considered—or rather, since government and the legislature are not actively seeking to exclude such views, one might more properly say that in excluding politics from the charitable sector the law denies an equal right to shout. On further analysis the appropriateness of this comparison quickly breaks down. Individuals who engage in political campaigning are spending their own money, and business owners, whether partners or shareholders, may make decisions collectively about their own money25 or delegate them to others. A charity, on the other hand, is a trust of other people’s money, money which is at the 21

Supra n.15, paras 103–104. Supra n.15, para 102. Contemporaneously the House of Commons Expenditure Committee likewise indicated that in its view political parties themselves should not be charitable: supra n.11, i, para 43. 23 Kemp Report, supra n.14, para 3.3.7. See also the Goodman Report, supra n.15, para 41, identifying the area as important but difficult. 24 M. M. Caplin and R. E. Timble, “Legislative Activities of Public Charities” (1975) 39 Law and Contemporary Problems 183, 184 (commenting in the context of US tax law). It should be remembered that non-charitable corporate bodies and associations, whether profit-making or not, may be restricted by their particular limited objects from pursuing political purposes. 25 In strict terms the assets of a business incorporated with separate legal personality are generally the property not of the incorporated members themselves but of the corporate body. However, the distinction between incorporated and unincorporated business is immaterial here if in either case a business partner’s investment is only a market-valued proxy for an entitlement to a share in the going concern. 22

(L) Dunn Ch11

25/1/00

1:45 pm

Page 166

166 Stephen Swann same time both quasi-public and beneficially ownerless.26 There is no evident constituency of owners which is able to authorise the pursuit of political ends by the charity trustees or officers. If such authorisation can be given, it must be by the initial donor, in which case the donation is clearly marked off as not purely (quasi-)public money, but instead as money subject to “private” control. The correlative of authorisation for political objectives is that this is not public money meriting the public fiscal subsidy generally attached to charitable funds. As the Charity Commission has observed, the question is not merely what charities should be free to do, but: whether charitable organisations, funded by gifts for charitable purposes, and supported by the taxpayer without his being consulted, should be free of restraints, and free to engage in political or polemical activity.27

It is significant that representations to the Kemp Commission on the Future of the Voluntary Sector in Scotland conceded that campaigning should be limited because it is at least partly funded by the taxpayer.28 Political movements in the UK do not generally receive tax exemptions.29 There is admittedly an exemption from inheritance tax for transfers to political parties,30 but its restrictive terms31—favouring as they do parties of proven immediate historic popularity and, thus, of established success—suggest that Parliament was not anxious to foster minority parties and, by inference, was not unduly bothered about promoting the welfare of those with minority views to articulate. If this evinces a legislative intention to foster democratic participation, it does so only to the advantage of established “big players” and only for those seeking political influence through formal representation in government. This particular tax exemption may therefore be seen as anomalous and not lending support for similar benefits to the political activity of charities.32 Indeed there may be good economic reasons for not extending this tax exemption to the political activities of charitable bodies. The tax subsidy which charities enjoy is predicated on the basis that they will deliver welfare services to effect redistrib26 Contrast the funded occupational pension scheme, which, especially prior to the Pensions Act 1995, might similarly suffer from an absence of direct control by interested voting parties. The pension trust lacks the truly quasi-public and beneficiary-free qualities of the charity. 27 [1982] Annual Report, para 16 (emphasis added). 28 Supra n.14, para 3.3.9. See also the White Paper, supra n.13, para 1.9: “[c]harity funds are not ‘public money’ in the sense in which that phrase is normally used, but once donated they are clearly in the public domain”. The reason lies in the fact that the funds must be applied for public benefit. Once the application is restricted to objects nominated by the donor which cannot be shown to be for the public benefit, the funds cease to be quasi-public and assume a private character. 29 Sheridan, supra n.1, 48. 30 Inheritance Tax Act 1984 (IHTA), s.24, re-enacting the Finance Act 1975, s.29 and Sched. 6, para 11. 31 A party must have had at the last general election, either two MPs or one MP and not fewer than 150,000 votes for its candidates: see IHTA, s.24. 32 The Goodman Committee similarly considered that this tax exemption for gifts to political parties should be viewed as distinct from charity and did not compel the extension of charity to include political purposes: supra n.15, para 104. Whitaker took the opposite view: Minority Report, para 25.

(L) Dunn Ch11

25/1/00

1:45 pm

Page 167

Justifying the Ban on Politics in Charity 167 ution of resources or provide public goods. Charities may be efficient in that task—their main endeavour. They may be efficient in collecting specialist information pertinent to their welfare service of assistance to government. However, charities may not necessarily be efficient at politicisation and a tax subsidy to that end is not inherently an effective one. If efficiency in political activity is to be assessed by the relative success in persuasion, there is no automatic means by which the success of a charity in delivering on its charitable function will logically imply its potential as a political actor. Relative strength in obtaining donor support, or in converting that input into service provision, may simply show ability in solicitation or service performance, possibly despite the charity’s shortcomings as a propagandist for its cause. In any event, the demonstrable ability in a competitive fund-raising market to promote compassionate sentiment and altruistic giving may not go hand in glove with the astute skills of message-management demanded in the back-stabbing ego hothouse of political warfare. By contrast, a tax subsidy to a political party which has established its political credentials by obtaining Parliamentary seats or votes might be rationalised as an efficient means of fostering democratic debate, although confining the tax subsidy to “proven” players will clearly have distributional effects as it serves to entrench the position of the dominant parties. The essential point seems to remain in tact. As Sheridan expresses it: it is important to a democracy that pubic debate should occur, but that does not mean that a trust for provoking it should be charitable, . . . with immunity from taxation.33

Indeed other commentators34 go so far as to discern fiscal considerations to be the real rationale for the exclusion of political purposes from charity law. However, some crumb of comfort can be offered for charity within the present law from this rationale, by turning the point on its head. If the bond between charity and fiscal subsidy can be broken, and if donors can impress on their donations an expression of their wishes in favour of political activity, the charitable trust money comes to resemble “private money” and the fiscal objection falls away.

CONFINEMENT TO THE ROLE OF SERVICE PROVIDER

A further argument against the current law is that it otherwise leaves voluntary organisations in the position of mere service providers, dealing with current ills and ultimately, in the style of George Bernard Shaw’s Major Barbara, propping

33

Sheridan, supra n.1, 60–1 (emphasis added). See e.g., P. Luxton, “Charitable Status and Political Purpose” [1995] NLJ Annual Charities Rev 24, 28; C. E. F. Rickett, “Charity and Politics” (1982) 10 NZ University L Rev 169, 176; G. LL. H. Griffiths, “The Art of the Possible” [1996] NLJ Christmas Appeals Supp 30. 34

(L) Dunn Ch11

25/1/00

1:45 pm

Page 168

168 Stephen Swann up the status quo with the donations of petty Bodgers and Undershafts.35 At its broadest, it may be said that funding of charitable purposes in isolation from political activity operates as a form of sop or “hush money” from those who benefit by perpetuating the social ills which smite the lives of others. Whether perceived as an integral and pernicious factor in the bourgeois superstructure subjugating the oppressed or as the semi-spontaneous well-intentioned outpouring of the affluent conscience-stricken, unprotesting charity undoubtedly has a politically conservative implication and for that reason may be considered objectionable. Nonetheless that implication may be part of the policy which the State maintains in allowing a sphere for charity and encouraging, through fiscal and other assistance, its role in welfare provision. Hence it may be argued in response that the fiscal subsidy is given directly for the purpose of providing the service, not for the end of creating a political situation in which the government must apply further funds itself in the fulfilment or augmentation of that service. If the position were otherwise the initial subsidy might simply and more efficiently have been spent by the government itself on direct provision or in persuading the electorate to accept the need for greater expenditure and thus tolerance of greater public borrowing or taxation. The fiscal subsidy is indeed predicated on a narrow role for the charity: to fulfill a role within the legislative and governmental parameters which the State has already set. Conversely, however, it must be stressed again that if the association between charitable money and tax privilege can be dissolved, this objection to greater political freedom for charities loses its force.

DENIAL OF FREEDOM TO OFFER EXPERTISE

In its role as service provider or in other profit-free activities which may gain the trust of outsiders, charity can acquire particular expertise of value to government and yet, it is argued, the prohibition on politics prevents it from offering that expertise.36 There may be something in this argument, but it probably overstates the position. Certainly charities will often have expertise to offer which would be valuable to public debate,37 but the law as applied by the Charity Commission allows charities at all times to communicate their expertise in a reasoned memorandum and to make other representations to government.38 It 35 See the evidence to the Kemp Commission of the Central Money Advice Project (supra n.14, 103); Whitaker (Goodman Report, supra n.15, Minority Report, para 21), castigating “cosmetic philanthropy” postponing more fundamental reforms; and Gladstone, supra n.1, 97, noting that some opinion favours such a limited role for charities. 36 See Caplin and Timble, supra n.24, passim, but especially 198. 37 As the Charity Commission states in CC9, supra n.16, para 3, “[c]harities have a wealth of knowledge and experience which they can contribute to the solution, as well as the treatment, of problems relating to their area of work. The nation would be impoverished if charities were cut off entirely from public debate and the opportunity to inform decision-makers.” 38 Supra n.16, para 12, indicating that entry into dialgoue with government on matters relating to the charity’s purposes or the manner of carrying out its work is political but ancillary.

(L) Dunn Ch11

25/1/00

1:45 pm

Page 169

Justifying the Ban on Politics in Charity 169 does not necessitate partisan political lobbying unless, its expertise falling on governmental deaf ears, that expertise can only find fuller implementation if the electorate can be persuaded to apply pressure. The Charity Commission’s view39 that the existing law allows charities to make an informed contribution to the public debate is no doubt a correct one.

OBSCURITY IN THE LAW AS THE SOURCE OF OVERCAUTIOUS RETICENCE

It has often been mooted that the boundary of what is permissible for charities is unclear40 and that this leads to unnecessary self-censoring self-restraint,41 especially in view of the risk of personal liability which, as was noted earlier, may be the consequence of misapplication in devoting charitable trust funds to political causes without due authority. Charities are thus forced to be “artificially cautious”.42 That view has generally not found favour with the Charity Commission, which suspects a tendency to assume the law (and its explanation of it) to be more restrictive than it actually is43—an analysis confirmed by the Goodman Committee.44 This is not the place to probe the detailed question whether the demarcation between permissible and impermissible political activity is in fact comparatively uncertain; examining the boundary of incidental political conduct would requires a thorough review of the case law and the treatment of it by the Charity Commission in their evolving guidelines. Two points can be made, however. First, charity managers must grapple daily with questions of degree on which personal liability may hang—primarily in fulfilling their duties of reasonable care or due diligence owed to employees, volunteers and beneficiaries. In any event, it is always open to an English charity to seek to obtain the desired clarity in the application of the law by consulting the 39

Supra n.16, preface. For example, anonymous evidence to the Kemp Commission referring to an “amorphous, ambiguous and outdated boundary”: supra n.14, 111. See also the evidence of Friends of the Earth Scotland: 145; and the Goodman Report, supra n.15, para 103, noting similar concerns about uncertainty. 41 See Gladstone, supra n.1, 114. 42 B. Nightingale, Charities (London, Allen Lane, 1973), 52. 43 See [1973] Annual Report, para 9 (some registered charities’ complaints that the Commissioners’ interpretation of the law was too restrictive was misconceived); [1978] Annual Report, para 28 (law on political activities does not create a lot of difficulty for charities). Later statements have been less sanguine: see CC9, supra n.16, para 10 (principle that trustees may to some extent use political means to achieve charitable purposes is not always easy to apply in practice). 44 Supra n.15, para 104: “the Committee considered that there was a general lack of knowledge and understanding of the present law, many charities being under the impression that all political activity was prohibited to charities, notwithstanding the contents of the Charity Commissioners’ Reports”. Paradoxically, the Committee added that the Commissioners’ advice had “resulted in great uncertainty”. The House of Commons Expenditure Committee in 1975 was less impressed by the Charity Commissioners’ statements, considering the position to be unsatisfactory notwithstanding, but conceded that ambiguity in the law might not be as serious as people imagined: supra n.11, i, paras 36 and 41, respectively. For the opposite view, see Gladstone, supra n.1, 97 (exactly where the frontiers of forbidden territory lie is far from certain) and passim, but especially 114. 40

(L) Dunn Ch11

25/1/00

1:45 pm

Page 170

170 Stephen Swann Commissioners for their advice.45 Admittedly there is no public adviser waiting so closely in the wings for Scottish charities, although charity trustees may obtain clarifying advice (at a price) by petitioning the Court of Session for directions. There may be little difference in practice. It has been noted46 that the Commissioners’ offer to advise has rarely been taken up. This may be due to ignorance of the opportunity or reflect the citizen’s cautious timidity in approaching the sector’s overworked police officer. The further alternative explanation is that the difficulties of applying the law in practice are often more imagined than real. It is doubtful whether there is anything inherent in the “ban on politics” which destines it to a perpetual obfuscation beyond salvage by judicial re-statement. If valid, this criticism is merely an attack on the lack of adequate guidance and not a challenge to the reason of the law itself.

PREVENTION FROM IMPLEMENTING THE MOST EFFICIENT SOLUTION

A similar rebuttal can be made in respect of the argument that the ban on politics may prevent charities from performing their welfare task efficiently. If that task is of such magnitude that only government can fulfil it or governmental assistance is indispensable, the most economically efficient solution is if government undertakes its proper role and charity is allowed to devote its funds to persuading government of its responsibilities, rather than wasting charitable money on marginal amelioration of the welfare problem.47 Hence it is said that “the existing restriction deters charities from using one of the most effective means of pursuing their goals”.48 It leads to trustees “speaking with a hesitant, muted voice when every practical consideration requires that their approach be forceful and clear”.49 “It [charity] should not be stopped from making a public hullabaloo if that is the best method of achieving its objects.”50 Thus the ban on politics prevents those involved from doing something really useful to eradicate a problem, rather than merely relieving it.51 This argument had its echo in Lord Greene MR’s dissenting judgment in IRC v. National Anti-Vivisection Society52 where he argued that “[a] charitable institution must surely be at liberty to achieve its object by the most efficient and practical means, which may well be legislation”.53 In fact Lord Greene MR was making the point to reinforce his view that a political object (as with any other non-charitable object) might legitimately be ancillary to a charitable main 45 46 47 48 49 50 51 52 53

For the protection which such advice can provide, see the Charities Act, s.29. Goodman Report, supra n.15, para 97. See, similarly, Whitaker, Goodman Report, supra n.15, Minority Report, para 21. Caplin and Timble, supra n.24, 184. Clark, supra n.17, 454. Nightingale, supra n.42, 52. Sheridan, supra n.1, 48. [1946] 1 KB 185. Ibid., 208.

(L) Dunn Ch11

25/1/00

1:45 pm

Page 171

Justifying the Ban on Politics in Charity 171 object.54 This was a proposition recognised in the law, but simply inapplicable in that case since the Society had a main object of abolishing vivisection: this objective postulated penal legislation against vivisection and was political. His dictum is material in this context, however. A charity is indeed able to pursue political means to achieve its charitable objects and no doubt should do so if this is the most efficient way of achieving its object. What it cannot do is pursue political means such that they become elevated into a main object in their own right. Political activity is only authorised to the extent that it advances the objects of the charity. The boundary defining illegitimate political activity is not crossed unless the political element ceases to promote the charity’s objects or it becomes a partner cause. To this extent the argument proceeds on a misconception as to the law. Furthermore, in so far as the charity seeks to off-load its welfare work onto government (as such) it is not actually performing its trust purpose. The object of the trust is not to produce an end result per se, to bring about a quasi-utopian state of affairs in which the welfare need is eradicated, irrespective of the social agent effecting that outcome. At the same time it is not necessary to go to the opposite extreme. It need not be said that the object of every charity is for the charity itself to bring about the welfare improvement or for the charity’s assets to be applied directly in bringing about the public benefit. Without doubt the charity may employ agents to effect its work or pay agents to use their own resources for that end. However, every charitable object must contain one implicit limitation on the manner by which that object is to be achieved. The object is an object of charity. If there is reliance on an agent, such that the object has in reality become an object of the agent, the object is really being delegated. Within the charitable sector itself this will be unobjectionable because each constituent organisation can only ever be an agent for achieving its object. If charity A (a grant-giving trust) is exclusively reliant on charity B (a service provider) to perform its object, the object remains internal to charity in any event. There is a material difference when government is the charity’s agent of choice and the task falls out of the charitable sector altogether to devolve on the public sector. Charity is a private-sector agent for a public-sector object. This may resonate with conservative political implications, but, as noted below, it is one which is inherent in the whole notion of a charitable sector, where the State rather than individual charities is to determine what welfare provision the State will assume and what, therefore, is residually left for charities to fulfil, if they so choose. To purport to employ the government as a dominant agent for change by soliciting its political authority is to seek to export the charitable object from the charitable sector into the State, in direct opposition to the prerogative of the State to determine its own boundaries and those of tax-exempt charity.

54

Ibid., 207–8.

(L) Dunn Ch11

25/1/00

1:45 pm

Page 172

172 Stephen Swann

POLITICAL REPRESENTATION FOR MINORITIES AND THE PROMOTION OF DEMOCRATIC DEBATE

Charities may be best placed to articulate the views of disadvantaged groups they serve, groups not otherwise well positioned (especially from want of means) to put forward their political case within the broader community.55 It . . . deprives legislators [and, one might add, the public which elects them] of the views of charities which are, in many cases, the only available spokesmen for interested groups that lack the funds or organization necessary for effective presentation.56

Whether or not this underestimates the intrinsic willingness of the media to champion the cause of the silent underclass, the broader point is that the political activities of charities may enhance the democratic process.57 The absence of both the profit motive (in contrast to private enterprise) and the pursuit of political office (in contrast to political parties) means that their independent voice, predominantly lacking in self-interest and prompted by social concern, may be of especial value to the survival of a healthy democracy.58 Moreover, as already noted, in their role as service providers charities gain insight and expertise which may be unique and otherwise lost from the political debate.59 A related argument is that political freedom, the ability for charities to champion their independent perspective, may be a necessary part of fund-raising. An organisation which is a mere service-provider and (by its uncritical silence) is seen as accepting government priorities may be viewed as a mere lackey or instrument of government. That could damage the charity’s ability to attract volunteers and funding for services from among those with political priorities different from those of the government of the day. Similarly, potential beneficiaries might be discouraged from seeking the assistance of a charity indistinguishable from the Establishment and mistrusted as a mere arm of an oppressive State. A charity’s independence may enable it to make a distinctive contribution to the democratic process, and an ability to make and publicise that contribution may be essential to preserving the popular image of the charity’s independence. 55 Kemp Report, supra n.14, para 3.3.6, referring to organisations speaking for “a wide range of marginalised groups and hidden causes which are often out of political favour”, and para 3.3.8 (organisations “argued that being directly involved in service provision meant that they were better placed to act as advocate for the collective needs of service users”). See, similarly, Whitaker, Goodman Report, supra n.15, Minority Report, para 22. 56 Caplin and Timble, supra n.24, 184 and 198. 57 See R. B. M. Cotterrell, “Charity and Politics” (1975) 38 MLR 471, 474 and the Goodman Report, supra n.15, para 103, noting a similar argument. 58 See Kemp Report, supra n.14, para 3.3.4, quoting Philip Seed of Raddery School: “[voluntary organisations’] independent status gives them a more positive image in the local community” (reproduced in the evidence to the Commission 103). See also para 3.3.5. 59 See similarly Kemp Report, supra n.14, para 3.3.6. See to somewhat similar effect CC9, supra n.16, para 17.

(L) Dunn Ch11

25/1/00

1:45 pm

Page 173

Justifying the Ban on Politics in Charity 173 There is evident strength in these arguments, but their practical limitations cannot be ignored. So far as publicising its political position enhances fundraising or the receptive attitude of its beneficiaries, such activity will be ancillary to the object of applying the (enhanced) income towards more efficient performance of the charitable purpose.60 Admittedly this does not enable the charity to undertake dominant political activity with the sole aspiration of publicity for the cause. However, evidence to the Kemp Report emphasised that campaigning and advocacy work are particularly difficult to fund.61 Even so far as funding can be obtained, there are inevitable limitations on political activity for charities arising from “market forces” within the third sector and from a charity’s self-interest in perpetuating its successful existence. It may prove counterproductive and prejudice rather than enlarge the support received62; for many charities avoidance of political activity will be based on this danger.63 Political campaigns are anathema to some donors: over-indulgence in politics may dissuade those who disapprove of the views taken or of the extent of the campaign.64 The impression may be given that service provision is marginalised, prejudicing future confidence among supporters.65 Institutional funders (including grant-making trusts as well as central and local government) might attach express limitations on gifts so as to exclude using those funds for campaigning, even if general freedom to apply charitable resources in that manner existed.66 At the very least the target of political activity may be affected because there will be a natural reluctance to criticise donors for fear of dissuading further funding.67 Extensive political activity within the sector may endanger the privileged position which the State accords to charities as a whole.68 There is a risk of 60 This supports the Charity Commission’s view that, by way of ancillary political activity, a charity may publish the advice or views it expresses to Ministers, “seek to inform and educate the public on particular issues which are relevant to the charity and its purposes, including information about their experience of the needs met in their field of activities and the solutions they advocate” (CC9, supra n.16, para 12), publish its comments on possible or proposed changes in the law (paras 34 and 36), comment publicly on social economic and political issues relating to the charity’s purpose or the way it is able to carry out its work (para 39) and comment on the manifesto proposals of political parties’ elections, where the proposals relate to the charity’s purposes or the way in which it is able to carry on its work (para 48). 61 Supra n.14, paras 3.14.6 and 3.15.6. 62 Charity Commission [1969] Annual Report (London, Stationery Office, 1970), para 16. 63 Gladstone, supra n.1, 115. 64 Sheridan, supra n.1, 49. See CC9, supra n.16, para 16, where the Charity Commission notes that many consider campaigning to be a misuse of a charity funds and a misuse of charity’s fiscal concessions. 65 As Sheriden expresses the point, “the establishment and its bourgeouis hangers-on will merely stop donating money to charities which do not use the money for the purpose for which it is given”: Charitable Causes, Political Causes and Involvement (Cardiff, University College Cardiff, 1972), 18. See also CC9, supra n.16, para 62 (potential loss of support for the charity and damage to the good name of charities generally). 66 The reluctance of grant-giving trusts and private business to support campaigning activities is noted by Alzheimers Scotland—Action in Dementia in their evidence to the Kemp Commission: supra n.14, 150. 67 Kemp Report, supra n.14, para 3.3.8. 68 Charity Commission [1969] Annual Report, para 16.

(L) Dunn Ch11

25/1/00

1:45 pm

Page 174

174 Stephen Swann prejudice to the sector generally if the political expenditure of some causes donors to lose faith in charity at large.69 Under Gresham’s law, a prominent political adventurism may imperil for all the moral claim which charity has for support.70 It is important here to distinguish the case where political activity is intra vires. This causes difficulty only in so far as donors cannot limit their gifts to exclude political activity if they so wish, so that, forced to give for either charity or politics, they decline to give anything for fear their gift will be directed towards the latter against their wish. If means can be established for enabling donors to opt in to political application as an alternative to charitable application, the objection disappears: donors know that they can restrict their gift to non-political charity if they wish.

CONCLUSION

An essential pillar of the argument against political charity is the possible countervailing intentions of donors. So far as these can be shown to be in favour of political activity, and so far as political activity can be demonstrated to be the product of funds provided by those with such intentions, the charity should have greater freedom in applying its money to that end because it can do so consistently with the views of its politically like-minded donors. By appropriate mention of the source of political funding in its publicity, it can campaign forcefully without prejudicing its respect among its other donors and that of other less political charities. Moreover, so far as the State is satisfied that the privileges (particularly of tax) which it affords are not used to pursue political purposes, no threat is likely to arise to the maintenance of those privileges for charity’s non-political endeavours. Despite the prevalant mood for change, the third sector itself accepts the need for some restrictions on political activity carried out by charities. This is implicit in the Kemp Report, which suggested that the voluntary sector’s “capacity to campaign is . . . greatly to be valued and should not be unduly hedged in by the law”.71 Indeed the Report only called for a “liberal interpretation” of rules on campaigning.72 This echoes earlier studies within the voluntary sector which acknowledged the strong justifications underpinning the current law and in the final analysis shied away from urging major reform.73 The analysis here 69

See Goodman Report, supra n.15, para 103, noting a similar argument. Ibid. para 105: “the word ‘charity’ has a moral connotation which itself attracts support and . . . the notion of a charity being permitted to become involved in political activity may detract from the special status accorded in the minds of many to charities”. 71 Supra n.14, at 1 (emphasis added). 72 Supra n.14, para 7.16.6. 73 See Goodman Report, supra n.15, para 104, concluding that political activity should not be a main object of a charity or its principal activity and should remain ancillary. 70

(L) Dunn Ch11

25/1/00

1:45 pm

Page 175

Justifying the Ban on Politics in Charity 175 endorses that view: the thrust of the law should be retained in tact because of the underlying policy reasons. At the same time, this exploration of the policy grounds on which the law is founded has suggested a way forward for amelioration of the predicament facing charities caught in the dilemma of confronting ultra vires or tolerating a negative image of political indifference. The challenge for a charity’s lawyers is to develop a mechanism which will enable the charity to engage in substantial political activity in a manner consistent with the balance of the mixed policy arguments outlined above. The law rightly fences off the field of major political endeavour from the energetic and motivated animal which is tax-exempt charitable intervention, but the instruments of the law may be utilised to promote political activity on behalf of the charity in a way which avoids the objections of unwilling donors and a hostile fisc. For the time being charities have resorted to organisational fission, dividing their political from their charitable activity by the barrier of separate legal form. The positive message from the analysis here is that less extreme measures would satisfy the policy concerns, if the tools at hand in private law can be grasped and used to construct distinct political funds, within charity but collateral to “pure” charitable expenditure. The next step for campaigning charities in the coming millennium is to exploit those tools and enter new and wider territory of permissible political activity.

(L) Dunn Ch11

25/1/00

1:45 pm

Page 176

(M) Dunn Ch12

25/1/00

1:46 pm

Page 177

12

Taxation of Trades in the Charities Sector IAN DAWSON

INTRODUCTION

To tax and to please may be impossible1, but to relieve from tax and to please is very much more promising. Governments, or at least the Treasury, prefer exemptions from tax not to err on the generous side. The money to fund government schemes has to come from somewhere and the reliefs from income and corporation tax are worth up to £1 billion annually.2 But for their part, charities are often under pressure to do more. This requires them to be alive to different and hopefully better ways of both raising money and investing any money not earmarked for immediate use. One way of raising extra revenue is by trading; one way of investing money is by holding property and renting it out. Both these activities may broadly be subsumed within the heading business, and one might expect that each will receive a similar tax treatment. In fact, under the UK tax code, contained in the Income and Corporation Taxes Act 1988 (ICTA 1988), they do not. In the income tax sphere, the concept of trading has been fluid. This is so not only on the borderline between an income gain and a capital gain—for example at what stage does improving a house, or successive houses, amount to a trade as opposed to a series of capital gains? It is also so where the argument is not whether an activity produces income, but whether an income-producing activity is properly to be regarded as the carrying on of a trade or exploiting real property for the purpose of producing income. It is proposed in this essay to examine what, under the UK tax system, constitutes trading generally, then to consider the exemption from tax which charities enjoy in relation to income derived from trading activities, both as a matter of right and as a matter of Revenue practice, and to contrast this with the 1 “To tax and to please, no more than to love and to be wise, is not given to men”: Edmund Burke, On American Taxation (1775), 49, as quoted in the Oxford Dictionary of Quotations. 2 Report by the Comptroller and Auditor General on the Inland Revenue, The Monitoring and Control of Tax Exemptions for Charities (HC 575 Session 1997–8), 4 Mar 1998 ( “the Monitoring Report”).

(M) Dunn Ch12

25/1/00

1:46 pm

Page 178

178 Ian Dawson position where the income is found to derive from the exploitation of real property, of which the most common example is renting.

WHAT CONSTITUTES TRADING ?

Until recently3 there was really only one area of tax law which required treatment under this heading, namely Schedule D, Case I. However, the changes made, as regards those within charge to income tax, to Schedule A with effect from the tax year 1995–6 have introduced the concept of the Schedule A business into the taxation of rents and other income from land. Expressly brought within that concept is: any transaction entered into by any person . . . for the exploitation as a source of rents or other receipts of any estate, interest or rights in or over any land in the United Kingdom.4

One should now consider not only whether an activity may constitute trading within Schedule D, Case I, but also whether it may be within a Schedule A business. Although “business” and “trading” are not synonymous, there is considerable overlap between the two terms.5 Thus it may be difficult to know whether the owner of land who permits (for a fee) persons to enter upon that land to sell items as part of a car boot sale is carrying on a Schedule A business or a trade within Schedule D, Case I.6 Indeed the position is further complicated by the fact that the taxation treatment of rental income for corporations was not changed in 1995. Given that the Schedules are mutually exclusive,7 there are some interesting questions where an activity within charge to income tax is found to be the carrying on of a Schedule A business in circumstances where the same activity would not be within charge to Schedule A as it applies to corporations. As yet there is no case law guidance on the true scope of the Schedule A business, and little further guidance in the statute beyond that set out above. Further, what is a trade is a question of law and fact, and is not assisted by the definition of “trade” in ICTA 1988: “ ‘trade’ includes every trade, manufacture, adventure or concern in the nature of trade”.8 Of course, this does not purport to be an exhaustive definition, but it does serve to confirm that there is no half-way house between income production which could amount to a trade, 3

I.e. the tax year 1995–6, the changes being introduced by the Finance Act 1995, s.39(1). ICTA 1988, s.15(1), Sched A, para 1(2). 5 Thus, e.g., the definition of “business” in the Partnership Act 1890, s.45 “includes every trade, occupation or profession”. 6 The precise position is made no easier by the presence of ICTA 1988, s.53 which enacts that “[a]ll farming . . . in the United Kingdom shall be treated as the carrying on of a trade or, as the case may be, of a part of a trade”. 7 Fry v. Salisbury House Estate [1930] AC 432. 8 S.832(1). 4

(M) Dunn Ch12

25/1/00

1:46 pm

Page 179

Taxation of Trades in the Charities Sector 179 and mere capital appreciation of an asset or assets which cannot constitute trading. A Royal Commission was set up to provide assistance with the solution to such problems and in 1954 produced its Final Report on trading, listing six indicators which might illuminate whether a taxpayer was carrying on a trade.9 These have come to be known as “badges” and, whilst not authoritative in terms of strict precedent, are nonetheless treated with respect by tax practitioners. Hence they provide a useful starting point. They are: (1) The subject-matter of the realisation Whilst almost any form of property can be acquired to be dealt in, those forms of property, such as commodities or manufactured articles which are normally the subject of trading, are only very exceptionally the subject of investment. Again, property which does not yield to its owner an income or personal enjoyment merely by virtue of its ownership is more likely to have been acquired with the object of a deal than property that does. (2) The length of the period of ownership Generally speaking, property meant to be dealt in is realised within a short time after acquisition. But there are many exceptions from this as a universal rule. (3) The frequency or number of similar transaction by the same person If realisations of the same sort of property occur in succession over a period of years or there are several such realisations at about the same date a presumption arises that there has been a dealing in respect of each. (4) Supplementary work on or in connection with the property realised. If the property is worked up in any way during the ownership so as to bring it into a more marketable condition, or if any special exertions are made to find or attract purchasers, such as the opening of an office or large scale advertising, there is some evidence of dealing. For when there is an organised effort to obtain profit there is a source of taxable income. But if nothing at all is done, the suggestion tends the other way. (5) The circumstances that were responsible for the realisation There may be some explanation, such as a sudden emergency or opportunity calling for ready money, that negatives the idea that any plan of dealing prompted the original purchase. (6) Motive There are cases in which the purpose of the transaction and sale is clearly discernible. Motive is never irrelevant in any of these cases. What is desirable is that it should be realised clearly that it can be inferred from surrounding circumstances in the absence of direct evidence of the seller’s intentions, and even, if necessary, in the face of his own evidence.

If an activity is found not to constitute trading then a disposal10 of an asset within that activity, will prima facie give rise to a charge to capital gains tax.11 9

Cmnd 9474, para 116 (HMSO, London, 1954). Since capital gains tax is chargeable on disposals, not merely sales. Taxation of Chargeable Gains Act 1992, s.256(1) provides an exemption as follows: “a gain shall not be a chargeable gain if it accrues to a charity and is applicable and applied for charitable purposes”. Note the absence of the word “only” in this definition. 11 See Taxation of Chargeable Gains Act 1992, ss.1(1) and 2(1). 10

(M) Dunn Ch12

25/1/00

1:46 pm

Page 180

180 Ian Dawson Since trade includes an adventure in the nature of trade, a one-off transaction will only be trading if it is found to be of an income nature. This is well illustrated by Lawrence LJ in Jones v. Leeming,12 where (in considering whether the purchase for potential re-sale at a profit of options on rubber plantations could fall within Case VI of Schedule D, the Commissioners having found that that did not constitute trading) he said: It seems to me that in the case of an isolated transaction of purchase and re-sale of property there is really no middle course open. It is either an adventure in the nature of trade, or else it is simply a case of sale and re-sale of property.

THE EXEMPTION FOR CHARITIES

The Principle If the activity amounts to trading, the charity will only be entitled to an exemption if it can bring itself within the rather limited exception contained in section 505(1)(e): exemption from tax under Schedule D in respect of the profits of any trade carried on by a charity, if the profits are applied solely to the purposes of the charity and either— (i) the trade is exercised in the course of the actual carrying out of a primary purpose of the charity or (ii) the work in connection with the trade is mainly carried on by the beneficiaries of the charity.

But if the activity of the charity is exploiting the charity’s estate or interest in land as a source of rent or other receipts then the charity may be taxable, not under Schedule D, Case I, but, as we have seen, on the basis that it is carrying on a Schedule A business within charge to tax under Schedule A. This may be beneficial to the charity inasmuch as the exemption from tax under Schedule A does not require the profits to be “applied solely to the purposes of the charity” but merely “applied to charitable purposes only”. ICTA 1988 section 505(1)(a) provides for: exemption from tax under Schedule A or D in respect of any profits or gains arising in respect of rents or other receipts from an estate, interest or right in or over any land (whether situated in the United Kingdom or elsewhere) to the extent that the profits or gains— (i) arise in respect of rents or receipts from an estate, interest or right vested in any person for charitable purposes, and (ii) are applied for charitable purposes only.”

Therefore under Schedule A it matters not that the trustees of the charity act beyond their constitution provided that the monies are in fact applied for 12

[1930] 1 KB 279, 302.

(M) Dunn Ch12

25/1/00

1:46 pm

Page 181

Taxation of Trades in the Charities Sector 181 charitable, i.e. any charitable, purposes. In contrast, under Schedule D, Case I, application for charitable purposes beyond the purposes of the charity will not attract the exemption.

The Detail Since the devil is often in the detail, it is necessary to subject section 505(1)(e) to detailed scrutiny. Under section 505(1)(e) the relief is available where (i) there is a trade, (ii) that trade is carried on by a charity, (iii) those profits are applied solely to the purposes of the charity; and either (a) the trade is exercised (b) in the course of (c) the actual carrying out (d) of a primary purpose of the charity; or (a) the work (b) in connection with the trade (c) is mainly (d) carried on (e) by the beneficiaries of the charity. There is a Trade Frequently whether there is a trade will be clear as, for example, where the organisation buys (perhaps cheaply) manufacturers’ discontinued lines or “seconds” for resale which it then sells through shop premises situate amongst other similar premises used (or at least available) as ordinary trading outlets on a town high street. Such a case fits easily within the Badges of Trade. Other cases may be less clear. Suppose in the above example the goods were not purchased but donated to the charity. The Revenue view is that that would not amount to trading but would be “a realisation of the value of a gift”.13 This argument does not fit easily with the fourth Badge of Trade. And it could mean that the traditional “rag and bone” man or a person who, with permission, scavenges on a waste tip looking for discarded items which he then sells is not trading, a conclusion which certainly appears unlikely to be accepted. Furthermore, one may ask what is the difference in principle between acquiring goods entirely free and at a substantial discount? There is and should be no difference, for in economic terms it is not difficult to construct examples where there is a greater element of gift where valuable goods are purchased cheaply as opposed to low-value goods being donated. For example, where a new entrant to the market wishes to popularise its wares by sales through parties, and in order to do so agrees that for the first 100 parties organised by charities it will sell the goods at 25 per cent of its normal selling price. It is submitted that if the charity is active in the selling process, whether by running shop premises or organising volunteers to run bring-and-buy sales, the fourth Badge of Trading would suggest that the activity would amount to trading, even if such bring-and-buy sales are simply the result of benefactors of the 13 Inland Revenue, Trading by Charities: Guidelines on the Tax Treatment of Trades Carried on by Charities (London, HMSO, 1995), para 7.2.

(M) Dunn Ch12

25/1/00

1:46 pm

Page 182

182 Ian Dawson charity running one from their own separate premises (their homes, business premises or a hall hired for the purposes). For the active involvement of the charity would be likely to bring the charity’s exertions within the fourth Badge. Indeed that would seem to be the Revenue view. It publishes a concession14 that: Bazaars, jumble sales, gymkhanas, carnivals, firework displays and similar activities arranged by voluntary organisations or charities for the purposes of raising funds for charity may fall within the definition of “trade” within Section 832, Income and Corporation Taxes Act 1988, with the result that any profits will be liable to corporation tax. Tax is not, however, charged on such profits provided all the following conditions are satisfied: The organisation or charity is not regularly carrying on these trading activities The trading is not in competition with other trades The activities are supported substantially because the public are aware that any profits will be devoted to charity, and The profits are transferred to charities or otherwise applied for charitable purposes.

Item 1 of this Concession implies that if there is a regularity to the fund-raising activity then there would be no concession and the case will fall within trading. Where, in contrast, the benefactors each run their separate bring-and-buy sales without any significant organisational input from the charity the better argument is that there is no trade but merely a series of one-off events. Nonetheless, since the statutory definition of trade includes an adventure in the nature of trade, a Revenue argument that each bring-and-buy sale was trading within ICTA 1988 could not be said to be obviously untenable. For plainly the main, and perhaps the whole, purpose of the exercise is to make a profit. The Trade Must be Carried On by the Charity “Charity” is defined for the purposes of ICTA 1988 section 50515 as “[a]ny body of persons or trust established for charitable purposes only”.16 An institution registered under the Charities Act 1993 will be conclusively presumed to be established for charitable purposes17 and a company so registered cannot change its objects without the consent of the Charity Commissioners.18 Here again, whilst many cases will be straightforward, “grey” areas are easy to imagine. For example, in the above case of bring-and-buy sales, at what stage do separate bring-and-buy sales organised by individuals and, hence, if trading at all, amounting only to so many individual trades, become one trade carried on by the charity? This is a question of fact and degree, but there must be activities where the outcome is doubtful And there can be a measure of retrospectiv14

ESC C4, revised 11 Mar 1994. But a similar definition is employed for other ss. in the ICTA 1988, so although there is in terms no general definition, in practice there is. 16 ICTA 1988, s.506(1). 17 Charities Act 1993, ss.4 and 96. 18 Charities Act 1993, s.64(2). 15

(M) Dunn Ch12

25/1/00

1:46 pm

Page 183

Taxation of Trades in the Charities Sector 183 ity, for if an individual sale will not be attributed to the charity, but a series will be, then the whole series, starting from the first may be brought into charge as trading activities of the charity.19 Similarly questions may arise where there is an element of joint venture. Suppose that a charity wishes to stage a gymkhana yet has no relevant expertise of its own and that Promotions Ltd has wide experience of staging gymkhanas on behalf of paying clients. It may be that Promotions Ltd is prepared to stage a gymkhana on behalf of the charity as a joint venture, it only taking a share of the profits over, say, £5,000. That arrangement is likely to be a partnership within the Partnership Act 1890 section 1(1), unless it is based upon a sharing of the gross receipts.20 That may form part of the trade of Promotions Ltd, but will it be a separate “adventure in the nature of trade” so far as the charity is concerned? If it is a joint trade is that trade “carried on by the charity”? Would any involvement in a joint venture above a de minimis level suffice to bring all the profits of that joint venture into charge? As yet these questions cannot be authoritatively answered by reference to either the words of the statute or decided cases. It may be that one cannot get closer to an answer than to assert that the issue must be tested by reference to the same criteria as above, in which case, if this is a one-off as opposed to one of a pattern, the charity may well not be trading. Those Profits are Applied Solely to the Purposes of the Charity Two aspects of this each require consideration. First, the phrase “the purposes of the charity” may be more ambiguous than first appears. It will be noticed from the definition of charity that it must be established for charitable purposes only. Does the word “purposes” in the phrase “the purposes of the charity” in section 505(1)(e) refer to those charitable purposes or is it wider? In many cases that distinction may not be of practical significance. But it may be significant where, for example, an administration block or furnishings within it are more lavish than necessary. Some might argue that a charity established for the relief of poverty ought not to occupy lavish accommodation. Others might argue that it is easier to attract donations if one is situate in up-market premises laid out so as to make the wealthy feel relaxed, which they might not in lesser accommodation. Would money spent on the lavish accommodation be expended for the purposes of the charity? Secondly the exact ambit of the word “solely” is unclear. Tax practitioners are familiar with the different nuance given to the word “wholly” in the two 19 Just as where the purchase, renovation, inhabiting and sale of one house by a couple living together will most probably not amount to trading, five or six such transactions within a comparatively short time scale will do so. Here, when the “trade” commenced will be a question of fact. That question could be answered by finding that the trade began as early as the first. Motive will be of especial relevance, as set out in the sixth Badge of Trade. 20 Which would then fall within the Partnership Act 1890, s.2(2).

(M) Dunn Ch12

25/1/00

1:46 pm

Page 184

184 Ian Dawson phrases21 “wholly and exclusively” and “wholly exclusively and necessarily”. The Revenue accepts that it is possible in the former case to split a single expenditure into two parts, one of which is within the tax exemption, the other not. Thus, for example, the expenses of running a car can be split in proportions agreed with the Revenue, so that an agreed part is an allowable deduction. On the other hand in the context of Schedule E there appears to be no reported case allowing such apportionment.22 In the present context does “solely” mean that if more than a de minimis sum from the profits of the trade is applied other than for the purposes of the charity, no part of those profits is eligible for exemption? Or that the profits may be split into those which are in the event applied for the purposes of the charity, which will be eligible for exemption, and those which are not so applied, which are not so eligible? Lest it be thought that this is mere pedantry, readers may be reminded that some charities do now involve themselves as willing participators in tax avoidance schemes. The Revenue challenged tax avoidance schemes in general, making a breakthrough in the 1970s with the House of Lords outlawing schemes which hitherto would have been thought unassailable.23 That was a change of attitude of the courts brought about in part by changing social attitudes. Might attitudes similarly change, in regard to charities, when it becomes common knowledge that without the tax exemption many rich people could not get richer without the entry of some charities into the tax avoidance arena? If such happens, the Revenue and the courts may then adopt a less sympathetic approach to the taxation treatment of charities, and interpret the legislation more stringently. The Trade is Exercised What amounts to the exercise of a trade is not always straightforward. Take, for example, Grainger & Son v. Gough.24 Louis Roederer appointed Grainger to be their agent for Great Britain. Grainger canvassed for orders for Roederer and received commission on all orders from Great Britain, if executed. The orders were transmitted by Grainger to Roederer in Reims where Roederer either exercised their right not to fulfil such order or executed it. Did Roederer exercise a trade in Great Britain? Matthew and Cave JJ, in the Queen’s Bench Division, Lord Esher MR, Lopes and A. L. Smith LJJ in the Court of Appeal, and Lord Morris in the House of Lords said Roederer did, but Lords Herschell, Watson MacNaghten and Davey said Roederer did not. 21 In connection respectively with identifying what are allowable deductions for the purposes of Sched D, Cases I and II, on the one hand and on the other hand Sched E: see ICTA 1988, ss.74(1)(a) and 198(1). 22 Generally this has been done as part of a consideration by the court of the tripartite test “wholly, exclusively and necessarily”. 23 E.g., Furniss v. Dawson [1984] AC 474. 24 [1896] AC 325.

(M) Dunn Ch12

25/1/00

1:46 pm

Page 185

Taxation of Trades in the Charities Sector 185 This may be of especial practical significance where the (UK) charity operates abroad as part of its charitable work. But it could also be relevant if a charity allowed its name to be associated with a plc. There may well be doubt whether, by so doing, it as well as the plc is trading. In the Course Of Ordinarily one would assume that this phrase was synonymous with the word “whilst”. But if that is correct then that limits the scope of this exemption. Suppose, for example, that a college is run by a charity which finds that there is a need for counselling services, but that it has insufficient funds to pay for counsellors itself. So it provides a counselling service but charges for it. That will arguably not be provided in the course of educating the college’s students, but as ancillary thereto. Suppose further that, in order to provide a better quality of service, e.g. having several counsellors, each with different skills, it opens up the service to non-students, so that each of the counsellors is fully occupied. Or that in providing the particular blend of counsellors the charity has stumbled upon a real need in the community which it serves. If the first scenario is within the exemption, which of the others are not? The Actual Carrying Out This links in closely with “in the course of” above and “of a primary purpose of the charity” below. It emphasises that the statutory language requires that one starts with the objects clause of the charity and works back, i.e. if the object of the charity is to provide education, then one has to ask “is education actually being carried out by the trade?” If not then it is submitted that the exemption is inapplicable. Of a Primary Purpose of the Charity The burden of the word “primary” should not be lost. Company lawyers are familiar with the notion of “main object”. So in Re German Date Coffee Co.25 the Court of Appeal felt itself easily able to conclude that a company formed to “use . . . certain inventions for manufacturing from dates a substitute for coffee, for which a patent has or will be granted” should be wound up once it had failed to acquire the patent, notwithstanding that it in fact had an operating factory making the coffee, albeit not protected by the patent. It is submitted that the same approach could be adopted in the present context. The enquiry should be as to what is the charity’s raison d’être; that will be its primary purpose and only a trade implementing that purpose will fall within the exemption. Ordinarily a charity will have only one primary purpose, e.g. the prevention of cruelty to children, but if it has several aims, each could be a primary purpose. In those circumstances it would be sufficient if the trade fell within one of them. 25

(1882) 20 Ch D 169.

(M) Dunn Ch12

25/1/00

1:46 pm

Page 186

186 Ian Dawson The Revenue takes a much broader approach, and includes within the tax exemption activities ancillary to the carrying out of a primary purpose.26 It cites as an example “the provision of accommodation to students by a school or college in return for rent”. It is submitted that, as a matter of language, if one activity is ancillary to another, in performing the former one cannot be performing the latter. One may be facilitating the performance of the latter, but one is not actually doing it. If the primary purpose of the college charity is to educate, then when providing living accommodation one is not educating. Per contra if the college charged students for the students’ use of a lecture room (so that the students could attend the lecture) then that would be in the course of the actual carrying out of a primary purpose of that charity. Turning next to the alternative route to exemption the following require to be satisfied. The Work What is or is not work should not give rise to difficulty. What, however, might give rise to difficulty is the quantum of work. In other words, does this element require that all the work in connection with the trade is mainly carried on by the beneficiaries, or some lesser amount? This will assume greater importance if element “in connection with the trade” below is interpreted widely, for much work may be done in connection with the trade which is not done in the course of carrying out the trade. The provisions of accountancy services by advisers to the charity will not be within the course of carrying out the trade, but would be in connection with the trade if they were related to it in the ordinary way, e.g. by making up the books of the trade. Although the linguistically more natural reading of “work” implies “all work” in the present context, if it does, that will make the task of the charity more difficult in establishing that the work is mainly carried out by beneficiaries of the charity. In Connection with the Trade That there must be some nexus between the trade and the work performed is clear: it is less clear how close that nexus must be. The primary concern must be whether “in connection with” is synonymous with “in the course of”. That is not the inherently most natural interpretation. Certainly the courts have construed “in the performance of the duties of the office”27—part of the test for deductibility of expenses in regard to Schedule E—significantly differently from “for the purposes of the trade”—part of the test for deductibility of expenses in regard to Schedule D, so one would expect that the courts’ initial reaction would be to construe “in connection with” in its more literal sense. This may particularly be so, having regard to the proximity of the words “in the course of the actual carrying [etc.]” in section 505(1)(e)(i). And the wider interpretation would include work done so as to enable the trade to be carried on at all (e.g. 26 27

Trading by Charities, supra n.13, para 4.4. ICTA 1988, s.198(1).

(M) Dunn Ch12

25/1/00

1:46 pm

Page 187

Taxation of Trades in the Charities Sector 187 the obtaining of planning permissions or other licences), or better carried on (e.g. the provision of independent financial or management advice). This may better further the apparent policy behind the relief than the narrower interpretation. Further, is one here concerned only with work of an income nature or, additionally, work of a capital nature? Take a farm run by an agricultural college. Ploughing, harrowing, seeding etc. will be work “in connection with” the farm, but will capital works such as installing a new drainage system or erecting new buildings? This, again, may be of critical importance, because if the charity exists to provide a sheltered work environment for disabled persons, those beneficiaries of the charity may be able to carry out the majority of the labouring tasks on the farm, but may be much less likely to be able to handle specialist drainage or building equipment. Mainly Doubtless the insertion of this word is to cover the common situation where the beneficiaries will be unable, whether through incapacity, lack of experience or some other reason, to conduct all the processes in the operation. Persons with learning difficulties may not be able to manage a business, necessitating all the management to be undertaken by persons other than beneficiaries of the charity. That will not per se prevent the trade from being exempt, but it will do so if quantitatively the amount of such management assumes substantial proportions. But is there any and, if so, what qualitative aspect inherent in the ascertainment of what is “mainly”? No assistance is given in the section as to the time span over which the criterion of what is “mainly” is to be applied. To revert to the above farming example: suppose that in year one much “one-off” work had to be, and was, done in order to make suitable the farm for the type of work which the beneficiaries were to do thereafter. Is that work to be taken into account when assessing what is “mainly”? Is . . . Carried On The use of the present tense may here pose problems, in that it suggests that one must look at the relationship on a continuing basis, so that a trade could change from being exempt to non-exempt as the proportion of work actually carried out by the beneficiaries varies. In this context the meaning of “in connection with” assumes great importance, for in a year when drainage or new buildings are installed, the majority of the work carried out in that year of assessment may well not be supplied by the beneficiaries. By the Beneficiaries of the Charity This will seldom cause problems of definition, although in practice it is not uncommon to find that sometimes beneficiaries of a charity are put on the payroll as employees in order to hide from them the fact that they are beneficiaries:

(M) Dunn Ch12

25/1/00

1:46 pm

Page 188

188 Ian Dawson for example where a person has psychological problems but is unable to understand that he or she has them.

COMMENT

It can therefore be seen from the above that there are genuine constructional doubts about the precise scope of the exemption under Schedule D, Case I, which contrasts with the simple, clear and single test for exemption under Schedule A,28 but that the Revenue in some key areas presently adopts a benign approach beneficial to charities. It is not always easy to know whether some activities are within the legal definition of charity, for example sport, such as football,29 or some forms of social housing, such as shared ownership or co-operative housing. Sometimes what are in a practical sense small differences may tip the balance, and it is at this interface where charity shades into “mere” voluntary organisation that the law ought to be certain, predictable and fair. If a charity carries on a non-core activity, like renting out (as a trade) property for its potential beneficiaries it is far from obvious, in the context of the existing law, why that should receive beneficial tax treatment, for by definition that is not an activity which was instrumental in that organisation achieving charitable status30. Of course, a justification could be found from the income flow thereby generated being ploughed into the charity. A question the answer to which appears uncertain is the extent to which a charity may lawfully enter upon activities through a company which it owns which it could not lawfully carry on itself. Take, for example, a university carried on by a charity. If the university’s engineering department developed and patented a revolutionary transmission system, could the charity without committing a breach of trust build a factory to build the transmission for commercial purposes? As a matter of charity law one would have thought not, since that trade does not involve the dissemination of knowledge but the application of the fruits of knowledge.31 One would expect that it could no more set up a company to carry on that trade: a charity can only invest its capital in accordance with its constitution, which by definition must be exclusively charitable,32 and can only apply its income for charitable purposes. Thus the Charity Commissioners could be expected to give directions under the Charities Act 199333 requiring the 28 I.e. whether income prima facie chargeable under that Schedule was “applied for charitable purposes only”. 29 IRC v. McMullen [1981] AC 1. 30 In other words a college is able to register as a charity because it is advancing education, not because it is carrying on a trade of providing accommodation. 31 See Incorporated Council of Law Reporting for England and Wales v. Att.-Gen. [1972] Ch 73; Re Hopkins [1965] Ch 669. 32 See the definition of “charity” in Charities Act 1993, s.96(1) referring to “charitable purposes” defined in s.97(1). 33 Pursuant to its general duties under s.1(3), and its more particular duties, e.g. ss.8 and 18.

(M) Dunn Ch12

25/1/00

1:46 pm

Page 189

Taxation of Trades in the Charities Sector 189 charity to divest itself of its (unauthorised) investment in the company carrying on those operations. Until they did so, it is submitted that the profits would in law belong to the charity, since a trustee cannot benefit from his position.34 In the meantime how are such profits to be taxed? On the argument set out above they would clearly be taxable, because the trade was neither carried on “in connection with the actual carrying on of a primary purpose of the charity” nor was it carried on “mainly by the beneficiaries [of the university namely the students]”. The application of the logic of the Revenue view35 could lead to the conclusion that the trade is within the exemption because it is ancillary to the dissemination of the knowledge to as great an extent as is the provision of accommodation for students. From the latter the students are simply better able to embark upon their study. From the former academic staff and students alike may well be driven to strive harder at their academic work when they have such tangible proof that the knowledge can lead to intellectual or mercenary riches. To encourage such striving towards academic excellence must be within the terms of the charity. If correct, then if the charity carried on the trade, the profits of that trade would be exempt from tax, but if the company set up by the charity carried on the trade, those profits would not be exempt because the trade would not be “carried on by a charity”.36 On a broader front it may be observed that although it is often thought that, from the taxpayer’s perspective, to be within an exemption to tax is “a good thing”, in the sense that the potential taxpayer will be better off in financial terms than would otherwise have been the case, this is not necessarily so. If a trade is within charge to tax, if it makes a loss that loss can be set against other income of the charity. It was noticed above that the Revenue view is that the provision of accommodation for students can be a trade37 which is ancillary to a primary purpose, and hence within the exemption. Yet it is notorious that universities find it difficult to break even on the provision of such accommodation. If the trade were within charge to tax, the losses would be available to set off against other income. Of course if all the charity’s income is exempt, there would be no advantage to it in having tax losses, but (a) those tax losses may be capable of use in tax avoidance schemes elsewhere, thus enabling the charity to augment its income by participating for reward in such schemes, or (b) it would enable the charity to have a (second) trade which is not ancillary and escape tax to the extent that the profits of this latter trade do not exceed the losses of the original trade. In this latter context the Revenue view is that certain trades may

34

Bray v. Ford [1896] AC 44. Trading by Charities, supra n.13, para 4.4. 36 The words are quoted from ICTA 1988, s.505(1)(e). 37 Letting without the provision of services is likely to be within charge to Sched A (trades are within Sched D, Case I) in the case of Sched A the exemption is more generous: the profits are exempt “so far as the same are applied for charitable purposes only” see ICTA 1988, s.505(1)(a). 35

(M) Dunn Ch12

25/1/00

1:46 pm

Page 190

190 Ian Dawson not be ancillary to a primary purpose and, if not then, they will be taxable unless they fall within an informal concession as set out at paragraph 4.6.38 If one turns to voluntary bodies which are not charitable, then the tax position is more straightforward. If the body is an unincorporated association, then its profits and gains will be chargeable to corporation tax. If, on the other hand, the body is not an unincorporated association, then the trustees will be chargeable to income tax and capital gains tax in principle in the same manner as any other person.

THE FUTURE

In a recent Communication relating to the voluntary sector, the European Commission has stated: The taxation rules applicable to the sector have to be clear and simple, and incentives as well as exemptions have to be studied attentively. Any individual tax treatment has to be justified in relation to the constraints specific to this sector and to its method of internal organisation which differentiates it from traditional economic actors.39

A similar underlying philosophy is evident in the budget statement on 2 July 1997 of the Chancellor of the Exchequer when announcing a fundamental review of the tax treatment of charities. The Treasury issued a statement that this provided an opportunity to government and charities to work together to see if it was possible, inter alia, to create a “more coherent and consistent” system which is “simple to administer” and “reduces charities’ compliance costs”. As noted above the exemption from income tax in respect of a Schedule A business is significantly wider than under Schedule D, Case I. Under Schedule A it matters not that the trustees of the charity act beyond their constitution provided that the monies are in fact applied for a charitable, i.e. any charitable, purpose. In contrast, under Schedule D, Case I, application for charitable purposes but beyond the purposes of the charity will not attract the exemption. And there are further doubts and ambiguities, some of which were adumbrated above. Especially now, after the introduction of the Schedule A business, it cannot make sense that, if a charity allowing (in return for fees) a car boot sale to take place on its premises is assessable under Schedule A, then it is entitled to the exemption provided only that it applies the profits thereof for (any) charitable purpose, but that if it is assessable under Schedule D, Case I, it will only be entitled to the limited exemption available as set out above. So, even were one to look no further, it would be difficult to resist the conclusion that the present UK tax treatment in respect of charities’ income under Schedules A and D, Case I, did not meet the aspirations of the European Commission. 38 39

Of the Revenue booklet, Trading by Charities, supra n.13. Promoting the Role of Voluntary Organisations and Foundations in Europe, Com(97)241, 12.

(M) Dunn Ch12

25/1/00

1:46 pm

Page 191

Taxation of Trades in the Charities Sector 191 That is not all. It is the case that there are avenues available to some charities which enable them (in economic terms) both to trade outside the exemption given by section 505(1)(e) and yet pay no tax on the profits of such trade. These involve the setting up of a subsidiary40 company, which then pays over all its profits to the charity. This can be done in a variety of ways, such as dividends, gift aid and covenants, but the net result is that notwithstanding that the activity does not come within the arena selected by Parliament as being appropriate for exemption from income tax, still in the case of dividends, less tax is payable than would otherwise be the case, and with gift aid and covenants, no tax need be payable.41 Both gift aid and covenants enable the recipient charity to reclaim tax otherwise payable on the sums received. Such repayments are administered by the Financial Intermediaries and Claims Office which repaid, in 1996–7 £136.6 million of tax on gift aid donations and, in 1995–6 £235 million on donations made under deeds of covenant.42 The conditions to be satisfied to entitle gift aid to be claimed are essentially merely that the donor, here the subsidiary, makes an outright gift of money, not subject to any condition as regards its repayment and from which neither the donor nor a connected person43 derives a benefit. There are some technical but not insuperable practical problems with each of these methods. Those are not however relevant in the present context. The point being made is that these methods are available to any charity with the resources to obtain proper professional advice. But setting up and running subsidiary companies are not sensibly pastimes for amateurs. There are strict accounting (statutory) requirements for companies, necessitating annual returns and meetings (however informal). Further, it is all too easy for a charity with a subsidiary trading company not always clearly to identify what, in law and equity, is the charity’s and what is the company’s. And the no-conflict of interest rules of equity in particular pose traps for the wellmeaning volunteer who does not have the benefit of professional guidance. Perhaps surprisingly, and certainly unfortunately, some 15 per cent of charity subsidiary trading companies made a loss in the five-year period 1990–4.44 But, taking the charity sector as a whole, what benefit do charities derive from trading income? According to a survey conducted by the Charities Advisory Trust,45 the mean average of charities’ trading turnover for the five years 1990–4 40 Strictly, the company need not be a subsidiary in the technical sense; the important point is that its purpose is to benefit the charity. 41 Since “covenanted donations to charity” are deductible as charges on the trading (subsidiary) company’s profits: ICTA, s.338(1) and s.339(8); and what has become known as gift aid is deductible (for both individuals and companies) under the provisions of the Finance Act 1990, s.25. 42 The Monitoring Report, supra n.2, paras 13, 15. 43 As defined in ICTA 1988, s.839. 44 Trading by Charities: A Statistical Survey (London, Charities Advisory Trust, 1996), 23, Fig 4. And not all these subsidiaries are of little known charities; thus RNLI. (Sales) Limited recorded losses throughout the 5-year period, rising from £40,375 in 1990 to £394,879 in 1994. (No figure was returned for 1993 because RNLI (Sales) Limited changed its financial year end.) 45 Ibid.

(M) Dunn Ch12

25/1/00

1:46 pm

Page 192

192 Ian Dawson was some £1.3 million per annum, yielding a net profit of £200,000 per annum which represented 1 per cent of the charity’s income.46 It is evident from this that the potential tax involved is not huge. This is especially so when one takes into account that the turnover of the two charities with the largest turnover, the National Trust (Enterprises) Ltd. (£40,655,000)(with a further £4,058,498 from the National Trust for Scotland Trading Co. Ltd.) and Oxfam Activities Ltd. (£17,470,000) were vastly greater than the next largest turnover companies.47 And the National Trust in any case receives other monies indirectly from public funds (such as grants from English Heritage). Hence the amount of such grants could reflect any trading income the Trust receives, thereby ensuring, assuming full exemption to be accorded to all its trading income, no net loss to the Treasury. It is therefore suggested that clear policies are required. In its recent consultation document48 the Treasury appears not to wish to grasp the nettle of whether charity businesses ought to pay tax. Paragraph 4.6 states that “[i]n practice, provided certain conditions are met, all of the profits of a charity’s business activities are generally relieved from direct tax”. This contrast with paragraph 4.11 which states: We have thought very carefully about exempting all of the profits of charity businesses from tax but we do not think we can go as far as this. Charity law, for good reasons, prohibits charities from running a business themselves on a substantial or regular basis for fund-raising purposes, and the tax system for charities has to reflect this. And it has to acknowledge the interests of small business, which would have concerns about any special exemptions for charity business profits.

The present system provides complete exemption for charities in respect of rental income which they apply for charitable purposes,49 thereby providing “unfair” competition for others, however small, who let out properties. It provides complete exemption where the charity can go down the subsidiary company route, and this regardless of whether there are small, privately owned, businesses which might suffer. It is only where the charity is itself unable to follow the subsidiary route where tax problems may prove insurmountable. Surely now is the time for a coherent policy to be explained fully.

46 Trading by Charities: A Statistical Survey (London, Charities Advisory Trust, 1996), 16, Table 5. 47 Ibid., 18, Table 7. 48 Review of Charity Taxation Consultation Document: HM Treasury (London, Stationery Office, 1999). 49 Under s.505(1)(a).

(N) Dunn Ch13

25/1/00

1:47 pm

Page 193

13

Establishment and Autonomy: The Church of England as a Voluntary Body DAVID HARTE

INTRODUCTION

For the purposes of this essay, “voluntary bodies” are taken to mean organisations which exist primarily to exercise public functions outside the direct control of government. The Church of England may claim to be the original example in England of such a voluntary body which has played a significant role historically in carrying out public functions and continues to do so. If one takes as its beginning the arrival of St Augustine at Canterbury, in 597 AD, the Church of England is an organisation which actually predates the English nation, let alone the modern State.1 Today, it is distinctive amongst voluntary bodies in its range of functions and in the complexity of its organisation. Further, unlike most voluntary bodies, as part of the universal Christian Church, it provides a comprehensive ideology for its own existence and for the roles which it performs in society. This ideology, including both formal doctrine and commonly held assumptions, is far from monolithic. Like the roles which it plays through its various denominations, the Church is continually developing its ideology. Ultimately, the Church provides an alternative framework for many of the functions exercised by the State itself. Indeed, it may be seen as offering a complete alternative society. This alternative is most fully represented in England by the national church, both because it is the largest denomination2 1 Those with Celtic tendencies would doubtless emphasise that by the arrival of St Augustine Christianity was already well established in the North. On the other hand, from the perspective of some, the Church of England, as an institution, really only dates from the Henrician Reformation, the breach with Rome and the Act of Supremacy, in 1558. See the debate between Maitland and Bishop Stubbs; F. W. Maitland, Roman Canon Law in the Church of England (London, Methuen, 1898); R. H. Helmholz, Roman Canon Law in Reformation England (Cambridge, CUP, 1990). 2 It is difficult to compare the size of membership of different denominations. Of those attending church every Sunday, the Roman Catholic Church is as well represented as the Church of England. However, the numbers baptised into the Church of England are still nearly 25% of those born each year: Statistics Unit of the Church of England, The Church of England Today: A Summary of Current Statistics (GS Misc 513, 1998).

(N) Dunn Ch13

25/1/00

1:47 pm

Page 194

194 David Harte and because of its historical legacy of working with the state in meeting many public needs. The Church of England has its own legislature and courts which, because of the “establishment”, are formally part of the state system.3 Its distinctive constitutional position has obliged it to pay particular attention to how it should accommodate to the State, both generally and in carrying out some of its major activities. Its long history has left a complex and far-reaching body of law. The variety of its activities today means that it confronts most of the issues likely to affect any voluntary body fulfilling public functions and it offers distinctive examples for dealing with some of these issues. For example, it offers a model for constitutional relations within the State which is peculiarly relevant in respect of devolution of government. This model allows for significant involvement of ordinary people in making legislation and policy.4 The Church of England also allows for substantial accountability, both through regulation within a state framework and through judicial rights of the public in the judicial process. The pattern of accountability is open to question at present because of the prospect of constitutional reform. At a national level, reassessment of the nature of the monarchy affects the joint role of the sovereign as Head of State and defender and supreme governor of the national church. At the legislative level, reform of the House of Lords means that the role of bishops in the House of Lords is to be addressed, together with the justification for the State playing any part in their appointment if they were to cease to sit in Parliament.5 Equally, reform of the legislature highlights the special status of Church of England legislation, particularly Measures which, within their area, are of equivalent status to Acts of Parliament. Topical here are the effect of incorporating the European Convention on Human Rights into United Kingdom law by the Human Rights Act 19986 and the related question whether the Church of England is an “emanation of the State” for purposes of European Community law, such that it is subject to the jurisdiction of the Court of the European Union in matters relating to the law of the European Union.7 3 For legislation see Church of England Assembly (Powers) Act 1919, Synodical Government Measure 1969. For the church courts see Ecclesiastical Jurisdiction Measure 1963. 4 See Synodical Government Measure 1969, Sched 3, Church Representation Rules. 5 For discussion of the relationship of Church and State with reference to the monarchy see V. Bogdanor, The Monarchy and the Constitution (New York, Clarendon, 1995). 6 Under the Human Rights Act 1998, Measures of the Church Assembly and its successor, the General Synod of the Church of England, are categorised as primary legislation (s.21(1)). Church legislation is given special protection (s.10). This normally allows a minister to amend primary legislation, including an Act of Parliament, declared to be incompatible with a Convention right (s.4). A minister may not use these extra Parliamentary powers to legislate to amend Church of England Measures (s.10(6)). This supports the significant entrenchment of the constitutional position of religious bodies under s.13(1). 7 See Case C–188/89 Foster v. British Gas [1990] ECR I–3313. European law could touch on employment of individuals by church bodies or the heritage responsibilities of the Church for important buildings and other sites. In so far as the Church of England carries out public functions in these areas its own legislation and administrative practices could be challenged at a European level. Heritage items have immunity from the rules which prevent restrictions on freedom of movement

(N) Dunn Ch13

25/1/00

1:47 pm

Page 195

The Church of England as a Voluntary Body 195 This essay considers how the Church of England and, to some extent, by implication, other religious denominations, fit the concept of voluntary bodies. It briefly notes how the Church evolved to that position from being more fully identified with the State. It also notes how the Church goes beyond what might normally be expected in a voluntary body and may claim to be a complete voluntary society or community. As such, it could provide some insights for a new pattern of governance suitable for a genuinely pluralist nation with linked communities in a minimalist State. As a model, the Church suggests that voluntarism could be more than simply an extension of charity law which serves as a convenient tool for meeting certain social needs, but an important factor in developing a genuinely pluralist society. The essay will review briefly the extent to which the Church of England already offers a democratic constitutional model of self-government. It will consider some aspects of the future legal relationship between the State and the national church as a voluntary organisation with public functions. Several representative areas of activity are particularly touched on in the discussion. These involve the Church of England as guardian of a major part of the national heritage and as a partner with the State in meeting important social needs. The essay concludes by considering some distinctive features of the Church’s role in this partnership with regard to schools and as provider of public spiritual services, notably at marriage and death.

THE CHURCH AS A VOLUNTARY BODY

Traditionally, voluntary organisations were likely to be charities run by volunteers who were unpaid, except that they would normally have their expenses refunded.8 That is far less true today, and many voluntary bodies, such as housing associations, may appear as essentially commercial organisations, even though, in law, they are by definition not devoted to making a profit. Thus, they are likely to be free to produce surpluses which are ploughed back into the organisation.9 Also, the employees who manage such organisations may enjoy substantial salaries. Nevertheless, their governing bodies will be controlled by real volunteers who are unpaid. Voluntary bodies may also be directly subject to democratic control,10 and even where they are not, they will be answerable to the public through systems of statutory regulation and inspection. Historically, the clergy have always been financially reimbursed for their ministry. However, the raison d’être of the clergy has always been to provide a of goods within the Union. However, it is interesting to note that EC food controls have been treated as applying sell-by dates to communion wafers produced for their church by Roman Catholic nuns. 8 Trustees may be paid for their services only in exceptional circumstances: Re Duke of Norfolk’s Settlement [1979] Ch 37. This applies where a voluntary body is set up as a charitable trust: Foster v. Spencer [1996] 2 All ER 672. 9 Goodman v. Dolphin Square Housing Trust (1979) 38 P&CR 257. 10 E.g., the National Trust. Its democratic basis is detailed in the National Trust Act 1971.

(N) Dunn Ch13

25/1/00

1:47 pm

Page 196

196 David Harte public service and not in any way to make a profit. Also, the Church of England has in many respects become a democratic institution. It has a hierarchy of councils and synods which are now substantially elected by lay members.11 The paid clergy have a unique status as ministers of God and are not employees in the technical sense.12 Although their role is analogous to that of employees in many ways, with senior clergy as managers, the clergy have statutory representation on church councils and bishops in particular have a veto over certain decisions.13 Such representation is not unique. In other bodies such as secular housing associations, it would seem normal for salaried employees to be members of governing committees. The work of the clergy has always been legally regulated, through the church hierarchy and by means of diocesan courts which still exist as public courts of the land. Each of the 42 dioceses has a consistory court with a chancellor appointed by the bishop from practising lawyers or civil judges.14 In regulating the conduct of clergy, diocesan consistory courts resemble bodies such as the disciplinary tribunals of the General Medical Council.15 The other major jurisdiction of the church courts is much more extensively used. This is the faculty jurisdiction, for approving alterations to parish church buildings and churchyards, discussed below, as a major aspect of the role of the Church of England as a heritage body.

THE ORIGINS OF THE NATIONAL CHURCH AND DEVELOPMENT FROM UNIFORMITY TO VOLUNTARINESS

The Church of England is a unique institution. It existed before the British State and, until the nineteenth century, it carried out numerous functions which, more recently, have been taken for granted as the responsibility of the State. Historically, Church and State were inseparably enmeshed in emerging European nations. From the Reformation through to the nineteenth century, the idea of an established Church presupposed citizens conforming with beliefs and practices set at a national level. That concept of establishment has effectively disappeared. Thus, the full range of secular public offices is now open to all irre11 Synodical Government Measure 1969, particularly Sched 3, Church Representation Rules, discussed infra. 12 Diocese of Southwark v. Coker [1995] ICR 176. For other denominations see President of the Methodist Conference v. Parfitt [1984] QB 386; Davies v. Presbyterian Church of Wales [1986] IRIL 194 . 13 See Synodical Government Measure 1969, Sched 3, rr 23(1)(d) and 28(1)(e). Where voting is by houses, particularly on matters of doctrine, it may equally be said that the laity also have a veto. 14 Ecclesiastical Jurisdiction Measure 1963, part I. There are 43 dioceses if the Diocese of Sodor and Man is included. 15 For current debate on reform of the church disciplinary procedures see General Synod Working Party, “Under Authority: Report on Clergy Discipline”, GS 1217 (London, Church House, 1996).

(N) Dunn Ch13

25/1/00

1:47 pm

Page 197

The Church of England as a Voluntary Body 197 spective of belief or its absence.16 The one significant surviving requirement of an office-holder in the State belonging to the established church is that which applies to the monarch as Head of State and supreme governor of the national Church.17 However, the Church of England continues to be very much established, in that it is specifically taken account of by English law, both as a network of lawful organisations amongst many others fulfilling public functions and because of special rules which allow it to operate. In this sense, all Christian denominations are established by law,18 as are other faith bodies. The Church of England is more prominent than others because of the complexity of the extensive special law resulting from its history. On the other hand, at a number of important points, notably the provision of education for children, other denominations, or at least the Roman Catholic Church, have almost as prominent a position. There are currently more Roman Catholic secondary schools than there are Anglican ones (361 Roman Catholic compared to 200 Anglican secondary schools, out of a total of 2,855 in the state system).19 During the long period when it was simply the spiritual expression of a Christian kingdom, the Church provided the administrative framework and the personnel for many of the roles which are now seen as the responsibility of the State. Before the Reformation, these included most aspects of government, notably education and health care, but also much in the way of government administration, including courts handling such diverse matters as the regulation of sexual morals and inheritance of personal property.20 More recently, church functions continued to range from the provision of social welfare by the parson, to education and the administration of significant areas of everyday law. Matters covered by the ecclesiastical courts until the mid-nineteenth century included much family and probate work and even defamation.21 By the time the State began to take over those aspects of public service previously run by the Church, the Church had become considered as an entity distinct from the State. Depriving it of public functions amounted to an early programme of nationalisation. Conversely, the functions left with the Church as it shifted to its modern relatively autonomous position may be seen as a prototype for privatisation. These functions include running its own schools and the remaining jurisdiction of its courts, which allow the Church autonomy in controlling its historic ecclesiastical buildings. If the basis for these functions was 16 The office of Lord Chancellor was only made available to Roman Catholics in 1974: Lord Chancellor (Tenure of Office and Discharge of Ecclesiastical Functions) Act 1974. 17 For discussions of the legal basis and significance of establishment cf. Bogdanor, supra n.5, chap 8 and J. Moses, A Broad and Living Way (Norwich, Canterbury Press, 1995). 18 E.g., General Assembly of the Free Church of Scotland v. Lord Overtoun [1904] AC 515. 19 UK Government Statistical Service, Statistics of Education: Schools in England (London, Stationery Office, 1997). 20 R. Helmholz, Canon Law and the Law of England (London, Hambledon, 1987). 21 The main transfer of jurisdiction to the secular courts was by the Matrimonial Causes Act 1857.

(N) Dunn Ch13

25/1/00

1:47 pm

Page 198

198 David Harte changed as part of a programme of disestablishment, the change could be seen as a further major stage in the move to privatisation. The State would doubtless always retain its regulatory oversight. Church schools, even if entirely private, would be subject to inspection. If the church courts were removed from the national court system they could survive as internal tribunals exercising supervision over parish church buildings, to the exclusion of listed building control by local planning authorities. This already happens in the Church in Wales which was disestablished in 1924,22 and in other denominations.23

THE CHURCH AS A

“ COMPLETE ”

VOLUNTARY SOCIETY

This essay is concerned primarily with the Church of England, as the national embodiment of the Church. However, in legal terms, the Church of England is an elusive concept. It is not a single legal entity but a mass of interrelated bodies, at various levels. Nationally, it includes the elected General Synod and a network of administrative bodies, particularly the Church Commissioners.24 A new centralised executive has been created in the form of the Archbishops’ Council, set up under the National Institutions Measure 1999. With regard to conservation, national Church of England bodies include the Council for the Care of Churches25 and the Historic Churches Conservation Trust.26 In each of the 42 dioceses, the bishop is a corporation sole. There is an elected diocesan synod and such statutory bodies as the diocesan board of finance.27 At grass roots level, there are the individual parishes which divide up the spiritual responsibility for the whole country but do not correspond with modern local government boundaries in a coherent way.28 Theologically, the Church of England is the temporary expression of the Catholic Church of Christ in one small country. Many functions fulfilled by the national Church are also performed by other denominations. As suggested above, the concept of “establishment” is misleading because any church needs to relate with the State and does so within a legal framework set by the law of the State.29 The Methodist and United Reformed Churches both operate under their own special statutes, in the form of Private Acts of Parliament.30 The 22

Welsh Church Acts 1914 and 1922. Planning (Listed Buildings and Conservation Areas) Act 1990, s.60(5)–(6). 24 Church Commissioners Measure 1947. 25 Synodical Government Measure 1969, s.2(1), Sched 2, Art 10(2). 26 Pastoral Measure 1983, s.44, amended by the Pastoral (Amendment) Measure 1994, s.13. 27 Diocesan Boards of Finance Measure 1925. 28 It is a proposal of the “Turnbull Commission” which led to the National Institutions Measure 1999 that the dioceses should be grouped in regions reflecting government regional arrangements: Report of the Archbishops’ Commission on the Organisation of the Church of England, Working as One Body (London, Church House Publishing, 1995). 29 E.g. Ecclesiastical Exemption (Listed Buildings and Conservation Areas) Order 1994, SI 1994, No. 1771, art 4. 30 The Methodist Church Act 1976 and the United Reformed Church Act 1972. See also Baptist and Congregational Trusts Act 1951. 23

(N) Dunn Ch13

25/1/00

1:47 pm

Page 199

The Church of England as a Voluntary Body 199 Roman Catholic Church enjoys a recognised place within the national legal structure. The various denominations and their specialist agencies are very much like other voluntary bodies which hang between the full-blown organs of the State and entirely free-floating private organisations. Even if they are, in legal terms, private bodies, church denominations and other church organisations are dependent upon the law of the State for their effective operation. Churches which do not have any statutory basis depend for their legal existence particularly upon trusts and on contracts which are made or implied between their members. The Church of England remains constitutionally part of the State and its ecclesiastical law is part of the law of the land.31 However, this is deceptive. The modern “establishment” is more a concordat in which the national Church provides a link between Parliament and the Executive on the one hand and a wide range of Christian bodies on the other.32 To some extent, the bishops serve as a channel for the concerns of other faiths, especially Judaism. Because of the special character of its legislation and its relationship with Parliament, the Church of England is able to facilitate the work of all denominations and faiths and is in a position to help develop a more effective role for them as voluntary bodies fulfilling social functions.33 As a voluntary body, the Church of England is particularly significant, because of its historical origins and its size. It may be seen as a State within the State. Although its committed membership may have shrunk, proportional to the population as a whole, arguably, it is becoming a more comprehensive community than it used to be, within the nation and linked with churches in other countries.34 By contrast, the Roman Catholic Church appears to be a worldwide empire that, traditionally, considered itself a societas perfecta. It did not mean by that expression a perfect society. Rather, the societas perfecta is a complete community, with the features of any fully fledged human State, particularly its own system of law. The concept of the societas perfecta was sidelined in the Roman Catholic Church by Vatican II in the 1960s and the revised 1983 Code of Canon Law which resulted.35 Although it is very extensive, the modern Roman Catholic Code is essentially an internal law for regulating distinctively religious activities and personnel.36 31 For a full discussion see N. Doe, The Legal Framework of the Church of England (Oxford, Clarendon, 1996). 32 For a wider comparison of constitutional relations between Church and State, see N. Doe, Canon Law in the Anglican Communion (Oxford, OUP, 1998). 33 The formal expression of such co-operation is the Churches Main Committee. 34 Particularly other Anglican churches; Doe, supra n.32, and the Lutheran episcopal churches of Northern Europe with which full inter-communion was established by the Porvoo Agreement of 1993. 35 The shift was associated with a new emphasis on human rights applying both outside and inside the Roman Catholic Church: J. Langan, “Human Rights in Catholicism” (1982) 10 Journal of Ecumenical Studies 25. 36 See J. Coriden, T. Green and D. Hentschel (eds.), The Code of Canon Law (New York, Paulist Press, 1995). Note the relatively small Book V, “The Temporal Goods of the Church”.

(N) Dunn Ch13

25/1/00

1:47 pm

Page 200

200 David Harte In England after the Reformation, the canon law of the Catholic Church was retained as a distinct body of law, but it was developed separately both from the canon law of the remainder of Europe and from the secular common law at home. This English canon law is the basis for modern English ecclesiastical law, that is the law relating to the Church, especially the law applied in the church courts.37 Ecclesiastical legislation is passed by the General Synod of the Church of England and is laid before Parliament. It may be vetoed but not amended. If not vetoed it receives the Royal Assent and acquires authority similar to that of an Act.38 If the existence of its own courts and formal legislative arrangements is the hallmark of a complete society, the Church of England may claim to have the essential characters of a coherent society within the more diffuse modern State. At a social and material level, the Church operates basic services, at both ends of life, including the provision of schools and of homes for the elderly. Because it can legally effect marriages, the Church goes as deeply into human relationships as the State and it goes beyond life by providing for the burial of the dead. It may therefore be said that, in England, the Church offers a model for a new pluralist society, where the State devolves as many as possible of its functions, not in an isolated manner, but to people in their chosen communities. Communities may be identified simply in geographical terms, as people living in a particular place. However, they may also consist of those who have chosen to group themselves on some other basis. Provided membership is open to all the public who are prepared to commit themselves, such communities may legitimately claim to be public bodies to which the State may properly delegate functions. The Church of England is organised on a parish basis covering the whole country and has the framework for providing services nationally and serving a network of public local communities. The Church does not offer a general opportunity of employment, but the State itself leaves the provision of paid work to private commerce. Where the State does directly intervene in helping to find jobs, for example with training schemes, the Church also plays a role along with other voluntary organisations. There is a major point of potential difficulty for the Church in taking on a wider role as a voluntary organisation which provides public services. This is its distinctive ideology. If a voluntary society is to be recognised by the State as a provider of public services, it will be required to comply with legal standards, such as those to be laid down in the Human Rights Act 1998. These include a ban on race, gender or religious discrimination. However, a religious body can hardly avoid discriminating in terms of religion. Even if it offers its services to anyone, it is likely to require at least some of its staff to be committed to its sys37 For the different concepts of ecclesiastical law, Church law and canon law see A. T. Denning, “The Meaning of Ecclesiastical Law” (1944) 60 LQR 235; T. Briden and B. Hanson, Moore’s Introduction to English Canon Law (3rd edn., London, Mowbray, 1992), chap 1; Doe, supra n.31, chap 1. 38 Church of England Assembly (Powers) Act 1919, amended by the Synodical Government Measure 1969.

(N) Dunn Ch13

25/1/00

1:47 pm

Page 201

The Church of England as a Voluntary Body 201 tem of beliefs. Religious liberties therefore raise different issues from equality of gender and race. If a person chooses one religion rather than another, they must abide by the moral principles of that religion. Equally, there can be no claim to be accepted as a member of a body whose principles one rejects. It would be invidious if an external secular court were put in the position of determining those principles.39

THE CHURCH AS A CONSTITUTIONAL MODEL

The Church of England is a significant player in the voluntary sector, not just because of the extent of its involvement and the revival of its historic role as a provider of social as well as spiritual welfare. It is also significant at a constitutional level because of its distinctively democratic structures and the ways in which it maintains the balance between its own independence, and indeed integrity, and its role as a partner with the State. Here, the experience of the Church of England may be of some interest in the current constitutional debate. Although a new management structure is now being put in place,40 the real identity of the Church of England must be sought at different levels, in the dioceses and parishes and amongst ordinary people who regard it as their Church. These include not only regular committed worshippers but any who are baptised and even occasionally attend worship. Looked at as a national phenomenon, paralleling the nation itself, from the grass roots up, the Church of England operates through a hierarchy of elected representative bodies. These are supplemented by various appointed committees and quangos along with their officers, such as diocesan secretaries and registrars and, centrally, the civil servants of the Church Commissioners and of the General Synod. The Church Commissioners handle the property of the Church at a national level.41 The staff at Church House carry out daily administration at a national level and advise the dioceses. These officers and administrative bodies are answerable to the elected councils or synods. The base of the synodical structure is the nearly 28,500 parishes into which England is divided. Each of these has an annually elected parochial church council, (PCC). This is responsible for the maintenance of the parish church buildings and churchyard.42 As in the higher tiers of church government, the professional clergy have ex officio membership and chairmanship. Normally the rector or vicar is chairman of the PCC, and has certain autonomous powers. Apart from assistant clergy and licensed lay workers or readers, the remaining members are elected, either as members of the PCC or to a related office.43 39 40 41 42 43

This appears to be recognised by s.13 of the Human Rights Act 1998. National Institutions Measure 1999. Church Commissioners Measures 1947 and 1964. Parochial Church Councils (Powers) Measure 1956, s.4. Church Representation Rules: Synodical Government Measure 1969, Sched 3, r 12.

(N) Dunn Ch13

25/1/00

1:47 pm

Page 202

202 David Harte There is also an elected lay vice-chairman44 and two or more elected churchwardens who share responsibility with the incumbent for order in the parish.45 Parishes are grouped in deaneries, typically of about a dozen or sometimes more congregations. When parishioners elect their PCC, depending on the numbers of parishioners, they also choose a number of members as their representatives on the Deanery Synod.46 This also has both a clerical chairman, the Rural Dean, and an elected lay co-chairman.47 All the clergy are automatically members, but there are larger numbers of lay representatives.48 Within each diocese there are several deaneries and a distinctive feature of the church system is that both clerical and lay members of the Diocesan Synod are elected by the Deanery members.49 These also elect directly to the General Synod of the whole church which meets twice a year, moving between Westminster and York.50 The system therefore includes a level of indirect elections. The Deanery Synods serve as electoral colleges for the higher echelons of the church democratic structure. Despite complaints that ordinary parishioners do not elect directly to the national or the diocesan synods, those who do take part in these elections are answerable to people who know them personally and those who are elected to the Deanery Synods may be expected to be in a position to make an informed judgement about those whom they in turn elect. A second significant feature of the church system is that it allows for the use of proportional representation with a single transferable vote.51 Although there are “parties” in the Church, this method tends to avoid excessive polarisation, whilst ensuring that a variety of positions are represented. The church system therefore demonstrates features of a possible reformed state electoral system. It also demonstrates how voluntary bodies which perform public functions may claim as good democratic credentials as central or certainly local secular government. Voluntary bodies appear to have been seen by recent governments as devices for shedding governmental responsibilities in providing important services for the public. The preoccupation with economics which seems endemic in modern society has meant that the emphasis is on providing better value for money and on tapping money without the opprobrium of increasing taxation. The idea of voluntary bodies as an aspect of democracy may be mentioned but seems largely ignored in practice. The democratic character of the Church of England in conservation, as steward of a major part of the national heritage, may be compared with that of the National Trust.52 Both institutions have elected councils and allow participa44

Ibid., App II, para 1(b). Ibid., r 11 and Churchwardens (Appointment and Resignation) Measure 1964. 46 Church Representation Rules, r 20. 47 Ibid., r 23(1)(a). 48 Ibid., rr 19 ff. 49 Ibid., r 24. 50 See ibid., r 29 for election of lay representatives. 51 Synodical Government Measure 1969, Sched 3, Church Representation Rules, r 26(7) for elections to diocesan synods and r 33(4) to the General Synod. 52 National Trust Act 1971. 45

(N) Dunn Ch13

25/1/00

1:47 pm

Page 203

The Church of England as a Voluntary Body 203 tion in general meetings by their full membership. Both have roles and powers specially guaranteed by Parliament. There are two levels at which the Church of England as a voluntary body directly accommodates the public by providing legal rights which are part of the general law. First, to a large extent, the public can play a democratic role in the structures of church government, even though they have no real religious commitment. Secondly, the Church of England operates its own systems for regulating any changes to its buildings.53 For parish churches regulation is exercised in each diocese through the faculty jurisdiction,54 by professional judges advised by an expert Diocesan Advisory Committee consisting of experts such as architects. The Church allows for very active participation by members of the public with a genuine interest in preserving and making the most of the national heritage through locus standi in church courts on faculty matters. This does not apply only to active church members, but to national amenity societies, anyone living in the parish and indeed “any other person or body appearing to the chancellor to have a lawful interest”.55 Provided they are baptised, those with an interest in the heritage of church buildings and liturgy who have “habitually attended public worship” at any parish church for the previous six months are entitled to be put onto the church electoral roll which will give them rights in church elections and standing in any faculty proceedings.56 The aims of the Church are, of course, primarily spiritual. However, so far as it fulfils material functions in providing material services, such as education, the aim is not profit-making but improving the services for the benefit of those to whom they are offered. As a custodian of the national heritage, the Church must so far as possible balance conservation concerns against the need for accessibility. It is these contrasting interests which matter, rather than maximum profit or efficiency. In each case, active involvement by Church members and by the general public is sought after. The areas where the public have rights in relation to the Church of England, because of its established position as the national church, include church heritage and also the provision of education and of pastoral ministry, especially in respect of marriage and burial. These reflect three different levels of integration with the State, each of which needs reassessment in the light of current trends, particularly as voluntary bodies assume a more prominent role. In its conservation role, the Church is largely left free to exercise its own responsibilities, although within a framework of state public law. In the case of education, the 53 As a result exemption is given from secular listed-building control: Planning (Listed Buildings and Conservation Areas) Act 1990, s.60. See too the Ecclesiastical Exemption (Listed Buildings and Conservation Areas) Order 1994, SI 1994 No 1771. 54 Faculty Jurisdiction Measure 1964; Care of Churches and Ecclesiastical Jurisdiction Measure 1991. 55 Faculty Jurisdiction Rules 1992, SI 2882; particularly rr 5 and 15. 56 Synodical Government Measure 1969, Sched 3, Church Representation Rules, r 1(2). What amounts to habitual worship is a question of fact for the electoral roll officer but would not seem to be a very stringent test. A person may be on more than one parish roll (r 1(3)).

(N) Dunn Ch13

25/1/00

1:47 pm

Page 204

204 David Harte State accepts the Church as a partner, albeit a junior one, in providing a major public service. In the third area, of religious provision for marriage and burial, the churches have a large measure of autonomy, but the ordinary citizen retains significant rights to call upon the ministrations of the national Church, again as a matter of public law.

CHURCH SCHOOLS

There are of course private Christian and other faith schools, affiliated to various denominations. These seem to be guaranteed their future existence by the European Convention on Human Rights.57 Anglican private institutions include some of the well known public schools. These may be subject to some supervision by the Church, often through ex officio membership of the diocesan bishop or other clergy on their boards of governors. Chapels may be subject to the faculty jurisdiction and alterations supervised in the same way as those to a parish church. Listed-building control by the local planning authority will not then apply.58 However, most church schools are integrated into the state education system. Of these, most were incorporated when the modern state system was established by the Education Act 1944. Significantly, these were labelled “voluntary schools”. At secondary level there are relatively few voluntary schools and more of these are Roman Catholic than Anglican. At primary level Anglican voluntary schools form a sizeable minority and tend to be well rated in modern teaching assessments. Of 18,480 primary schools in 1996, 28 were Methodist, 1,777 Roman Catholic and 4,597 Anglican.59 There is a small group of Jewish and now Muslim schools within the state sector. Voluntary state schools are largely integrated within the state sector but their voluntary character is important for maintaining a distinctive ethos with independent funding and parental support for their activities. Under the 1944 pattern there were two degrees of voluntariness, represented by voluntary controlled and voluntary aided schools. The controlled schools retained a religious character, with some governors appointed by the relevant denomination. They were entitled to a number of teachers qualified by their faith who were reserved to take religious education. However, buildings were taken over by the local education authority. Voluntary aided schools had a more specifically religious base and retained their own buildings. Although they also had to contribute to the maintenance of the buildings, if the school was closed, the Church got the value of the site. There was a further category of special agreement schools which differed from the standard pattern 57 European Convention on Human Rights, First Protocol, 1952, cmd. 9221 Art 2 (London, HMSO, 1952). 58 Re Tonbridge School Chapel [1993] 2 All ER 350. 59 Department of Education and Employment Statistics of Education (London, HMSO, 1997).

(N) Dunn Ch13

25/1/00

1:47 pm

Page 205

The Church of England as a Voluntary Body 205 The picture was complicated by the Conservative reforms in the 1980s with the introduction of centrally grant maintained schools.60 These could be faithbased and a few church schools moved into the grant-maintained sector, although the denominations preferred schools to remain within the local authority part of the state system. Under the current government the categories of school have been recast by the School Standards and Framework Act 1998.61 The non-religious “county schools” become community schools. Others will be aided schools or foundation school. The basic distinction between controlled and aided church schools has been kept. The Labour government has taken steps to restore local authority participation in grant-maintained schools by converting them to foundation schools and to prevent selection by academic ability. However, it appears happy to allow selection to continue based on parental choice of faith and to support a continuing role for religious aided and foundation schools in the state system. Control on the part of parents was increased, through greater numbers and powers for parent governors.62 Those developments raise special questions for church schools, particularly over the selection of pupils in popular institutions. Although the present government maintains traditional Labour opposition to selection by ability it has not challenged the principle that church schools may give priority to children whose parents have a genuine religious commitment.63 Apart from denominational schools, religious education and worship will continue to be mandatory in normal community schools. Since the Education Reform Act 1988, it has been provided by statute that religious education64 and worship65 in community schools should reflect the traditional role of Christianity in British society.66 Syllabuses for religious education are drawn up for each local education authority by joint committees including elements from the authority itself, from teachers, from the Church of England and from other denominations and faiths acting together.67 A majority of representatives from each of these four sub-groups must approve the syllabus. A similarly constituted 60 Education Reform Act 1988, Part I, Chap IV; Education Act 1993, Part II; Education Act 1996, Part III, Chap. I. 61 School Standards and Framework Act 1998, ss.20–21, following the proposal in the White Paper, Excellence in Schools, Cm 3681 (London, Stationery Office, 1997). 62 Education Act 1980 and Education (No 2) Act 1989; consolidated in the Education Act 1996. The principle of parent governors has been taken further in the School Standards and Framework Act 1998. 63 School Standards and Framework Act 1998, Chap VI, Part III, s.86 protects parental preference. S.91 protects the freedom of voluntary schools to operate admissions policies designed to ensure their religious character. 64 Education Act 1996, s.375; School Standards and Framework Act 1998, s.69 and Sched. 19; para 2(5). 65 School Standards and Framework Act 1998, s.70, Sched. 20, para. 3(2). 66 This is subject to safeguards for the freedom of both teachers (ibid., ss.59–60) and parents (s.71). 67 Ibid., Sched. 19, para 1, and Education Act 1996, s.375 and Sched 31.

(N) Dunn Ch13

25/1/00

1:47 pm

Page 206

206 David Harte Standing Advisory Council for Religious Education (SACRE) in each local authority monitors the syllabus and worship.68 It is significant that the framework for religion in schools is, therefore, essentially locally determined, by contrast to the national curriculum for other subjects.69 It could be said that, as voluntary associations, religious bodies have helped to ensure subsidiarity and local democracy in at least one part of community life. At the same time, the established position of the Church of England enables it to provide a national perspective which is distinct from that of the central government bureaucracy.70 With parent governors, representation from the denomination and syllabuses and worship determined largely by the Christians in the diocese, the voluntary principle is very much alive in church schools. As ideologies within society diverge, there will doubtless be pressure from secularists to impose a new uniformity. It may be argued that this is necessary to avoid sectarian divisions like those which have racked Northern Ireland. There is a fear, for example, that Muslim schools could insulate Muslim children from the wider society and give them a false picture of what other people are like and what other people believe. Despite these dangers, it may be thought that the voluntary principle represented by the Church in education supports a mutually respectful and mutually enriching pluralism which exists in society and which should be the aim of an inclusive state.

PUBLIC RIGHTS TO THE RITES OF THE CHURCH

The established Church has a legal responsibility to provide regular public services throughout the country on Sundays.71 There is much flexibility in the use of modern forms of service.72 From a conservation point of view, this means that the law cannot be used effectively by lovers of traditional liturgy to attack clergy for using modern versions.73 Also, the duty is to provide services, not to keep church buildings open for regular devotion or sight-seeing. However, there are duties to provide for marriage and burial which raise wider issues. In modern secularised Britain, the role and status of marriage have become unclear. Legally, marriage in a church building of the Church of England remains available for the public.74 There is generally considered to be a right to be married according to the rites and ceremonies of the Church of England in 68

Education Act 1996, ss.390–392. Education Act 1996, Part V, Chap II. 70 See, further, Report of the Board of Education of the General Synod of the Church of England, “Church of England Schools in the New Millennium”, GS 1321 (London, General Synod of Church of England, 1998). 71 Canons of the Church of England, Canon B11. 72 Canons B1–5 and B14A. 73 R. Bursell, Law and Liturgy (Oxford, Clarendon, 1997). 74 Marriage Act 1949, ss.5–6. 69

(N) Dunn Ch13

25/1/00

1:47 pm

Page 207

The Church of England as a Voluntary Body 207 the parish church where one resides. This has been assumed to apply to believers and unbelievers alike, even if neither party has “ever set foot in the church before”.75 The right has been criticised for being based on a legal fiction, 76 and individual clergymen do have a counterbalancing right to refuse to celebrate a marriage where one of the parties is a divorcee with a previous spouse still living. An incumbent also has a right to forbid the use of their church for such a ceremony.77 However, as a voluntary body, the Church of England offers a public service in celebrating marriage for those members of the general public who want it. The Church of England marriage service is significant because, increasingly, it offers something which the State is unable to: a formal public endorsement of personal commitment by a man and a woman which is designed to form the basis for secure family life and the creation and upbringing of children. The State offers alternative ceremonies which may now be carried out in other venues which have been registered for that purpose.78 However, society’s attitude to traditional marriage has become very ambiguous. The general availability of divorce and the extension of matrimonial property rights to non-married cohabitees have reduced the distinctiveness of secular marriage. The future possible recognition of same-sex unions as equal to marriage in secular law would be a further step. The popular tendency seems increasingly to ignore marriage socially. It is being progressively replaced by the uneasy concept of personal “partnerships”. These imply that the individuals concerned want it recognised that they have a relationship but do not consider it the business of anyone else, including the State, to know more about that relationship, such as how long it is likely to go on or whether it is exclusive. By contrast, Christian marriage is still offered by the Church as a permanent commitment supported by the community of the Church.79 The Roman Catholic Church operates an elaborate system for allowing remarriage, by judging certain unions as null.80 The Church of England approach is to accept, pragmatically, that some marriages may come to an end and to allow clergy to follow their own consciences and their discretion in deciding whether a further marriage is doctrinally possible and pastorally right in a given case.81 Burial, the other special service provided by the established church which is available to the public, can be claimed by or rather on behalf of, anyone who 75

Law Commission, Solemnisation of Marriage, Working Paper No. 35 (London, HMSO, 1971). Doe, supra n.31, 384. 77 Matrimonial Causes Act 1965, s.8. 78 Registration of Marriages Act 1996. 79 Canons of the Church of England, Canon B30. 80 Coriden et al., supra n.36. 81 Regulations Concerning Marriage and Divorce, passed in the Upper and Lower Houses of Canterbury Convocation in May 1957 and declared an Act of Convocation on 1 Oct 1957. Cf guidelines of the House of Bishops of the General Synod, Marriage Discipline, GS 669, 13 Feb 1985 (London, General Synod of the Church of England). 76

(N) Dunn Ch13

25/1/00

1:47 pm

Page 208

208 David Harte dies in a parish with an open churchyard.82 Elsewhere, there is a right to burial in consecrated land which will be provided in a municipal cemetery but will be subject to the faculty jurisdiction of the Church of England. There are exceptions, where burial in consecrated ground is restricted or prohibited under church law, as in the case of a suicide, but these cases are rare.83 Similarly, in the case of those who have been baptised, there is a right to have the incumbent or his deputy read the Anglican funeral service. The right to interment applies to calcified remains after cremation as it does in the case of traditional burial.84 The legal right to Christian burial provides a civilising reminder of mortality and, at the same time, of the hope that there may be some lasting significance to human life.85 Here the secular State can go no further. By incorporating the services offered by the Church, public law allows for the sensitivities of the bereaved and of those who wish to make preparation for their own death. The role of the Church in providing for burial could become an essentially private one, but disposal of the dead will always have a public dimension, for health reasons. A voluntary organisation which ensures seemly disposal of the dead and continuing supervision of memorials is likely to remain useful from a secular perspective but will require regulation by the State to supervise its arrangements.

THE PLACE OF THE CHURCH AS A VOLUNTARY BODY

Increasingly, the Church could assume a lead in social welfare provision where the State abdicates responsibility. Since the publication of its report, Faith in the City,86 and the creation of the Church Urban Fund, the Church of England has been seen as a leader in the field of welfare, providing accommodation through housing associations and hostels. It could increasingly provide a framework for the care of the elderly and training for the unemployed. In an age characterised by relativism, the Church provides a coherent philosophy which cannot be matched by the secular State. Christianity may well be said to require the expression of Christian commitment in every aspect of life. As the life patterns available in ordinary society become increasingly unsatisfactory from a Christian perspective, it may become natural for the Church to provide housing, work and recreation in a specifically Christian setting. This will raise practical problems. Isolation of a religious group can lead to decline and, eventually, to disappearance. Old communities which used to be inherently 82 Winstanley v. Manchester Overseers [1910] AC 7; Re West Pennard Churchyard [1991] 4 All ER 124. 83 Canons of the Church of England, Canon B38. 84 Church of England (Miscellaneous Provisions) Measure 1992, s.3. 85 For theological considerations discussed in relation to exhumation see Lomas Ch. in Re Smith [1994] 1 All ER 90. 86 Report of the Archbishop of Canterbury’s Commission on Urban Priority Areas (London, Church House, 1985).

(N) Dunn Ch13

25/1/00

1:47 pm

Page 209

The Church of England as a Voluntary Body 209 stable can be vulnerable as young members are attracted outside. The Mennonites and the Amish in North America provide examples. Other nonChristian communities such as Jews and Zoroastrians illustrate the same point. Generally isolation is not desirable from a Christian viewpoint. Christianity is a proselytising religion which aims to expand rather than to wither away. It is therefore natural for church people to live in ordinary communities, rather than in ghettos. The ubiquitous parish church is located specifically in the ordinary community. Many “good works”, begun in the past as Christian initiatives, are now run without any specifically Christian character. This pump-priming, starting associations as a matter of Christian responsibility, raises questions over how far the constitutions of voluntary associations can or should be designed to maintain a specifically Christian character, or any other specific ethos. Increasingly, if the wider society becomes less sympathetic to their beliefs, Christians may be more concerned to maintain the Christian ethos of organisations where they work. There has been time in this essay only to touch on the range of functions which the modern Church exercises as a part of the voluntary sector. Frequently, the Church complements work by other voluntary bodies. This is the case in education, and increasingly in areas such as housing and provision for the elderly. However, the central functions of the Church are also of public interest, notably when these involve the conservation of old church buildings and their contents as part of the national heritage. There are secularists who value these as monuments and museum pieces but would like to see them in the hands of secular conservators. There are, equally, substantial numbers of church people who see the tangible heritage as anachronistic baggage which they would gladly shed to free money and effort. Realistically, the State will not take over financial responsibility for the heritage of religious buildings whilst the Church is still there to find most of the running costs. Equally, the Church would be blind if it failed to see that the heritage provides a key point of contact with non-Christian Britain which can be used to explain the Christian faith to tourists and occasional visitors at events like weddings and funerals. As the voluntary sector expands, therefore, it seems that the role of the Church may develop in either of two ways. On the one hand, the Church may emerge as a significant partner in a pluralist society, providing an increasing range of amenities for its members, including any members of the public who wish to join. Alternatively, the Church could be re-established in the public perception essentially as a heritage body, like English Heritage or the National Trust. Which model emerges will depend on whether English society is becoming truly pluralist, allowing a real variety of life-styles and ideologies to flourish, or is moving towards an essentially secular society such as France. With an increasingly integrated Europe, which model emerges may also be an indicator of the future character of Europe itself.

(N) Dunn Ch13

25/1/00

1:47 pm

Page 210

(O) Dunn Ch14

25/1/00

1:48 pm

Page 211

14

Challenges and Dilemmas Faced by Conservation and Animal Welfare Charities Who Both Enforce the Law and Press for Changes STUART HARROP

INTRODUCTION

For a period of five years, the author had responsibility for the legal activities (including the prosecution function) of the Royal Society for the Prevention of Cruelty to Animals. Both the extent and quality of the RSPCA’s prosecution activities are well known. Without its work either the vast majority of animal cruelty transgressions would go unpunished or the public purse would be forced to bear the cost of processing thousands of specialist charges each year. This essay, examining the conflicts faced by charities like the RSPCA, is not written to highlight errors observed or otherwise known to the author. On the contrary, its purpose is to discuss the manner in which the RSPCA, and other specialist charities, balance their responsibilities whilst, simultaneously, operating prosecution functions and pressing for advances in the law as it relates to their fields of interests. The author should add, also, that he is neither a specialist prosecution nor a charity lawyer. Hence the approach in this discussion is that of a more managerial viewpoint.

THE CONTEXT OF CHARITIES AS LAW ENFORCERS

The right of members of the public to take private prosecutions of offences (except where statute limits the right to prosecute to a public body) has been long established and remains firmly entrenched as a general principle of English1 1 Scottish law takes a different approach: the right to take private prosecutions is not available. For discussion see M. E. Cooper, An Introduction to Animal Law (London, Academic Press, 1987), 11.

(O) Dunn Ch14

25/1/00

1:48 pm

Page 212

212 Stuart Harrop law.2 The main restriction derives from the High Court’s power to make a Criminal Proceedings Order which prevents a private prosecutor from further exercising this right, without the Court’s leave, where that person has persistently instituted vexatious prosecutions.3 Further, the Director of Public Prosecutions (DPP), beyond a specific remit, has the power to take over private criminal prosecutions at any stage.4 Private prosecutions in some fields cleared the path for official bodies to assume responsibility, ultimately, for functions which began as private initiatives. For example, many cruelty offences relating to agricultural practices, although once prosecuted by the RSPCA, are now often, but not exclusively, processed by or through the government ministry responsible for agriculture.5 Other early pioneers in private prosecutions laid the foundations for modern, sophisticated prosecution departments which remain exclusively within the private, charity sector. Cases taken by charities have also proved to be ground breaking in terms of their sophistication. In a recent pioneering case (deriving from investigation work in 1991) the Royal Society for the Protection of Birds (RSPB) assisted by academic expertise, employed novel genetic fingerprinting techniques to trace the ancestry of goshawks (and later other birds of prey) in order to disprove alleged familial links and thereby demonstrate that the birds were illegally taken from the wild rather than captive bred. The prosecution of this case attracted great media interest. Additionally there was a professional interest in the new application of an expanding area of scientific expertise. The application of genetic fingerprinting techniques has since been used in relation to crimes concerning other birds of prey as the portfolio of genetic knowledge in relation to these various species has developed.6 The courts certainly appear to feel confident enough in the capabilities of private prosecutors, like the RSPB and RSPCA, to ensure that their right to prosecute is as wide and unrestricted as possible. The founders of the RSPCA were at times ridiculed for prosecuting offences concerning ill-treated animals and yet they laid the foundations for a respected function, still in their hands,7 which in 1997 secured a total of 2,650 convictions for cruelty offences.8 The case of 2 The general rule is that anyone can bring a prosecution. See R. J. Stafford, Private Prosecutions (London, Shaw & Sons, 1989). 3 Supreme Court Act 1981; Prosecution of Offences Act 1985. Stafford, supra n.2. 4 S.6(2) of the Prosecution of Offences Act 1985. 5 The offences in the Agriculture (Miscellaneous Provisions) Act 1968, by example, are prosecuted by Ministry appointees and also by the RSPCA and other interested parties. 6 Since the first use of this technique, and the further development of the sophistication of DNA profiling techniques, there have been 12 further cases concerning raptor species. For discussion see G. Shorrock, “The Success of DNA Profiling in Wildlife Law Enforcement” (1989) 1(4) International Journal of Biosciences and the Law 327. 7 See R. D. Ryder, Animal Revolution (Oxford, Blackwell, 1989) for a historical perspective of the development of the RSPCA. 8 According to RSPCA National Facts and Figures 1997 these convictions concerned the prosecution of 1,776 defendants. In addition to the prosecution function the RSPCA also collects evidence and investigates potential offences through its inspectorate. In 1997 a total of 133,664 complaints

(O) Dunn Ch14

25/1/00

1:48 pm

Page 213

Dilemmas faced by Conservation and Animal Welfare Charities 213 RSPCA v. Woodhouse9 relates specifically to this point and also to the RSPCA’s particular position. The RSPCA assumes the main responsibility for the core animal-welfare prosecutions set out in the Protection of Animals Act 1911 and also many of the prosecutions in relation to agricultural animals in other areas of legislation such as the Agricultural (Miscellaneous Provisions) Act 1968 (to the extent that the latter offences are not prosecuted by the Minister responsible for agriculture). The Woodhouse case related to one of the many more obscure offences which are occasionally the subject of an RSPCA prosecution: in this instance, the Transit of Animals (Road and Rail) Order 1975,10 which stated that the offences prescribed by it would be enforced by the local authority. Even so, the court in Woodhouse held that the RSPCA was fully entitled to prosecute because, although a duty may be placed on a specified body (in this case a Local Authority) to prosecute these offences, there was no expression of exclusivity in the Order and, without express words, private prosecutions could not be excluded. With the extensive round of denationalisation that characterised the Thatcher years, many previously “public” functions devolved to the private sector along with the incidental but very necessary enforcement and prosecution powers. Therefore we find that, beyond the charitable sector, there are numerous private prosecutors, for example, in the water, gas, telecom and rail industries. When these prosecution powers passed from public responsibility provision was made to regulate the activities of the privatised industries and to eradicate conflicts of interest. For example, in the water industry, as they operated pursuant to legislation in the 1970s, the water undertakings known as “Water Authorities” housed pollution control, water quality enforcement and the sewage function all under the same roof.11 This collection of conflicting functions within one authority created an interesting scenario for the pollution prosecution team faced with commencing proceedings against its employer when illegal, polluting effluent escaped into rivers from sewage works. These and other parallel anomalies were gradually resolved as new legislation, including privatisation instruments, split away these functions to avoid such conflicts. However, in the charitable sector, there are still potential conflicts in both the substantive approach to prosecutions (where a charity is lobbying for change in the very law it also has a duty to enforce) and in the procedural aspects of prosecutions where the same organisation gathers the evidence, provides the witnesses and also processes the prosecutions. Until recently this latter procedural approach was the norm for most prosecutions, in that the police would gather were investigated. The majority of the RSPCA cases begin in the Magistrates Court (the author can think of only one offence within the ordinary portfolio of the RSPCA which could result in proceedings commencing in the Crown Court) but often they pass, on appeal, to the Crown Court or to higher courts. 9 [1984] CLY 693. 10 SI 1975 No. 1024 as amended. 11 See, inter alia, the Water Act 1973 and other contemporaneous legislation now either repealed or drastically amended.

(O) Dunn Ch14

25/1/00

1:48 pm

Page 214

214 Stuart Harrop the evidence and also operate as prosecutor. Some would level criticism at this type of arrangement for a number of reasons: it might lead, for example, to undue pressure being brought to bear on prosecution staff from witnesses who would also be colleagues. However, the old regime concerning offences investigated by the police has now been replaced. The position is also academic for the great majority of public prosecutions, but the difficulties remain in the private sector.

THE MODERN CONTEXT OF PRIVATE PROSECUTIONS

The changes to the procedures whereby the police previously both investigated and prosecuted offences have neither affected the right to take private prosecutions nor materially affected any aspect of the manner in which private prosecutors operate. The status quo is expressly maintained in section 6(1) of the Prosecution of Offences Act 1985. In the current arrangements, the DPP, through the Crown Prosecution Service (CPS), assumes control of prosecutions which follow on from police investigations. This general principle leaves many offences to be pursued by private prosecutors. A substantial proportion of these offences are prosecuted by entities such as local authorities, national and denationalised organisations and institutions. Where this is the case the prosecutors have acquired household name status and, therefore, may not be perceived as private in the sense that the public assumption would be that the prosecutor has been officially endowed with authority. In addition, an occasional CPS prosecution, deriving from a police investigation, may be discontinued and it may be taken over by an interested private prosecutor with the DPP’s permission, providing other requirements of criminal and procedural laws are satisfied. The CPS not only applies its own criteria to decisions to prosecute but also, from a practical standpoint, has limited resources. In setting its priorities, therefore, it is possible that it may decide to forego prosecuting an animal-welfare or bird-related case, whereupon the RSPCA or the RSPB may assume responsibility for the prosecution on the basis of its focused resources and desire to bring this type of case to justice. There are also some categories of cases where, as a protective measure, prosecutions require an authority such as the DPP, the Attorney-General or a particular Secretary of State, to give consent prior to the commencement of proceedings. An example of such an arrangement is the prosecution of insider dealing in company securities where a city regulator such as the Stock Exchange may be an appropriate prosecutor. In other cases, perhaps to achieve comprehensive objectivity by going beyond self-regulating private organisations, it is more appropriate to reserve the prosecution to an independent public body.12 12 See s.8(2) of the Company Securities (Insider Dealing) Act 1985; Town and Country Planning Act 1990.

(O) Dunn Ch14

25/1/00

1:48 pm

Page 215

Dilemmas faced by Conservation and Animal Welfare Charities 215 There are other instances where primary or subsidiary legislation specifies that a particular body, such as a local authority, has a power or an obligation to prosecute specified offences. If the instrument is to be interpreted as granting a non-exclusive power to prosecute, the effect of placing the power or obligation in a legislative instrument is twofold. First, it ensures that a prosecutor will be particularly aware of the offences and, in consequence, the prosecution power will not simply be ignored. Secondly, the public or local authority exercising it can properly justify the appropriation of funds for the purpose of carrying out that function without risking a judicial review of its activities.13 From a charityprosecutor’s point of view the ground is also open for that charity to prosecute some offences alongside the public entity possessing the power. However, the charity would be wise to co-ordinate its activities in this regard with the body possessing the primary right. Care must be taken, therefore, before the private prosecutor ventures into unknown territory. The target offences may not be available to a private entity or there may be a need to consult with competitor-prosecutors who may have a more pressing need to be involved in the particular prosecution, perhaps based on their accountability to government or to those who pay for the function, such as council tax-payers. Further, it is often the case that prosecutors endowed with specific powers have greater expertise in the prosecution of offences within their particular discipline simply through experience.14 As has been stated, private prosecutors are not given an entirely free rein to commence and continue with proceedings. Under section 6(1) of the Prosecution of Offences Act 1985 the DPP has power to take over private prosecutions to ensure that the prosecution is conducted more efficiently in the public interest.15 This power may also be used to assume responsibility for proceedings in order to discontinue them.16 With similar, but comprehensive, effect where the High Court’s powers in relation to persistent, vexatious prosecutions are exercised, a private prosecutor can be effectively shut down indefinitely, albeit that to the author’s knowledge there has been no case in which this has happened. Beyond the provisions of criminal and procedural law there are very few restrictions placed on private prosecutions. However, there are a number of issues which may guide the private prosecutor. These have included the

13 One of many examples of this approach is the Transit of Animals (Road and Rail) Order 1975 which, as noted above, grants non-exclusive rights to local authorities to prosecute offences. 14 In these circumstances the best approach for a charity competing with the “official” prosecutor is to co-operate: competition may bring disaster. Both the RSPCA and the RSPB, for example, are interested in controlling the import of endangered species into the UK, and their enforcement teams to co-operate with HM Customs and Excise. Much of the trade is apprehended by HM Customs and Excise which may then prosecute under particular legislation available to it, in relation to which it has much experience and expertise. 15 A similar power is vested in the Attorney-General: see M. Murphy and E. Stockdale (eds.), Blackstone’s Criminal Practice 1996 (London, Blackstone Press, 1996), para D2.36. 16 Ibid., para D2.34.

(O) Dunn Ch14

25/1/00

1:48 pm

Page 216

216 Stuart Harrop Attorney-General’s guidance for all who prosecute on behalf of the public,17 which as at least one commentator believes are: meant to be observed by prosecutors in general and not merely by the Director [DPP] or the Crown Prosecution Service.18

Similarly the CPS operates under its Code for Crown Prosecutors issued by the DPP.19 Although these guidelines are not expressed to affect private prosecutors, it would be useful for such prosecutors to take note of them or build up their own principles based on the code in order to ensure that they are seen to take a responsible and professional approach to this function. Certain salient points from the CPS code merit examination in the context of charity prosecution activities. Paragraph 1.1 of the CPS code states that: The Crown Prosecution Service applies the code for Crown Prosecutors so that it can make fair and consistent decisions about prosecutions.

Since a charity-prosecutor is invoking the criminal law rather than legal redress based on private interests, it would be appropriate to operate in a manner which is fair and consistent. It is inappropriate to employ the criminal law, for instance, to pursue capriciously a vendetta against defendants who have become arbitrarily chosen targets, whilst other comparative offenders do not become the subject of prosecutions. An express policy (which would include a provision along the lines of paragraph 1.1 of the CPS code), applied contractually to charity employees, could assist to eradicate the possibility of such an arbitrary approach and also deal with other matters which arise in other parts of the CPS code. Paragraph 2.3 goes on to say that: Crown Prosecutors must be fair, independent and objective. . . They must also not be affected by improper or undue pressure from any source.

Clearly a charity which both collects evidence and processes prosecutions must be careful to ensure that parties not privy to the prosecution process itself cannot exert pressure on independent prosecutors. Those who obtain the evidence in the first place may be too close to the case to see the matter objectively, or they may want a case to proceed in order that personal statistics may be maintained. Similarly, those operating a campaign to change the law may be actively looking for material to back that campaign; they should not be in a position to influence prosecution decisions. Paragraph 5.1 states:

17

Announced in the House of Commons on 14 Feb 1983. Blackstone, supra n.15, para D2.36. 19 The Code for Crown Prosecutors (3rd edn.) issued under s.10 of the Prosecution of Offences Act 1985. 18

(O) Dunn Ch14

25/1/00

1:48 pm

Page 217

Dilemmas faced by Conservation and Animal Welfare Charities 217 Crown Prosecutors must be satisfied that there is enough evidence to provide a realistic prospective conviction of each defendant on each charge.

It is essential, in order to operate effectively and to ensure respect, that a prosecutor prepares all cases carefully and is fully equipped to decide whether each case has a reasonable chance of success. That is not to say that the prosecutor has somehow failed to fulfil the required standard where the defence is able to destroy the prosecution case very early on in the proceedings through information which could not be accessible to a prosecutor, or through the application of a technical provision which is beyond their foresight or control. Further, a prosecutor should not be prevented from taking a case where the law is not entirely clear and where uncertain aspects of the law have frustrated otherwise sound cases.20 In most cases the principle in paragraph 5.1 of the Code should be satisfied by a well managed approach to the caseload and by an employer or team leader ensuring that prosecution staff are sufficiently skilled in the specific class of prosecutions they will be concerned with, in addition to all relevant aspects of criminal procedure and the law of evidence. Although not examined in detail herein, the Code also deals with the prosecution of the elderly, the mentally unfit and youth offenders and other factors which have a crucial bearing on decisions to prosecute. All of these issues are worthy of note for the charity-prosecutor and in order to deal with them they require, not only a thorough knowledge of procedures, but also sensitivity. Staff in an enforcement function certainly should be equipped with some special, formal guidance on these issues (whether through an internal procedural code or otherwise) in addition to knowing how the procedural requirements of the law operate where relevant. Finally, there are provisions in the Code which relate to the delay arising between the offence occurring and the commencement of a prosecution. This area also needs to be addressed by the private prosecutor both in terms of policy and in terms of ensuring that a private prosecution department is sufficiently resourced to deal expeditiously with its caseload. This brief analysis of the Code for Crown Prosecutors is by no means comprehensive, but it raises a number of significant issues that must be relevant considerations for any prosecutor before commencing a prosecution. At the minimum, the principles set out in the Code represent a common-sense checklist of matters for consideration by private prosecutors. Further, if the principles within the Code are generally complied with, a prosecutor should continue to enjoy the respect of the courts. If a charity-prosecutor loses that respect, the consequences can be dire from a number of perspectives. In practice, charities are in the public eye at all times and a good performance of their functions should tend

20 Nevertheless, in these circumstances it is always wise to take the opinion of an expert lawyer to ensure that the prosecution is an appropriate one.

(O) Dunn Ch14

25/1/00

1:48 pm

Page 218

218 Stuart Harrop to ensure continued financial support from public donations. A disreputable charity, however, is likely to face financial difficulties. Beyond the detail of the Code, it is essential that all private prosecutors take the matter of prosecuting responsibly and with full reference to all relevant ethical considerations. This general principle applies not only to decisions to commence proceedings, but also to the manner in which tactics are employed in the conduct of the prosecution case. Obviously it is preferable to engage expert, qualified case administrators and advocates to ensure that this general principle is fulfilled since this type of issue is dealt with extensively in the rules for the conduct of lawyers. Therefore, if a solicitor or barrister is engaged by a charity, the rules of the Law Society or the rules of the Bar Council (as appropriate) should govern the ethical aspects of the prosecution, matters in relation to the proper conduct of the case, levels of expertise and so on. If a charity-prosecutor is processing many cases on a regular basis and wishes to operate in-house, it may also be best advised to operate a prosecution function through a qualified lawyer regulated by their respective governing body, in addition to the employer’s contractual stipulations. It is also essential that a charity-prosecutor is familiar with the law concerned with contempt of court. As has been mentioned, a charity is properly determined and focused in its desire to win changes in the law and generally to make the public aware of its good work. Its media presence is a crucial attribute. Significant prosecutions can provide effective publicity for a charity’s causes and assist in its campaigns to alter the law. However, the publicity must come at the right time and not in a manner which may cause a miscarriage of justice during the course of a prosecution.21 Therefore, officers conducting cases must be aware of the provisions of the Contempt of Court Act 1981 which deal with the public disclosure of prosecution information during active criminal proceedings. Those officers must, in particular, be aware of the strict liability rule22 and the consequences which would ensue from a transgression, not only in terms of personal liberty for a prosecutor or reporter, but for the reputation of the prosecutor and the causes espoused. It is clear that, currently, the record of prosecutor-charities is good, and that factors comparable to those within the Code or matters relating to other relevant, general principles are taken into account. Indeed, the RSPCA prosecution statistics (called by the RSPCA Cruelty Statistics) are to be proud of and this information is used extensively in supporting publicity. In making these statistics available, charity-prosecutors demonstrate their extensive caseload and dedication; they also demonstrate a willingness to have their prosecution work tested in the glare of media publicity. To date, in the context of this testing, there is no evidence to suggest that professionalism has been sacrificed as a result of a charity’s subjective approach to prosecutions. 21 An appropriate formula to safeguard the position might be to keep all evidence confidential until after a conviction is secured and the time for appeal has elapsed. 22 Ss.1–2 of Sched 1 to the Contempt of Court Act 1981.

(O) Dunn Ch14

25/1/00

1:48 pm

Page 219

Dilemmas faced by Conservation and Animal Welfare Charities 219

THE GROWTH OF PROSECUTING RESPONSIBILITY

In terms of prosecuting trends, the creation of the CPS has been a major factor. Naturally the separation of the enforcing witness from the enforcing prosecutor should, inter alia, reduce the risk of undue pressure being placed on the prosecutor, and facilitate visible objectivity within the prosecution activity. However, this trend of separation is not usually a practical possibility within charitable institutions, since undertakings within charities cannot be so easily demerged as they can in industry or the public service. In the RSPCA, by example, the witnesses and the prosecutors often work closely together. Many of the members of the RSPCA’s prosecuting team move up through the ranks of its inspectorate. The quality of their training and the intensity of their experience bring to RSPCA inspectors a comprehensive understanding of a very narrow and specialised field of animal-welfare and conservation law. At present, there are very few facilities for others to gain the relevant, comparable experience or knowledge. However, a detailed, working knowledge of a specialist area of law and the pertinent offences is not enough. The rules dealing with the conduct of proceedings, even at Magistrates Court level (where the vast majority of the RSPCA’s cases are prosecuted), have grown in complexity in recent years, requiring even greater expertise and professionalism in the private prosecution team. Some of the developments concern the rules relating to the disclosure of evidence. This is an area that requires constant and consistent attention: an apparently sound case can fail simply because this area was not properly addressed, perhaps as a result of the pressure of a large prosecution workload. Although previously established procedures required that the evidence on which the prosecution case is based had to be disclosed to the defendant, the Criminal Procedure and Investigations Act 1996 now provides that material beyond such evidence must be disclosed to the defendant in certain instances.23 Therefore, in addition to the work involved in fine-tuning the case, the prosecutor must consider the files for further information which may fall within the required categories stipulated by the Act. By this example it can be seen that the work of a private prosecutor is not only increasing but also that greater responsibility and expertise are required of the prosecutors.

THE USE OF PRIVATE ORGANISATIONS TO CARRY OUT PUBLIC FUNCTIONS

Through custom and practice and often the pioneering work of a few committed people, private organisations gathered to themselves many functions (which 23 Under the Act, inter alia, a person pleading not guilty is entitled to receive from the prosecutor previously undisclosed material which, in the opinion of the prosecutor, could undermine the case against the accused.

(O) Dunn Ch14

25/1/00

1:48 pm

Page 220

220 Stuart Harrop are now often regarded as if they were within the public sector) long before public and quasi-public authorities came into existence. By example the RSPCA inspectors were enforcing the law before the police force, as we know it today, was exercising comparative duties. Nevertheless RSPCA inspectors, despite their uniform and official appearance, and despite the difficulties faced in some cruelty offences, have no power beyond that of a member of the public to enter premises, to effect an arrest, to stop and search or to appropriate evidence.24 Indeed, in the conduct of the RSPCA’s (and other) private prosecutions, the police are often extremely helpful in providing assistance for the purpose of facilitating entry, searching, detaining evidence, charging and so on to enable the lacunae within the powers of charity-prosecutors to be filled. In these circumstances, the police are providing assistance rather than conducting the preliminary investigation. If they do more than this it is possible that the prosecuting charity may not be permitted to assume control of the ensuing prosecution, since, as noted, only the CPS may proceed with police cases unless the consent of the DPP is forthcoming.25 Some of our longest standing and best known charities carry with them much history. This is illustrated in the first paragraph of the preamble to the Royal Society for the Prevention of Cruelty to Animals Act 1932 which states: Whereas in the year 1824 at Old Slaughters Coffee House, St Martin’s Lane in the City of Westminster a Society for the Prevention of Cruelty to Animals was established by diverse benevolent persons having for its object the mitigation of animal suffering and the promotion and expansion of the practice of humanity towards the inferior classes of animated beings.

That meeting, at the aptly named “Old Slaughters Coffee House”, commenced the dynamic that is still in motion today. The RSPCA not only lobbied heavily for legislation from the outset but it became, and it was fully accepted that it was appropriate for it to become, the main protagonist in enforcing and prosecuting offences in relation to the new animal welfare legislation. Indeed, the RSPCA became part of the establishment and the second preamble to that Act describes how Queen Victoria extended her royal patronage to the Society and the third preamble notes how support for the Society had “grown greatly in size and influence”. In the late nineteenth century the vehicle of the private enforcer of legislation became a publicly accepted vehicle to the point that it remains difficult, for the casual observer, to distinguish the official from the 24 In some cruelty offences where crime may be orchestrated and carefully planned, such as poaching-related crimes, badger baiting and other offences which arise through the trapping of wild animals for illegal, cruel sport, it is necessary to ensure that wider powers are available to bring offenders to justice. Such powers can include the power to stop and search potential offenders and their vehicles in addition to the right to seize and detain evidence. Powers of this nature are vested in constables, but not, of course, the staff of private prosecutors, pursuant to, for example, s.12 of the Deer Act 1991, s.11 of the Protection of Badgers Act 1992, s.4 of the Wild Mammals (Protection) Act 1996 and in the case of comparable conservation offences, s.19 of the Wildlife and Countryside Act 1981. 25 Prosecution of Offences Act 1985.

(O) Dunn Ch14

25/1/00

1:48 pm

Page 221

Dilemmas faced by Conservation and Animal Welfare Charities 221 unofficial. To this day it is probably accepted by many in England and Wales that it is the official role of the RSPCA and the RSPB, by example, to prosecute, respectively, animal welfare cases and bird related offences.26 Of course a private organisation has funds targeted to particular ends. In the RSPCA’s particular case, not only does it allocate funds to its enforcement function from general revenue, it also receives donations and legacies specifically to carry out, inter alia, the investigation of offences and the enforcement of animal cruelty law.27 In theory, therefore, donors have some solid assurance that, subject to continued donations, these areas of the law will be enforced. There can be no politically based curtailing of these activities or U-turns that would result in priorities being altered or the reallocation of donations elsewhere. Additionally, charities with specific objects in their Memoranda of Association are, by definition, obliged to retain their emphases on the subject-matter of those objects. They do not have the power to spread their resources thinly over disparate subject matter not referred to in their constitutional documents. A team enforcing animal-welfare or bird legislation can remain concentrated on developing expertise in that area knowing that such a strategy is unlikely to change or that hard work devoted to building expertise is unlikely to prove futile. Consequently, the RSPCA has an enviably effective team of prosecutors, some of whom grew up through the ranks of the RSPCA inspectorate (as already described) and some of whom bring professional prosecuting abilities to the department, such as lawyers who are recruited for this purpose. The endproduct is a purpose-built team with dedicated expertise very relevant to the particular and often obscure offences which concern the department. It has been seen that, because these charity-prosecutors are private prosecutors, they have little express responsibility to those who regulate prosecutors. Further, within their own regulatory sector, there are no specific guidelines issued by the Charity Commissioners in relation to this area of charitable activity. Guidelines for decisions to prosecute within charities, therefore, must be assumed unilaterally on an internal basis. Of course the Charity Commission will, in any event, investigate complaints concerning the manner in which a charity is operating its prosecution function. But the Commissioners do not 26 The RSPCA and the RSPB occasionally work together to prosecute bird-protection cases where welfare aspects are present. It must also be borne in mind that the Department of the Environment, Transport and the Regions is involved in the prosecution of some bird- and habitatprotection cases as are English Nature and other relevant official bodies. Further, animal-welfare offences are not the exclusive domain of the RSPCA. Other charities and non-charitable private organisations (such as the League Against Cruel Sports) take cases from time to time and, as has been mentioned, government departments also involve themselves in these matters. England and Wales are specifically mentioned, again because the law relating to prosecutions is different in Scotland (supra n.1). However, it should be noted that, although the RSPB has operations in Scotland, the RSPCA does not. (The Scottish Society for the Prevention of Cruelty to Animals operates in Scotland but does not prosecute.) 27 See RSPCA, Trustees Report & Accounts 1997, 36 where the reference to the Hadow Bequest describes a restricted fund to be used specifically for the RSPCA’s cruelty prosecutions (RSPCA, Horsham, 29 Apr 1998).

(O) Dunn Ch14

25/1/00

1:48 pm

Page 222

222 Stuart Harrop have extensive precedent to assist them in the manner in which they deal with prosecution matters, nor are they focused on these issues as, for example, the DPP’s office would be. There is some authority in case law concerning the subject of charities interested in the enforcement of the law28 and, occasionally, statute has given some authority to charities to carry out activities which include the enforcement of legislation. By example, the rules of the RSPCA (as originally expressed in paragraph iv(6) of the Schedule to the 1932 Act and perpetuated to the present day in subsequent revisions) include the following within the powers of the Society: The proper conduct of punitive, persuasive, educational, parliamentary and all other operations . . . considered necessary in furtherance of the objects of the Society.

Ostensibly, the use of the word punitive in this paragraph, incorporated in the 1932 Act, provides legislative authority for the enforcement work of the RSPCA.29 It may be that, because of this statutory authority, the RSPCA, and other bodies in a comparable position, could be accountable to the courts through the process of judicial review.30 Whatever the position concerning the availability of judicial review, however, where the Charity Commissioners have appropriate regulatory power, the RSPCA’s (and others’) statutory powers should be read in the context of the limits which curtail the activities of charities. In this respect, through the issue of specific guidelines, the Commissioners have detailed how the political and lobbying activities of charities should be carried out, but they have not extensively or even directly outlined the manner in which punitive or enforcement activities should be executed. Although they have not ventured deeply into regulating the prosecution functions of charities, the Commissioners’ guidelines in respect of political activities31 have a bearing on the issues examined herein as they relate to the use of prosecution material in campaigns. The very issue of the guidelines demonstrates at least two important points. First, there is an increasing public interest in issues such as animal cruelty, which in turn has attracted politicians to include these matters in manifestos, thereby making animal cruelty political. Secondly, the growing power of the media has had a significant effect on charity work by providing an extensive, and largely free, facility for publicity. Both of these points emphasise the need to assist charities to maintain neutrality and to operate within the confines of the law in their lobbying work and to maintain a similarly neutral and professional approach to their prosecution activities.

28

Re Vallance (1876) 2 Seton’s Judgments (7th edn.) 1304 and Herrick (1918) 52 ILT 213. It should be noted, in addition, that this paragraph also provides a basis for the lobbying work of that Society through reference to the word parliamentary. 30 See Scott v. National Trust for Places of Historic Interest and Natural Beauty [1998] 1 WLR 226 for an examination of the applicability of judicial review in the context of a body vested with statutory powers and which is regulated by the Charity Commissioners. 31 Charity Commission, Political Activities and Campaigning by Charities, Leaflet CC9 (London, TSO, 1997). 29

(O) Dunn Ch14

25/1/00

1:48 pm

Page 223

Dilemmas faced by Conservation and Animal Welfare Charities 223

THE DEVELOPMENT OF THE LOBBYING ENFORCER—THE GROWTH OF INFLUENCE

Charity-prosecutors carry with them much authority. In some cases their enforcement functions are so extensive, specialised and costly32 that, if they decided to jettison these activities, it would be difficult to see how governmental or other public bodies could find the finance, expertise—and indeed time— to carry out those comprehensive and massive undertakings. This type of authority lends weight to public pronouncements and creates a solid, reliable foundation for the advocacy involved in campaigning. Not only are these charities performing extensive quasi-public functions, they also have access to the weight and power of the media, not in the sense of being in the background, but often in the primetime position. Animal welfare and conservation news is often among the headlines in the newspapers, television and radio. When the RSPCA and RSPB prosecute some of the higher profile cases the coverage and publicity are extensive and free. Beyond the day-to-day newsworthy items: documentaries, regular programmes and serialised fiction based on charity work all add to the substantial public presence of these organisations. The media, therefore, not only properly bring these things to public notice, but also assist the relevant organisations with publicity which, in turn, assists in raising funds to pay for these costly functions. Public opinion, in relation to animal welfare and conservation activities, appears to be consistently high, and advances in the law have demonstrated that the interest in these issues extends beyond the media to the UK and European Parliaments and penetrates into parliamentary activities.33 Consequently, with the assistance and concurrence of the media, the enforcement activities of charities like the RSPCA and RSPB have the potential to provide extensive and persuasive material to support lobbying initiatives. It is far easier to call authoritatively for a change in the law when the advocate has attempted to enforce and prosecute offences unsuccessfully. Further, if the lobbyist is able to supply authoritative testimonies and photographs to the media showing loopholes in the law which, for example, frustrate the prosecution of animal cruelty, it is far more likely that, through public concern, the politicians will take note.34 With the growth in efficiency of the media comes a concomitant responsibility to be assumed by the media and by the parties who supply information for 32 According to RSPCA National Facts and Figures 1996 the cost of RSPCA prosecutions in 1996 was £1,461,046 of which £338,829 was recovered in costs awards. 33 According to a MORI poll in 1991 UK MPs received more letters on animal welfare than almost any other issue. The position is similar in Europe where lobbying has now resulted in specific provisions in the Treaty of Rome dealing with Animal Welfare: see S. Harrop, “The Dynamics of Wild Animal Welfare Law” (1997) 9 Journal of Environmental Law 287. 34 Because offences of cruelty to non-captive wild animals were not included in existing animalwelfare legislation, the RSPCA was able to demonstrate, in a media campaign, horrendous cruelty to wild animals which had been the subject of prosecutions which had failed for technical reasons. This campaign played a significant part in the passing of the Wild Mammals (Protection) Act 1996: Harrop, supra, n.33.

(O) Dunn Ch14

25/1/00

1:48 pm

Page 224

224 Stuart Harrop public consumption. Consequently, charities must increase their vigilance to ensure that their publicly visible functions are executed with professionalism, with due regard to proper ethical considerations and with expertise. It is also essential that the regulators of these charities seek to work closely with them to ensure that their activities are properly and responsibly conducted and that the power, endowed upon them by the media, is not abused. In terms of the use of material to support lobbying activities, the Charity Commissioners have produced guidelines which require that information must be, inter alia, accurate, sufficiently full to support the lobbying position and not solely reliant on emotive content.35 Although there are risks and potential conflicts, there is no doubt that a professionally run prosecution department within a charity is capable of generating (in a manner which is legally and ethically acceptable) material, for use by that charity’s lobbying arm, which is appropriately informative for those who are empowered to make decisions to advance the reach of the law and which otherwise falls within the requirements of the Charity Commissioners’ guidelines.

THE CONFLICTS AND MANAGEMENT SOLUTIONS

The foregoing description and analysis outline the belief that there are certain potential conflicts of interest that may arise where a charity both enforces and seeks to change the law. In addition it emphasises the importance of ensuring that a prosecuting charity is suitably equipped and facilitated to be able to operate professionally, efficiently and effectively. The following is a summary of some of the issues along with some basic suggestions that may assist to avoid the difficulties envisaged in this discussion. The Charity Commissioners regulate charity-prosecutors generally, but they have not issued express, extensive guidance in respect of their enforcement activities. Although charity-prosecutors may have their freedom to prosecute restricted by the Court or others in certain circumstances, this aspect of regulation is not designed to resolve the conflicts within a charity between its lobbying, enforcement and other functions. In view of the diverse activities executed particularly by the larger charity-prosecutors, it may be appropriate for the Charity Commissioners to issue guidelines to charities to assist them to resolve the potential conflicts. There are no expressly binding rules concerning prosecution policy for private prosecutors. Nevertheless, the expectations of the courts are likely to require that publicly visible charity-prosecutors apply themselves objectively to their work, and to the majority of matters dealt with in codes for public prosecutors. Therefore, it is appropriate, for those charities that assume an extensive portfolio of prosecutions to adopt internal guidelines dealing with the type of issues detailed in, by example, the DPP’s guidelines for the CPS. 35

Supra n.31.

(O) Dunn Ch14

25/1/00

1:48 pm

Page 225

Dilemmas faced by Conservation and Animal Welfare Charities 225 Where a charity-prosecutor also gathers the evidence and investigates the offences (which would usually be the case) there is always the risk that the prosecuting team could receive undue pressure from witnesses. To avoid the ensuing difficulties it may be appropriate to ensure that the reporting lines for the prosecuting team and the investigators are separate; or, at the very least, that the prosecution team has direct, unrestricted access to the charity’s chief executive and/or trustees. There is an increasing number of decisions to be made within a prosecuting team that depend on a professional and ethical standpoint. As has been said, internal prosecutors must be in a position to have access to the highest authorities within a charity and they must be shielded from undue pressure and irrelevant influences. Consequently, it would be most appropriate for in-house prosecutors to report to the managers of a charity at a high level. Further, where the in-house prosecution function is extensive it may be helpful for the function to be led by a qualified lawyer who is also subject to personal regulation in respect of their legal work. It is essential that the in-house prosecution team is not under pressure from those responsible for publicity and campaigns. A prosecution function must exist, primarily, for law-enforcement purposes. The supply of fuel for campaigns or publicity can only be an incidental and subsidiary function and, indeed, must be fully subordinated to the rules and principles which govern the prosecution function. Further, considering both the contempt of court rules and the general rules of criminal procedure, a prosecutor, when dealing with questions of public disclosure of evidence, must not act in a manner that could prejudice a case. Therefore, the in-house team should operate under separate reporting lines from campaigns and publicity functions and must have both the ability and right to seek support from those in ultimate authority within the charity, when this type of conflict arises. Further, there should be expertise within an in-house prosecution department that embraces knowledge, inter alia, of the contempt of court rules as they relate to prosecutions. That expertise must be vested in a position of suitable authority to ensure that the other conflicting needs of the organisation—such as the genuine need to have good public relations material—do not override the proper professional and ethical considerations which should be taken into account.

MACRO SOLUTIONS

There is a further, obvious—but perhaps superficial—solution to the conflicts described in this analysis which merits a brief examination. Where a charity undertakes a large number of prosecutions through an extensive in-house function, the most drastic and effective way to ensure that there are no conflicts is to split the charity into two organisations: one which includes the investigator and lobbyist and one which includes the prosecutor. It is submitted, however, that

(O) Dunn Ch14

25/1/00

1:48 pm

Page 226

226 Stuart Harrop this approach would be practically flawed or disproportionately difficult to achieve for a number of briefly stated reasons. With regard to long-existing charities there is a public expectation, and indeed an expectation from donors, that the charity will continue to function within its comprehensive objects. The first point is, of course, reflected in the law, and such a split envisaged here would, at the least, require full approval from the Charity Commissioners via a scheme (with all the difficulties associated with the cy-près doctrine). In the case of some charities, like the RSPCA, which have statutory authority backing their activities, perhaps statutory approval would also be required. A charity split in this way might have an uncertain future: it might be that it is the very mix of comprehensive activities which makes it an attractive target for donors. In view of these disadvantages, for the moment perhaps the only proportionate response would be to take a precautionary approach based on the suggestions in the last section. In these circumstances it would be for the Charity Commission to take the lead in preparing guidelines and designing model arrangements for conformity by those charities which operate within circumstances which may give rise to the potential conflicts discussed. It would be anticipated that the preparation of such best practice arrangements would take the form, initially, of a negotiation between the relevant charities and the Commissioners with some input from the central prosecution regulators. Penultimately, the question remains whether the courts, the AttorneyGeneral or the DPP should have a greater role in regulating charities and other private prosecutors. Depending on the attitude of the Charity Commissioners and the level of responsibility demonstrated in the charitable sector, there may be, at some time, the need to issue a prosecuting code that is expressly binding on prosecutors beyond the CPS. However, if the central regulators have an opportunity to assist the Charity Commission in preparing guidelines it may be that no more assistance may be required from them. Finally, it must be reiterated, however, that the record of animal welfare and conservation charities to date demonstrates that, despite these potential conflicts, they have operated with great expertise, professionalism and with all due respect to ethical considerations. If everything is working, then why change it? The answer may be that it is better to apply precautionary, preventative maintenance now with a view to avoiding a potentially costly repair bill. With the developments described in this analysis (increasing prosecution responsibilities and increasing media exposure) it may be appropriate, now, to assist charities to determine their priorities by the use of soft, but formal, controls in the form of guidelines and advice.

(P) Dunn Ch15

25/1/00

1:48 pm

Page 227

15

Conflicts of Interest in Charity Law PETER LUXTON

The duties of a fiduciary include duties of care and skill, to act in good faith, to exercise powers conferred for their proper purpose, and the duty of undivided loyalty to the trust; this last includes a duty on the part of the fiduciary not to put himself into a position where his duty and interest conflict. In English law, the rule against conflicts of interest has two aspects. First, it is in nature prophylactic, in that its aim is to deter a fiduciary from entering into transactions in which he may be swayed by considerations of personal interest. Secondly, it has a restitutionary purpose, in that it encompasses the duty of a fiduciary to account for any benefit obtained by reason of, or by use of, his fiduciary position.1 The potential for conflicts of interest on the part of charity trustees2 is perhaps greater today than at any time in the past. This is due mainly to the growing importance, professionalism and commercialisation of the charity sector in recent years, the tightening of legal controls in the Charities Acts 1992 and 1993, and to changing social attitudes to charity. Conflicts of interest can occur in a variety of circumstances. For example, one effect of the emergence of what has been termed “the contract culture”3 in the 1980s is that many charities, particularly those concerned with welfare and the elderly, are no longer receiving grants from central or local authorities, but are having to tender, in competition with other bodies, for the supply of services; this can give rise to a potential conflict of interest if a charity whose trustees are connected with the administration of a public body intends to enter into a contract with that body.4 In the last few decades also, fund-raising has assumed a variety of forms and a new intensity; 1 Boardman v. Phipps [1967] 2 AC 46, 123 (HL); New Zealand Netherlands Society “Oranje” Inc. v. Kuys [1973] 1 WLR 1126, 1129; cf Chan v. Zacharia (1984) 154 CLR 178, 198 (Deane J, High Court of Australia); Don King Productions Inc. v. Warren [1999] 2 All ER 218, 238–9 (Morritt LJ). 2 The expression “charity trustees” in this chap is not intended to be restricted to trustees of charitable trusts, but has the wider meaning which that expression bears in the Charities Act 1993 (“CA 1993”). For the purposes of that statute, s.97(1) provides that “charity trustees” means “the persons having the general control and management of the administration of a charity”. Such persons are therefore to be considered “charity trustees” regardless of their designation (whether it be “trustee”, “governor”, “manager” or “director”) or of the legal structure of the charity. 3 J. Warburton and D. Morris, “Charities and the Contract Culture” [1991] Conv 419. 4 See (1993) 1 Decisions 29 (para 9); Charity Commission, Charities and Contracts, Leaflet CC37 (London, TSO, 1998), paras 30–36. For the problems of potential conflicts of interest involving nominative or representative trustees, see [1991] Ch Com Rep 8 (paras 42–43).

(P) Dunn Ch15

25/1/00

1:48 pm

Page 228

228 Peter Luxton and charity trading, often through the use of subsidiary trading companies, has grown in scale and in importance. There is a potential for conflict of interest where a charity trustee is also a director of one of the charity’s subsidiary companies, such as a trading or a property company.5 The consequences of a breach of the rule can be serious both for the charity and for the charity trustee. The existence of a conflict of interest could lead to the charity’s being subject to an inquiry by the Charity Commissioners6 and to the exercise by them of one or more of their remedial powers,7 which include removing or suspending the trustee in breach. In appropriate circumstances, the Attorney-General or the Charity Commissioners8 could apply to have a transaction in breach of the rule set aside. Alternatively, they could allow the transaction to stand and seek instead to make the charity trustee account as a constructive trustee for any profit made. In appropriate circumstances, there might also be the possibility of criminal proceedings. In any event, even a technical breach of the rule may damage a charity through adverse publicity. The need to clarify the scope and stringency of the rule against conflicts of interest has therefore never been more pressing. This essay seeks both to examine the nature and scope of the rule against conflicts of interest as it applies to charity trustees, and to determine the extent to which a potential conflict can be avoided without having to obtain the Charity Commissioners’ consent. These broader issues are analysed in the context of three specific areas of potential conflict: dealings between a charity trustee and the charity; charity trustees who are also “beneficiaries” of the charity; and remuneration and indemnity insurance.

THE NATURE AND SCOPE OF THE RULE

An attempt to analyse the application of the rule against conflicts of interest to charities encounters an initial difficulty—the dearth, on this issue, of case law concerning charities. This arises partly because problems involving conflicts of interest affecting charities are usually dealt with by the Charity Commissioners, and there is very little practical scope either to appeal from their decisions or to apply directly to the courts. Such an appeal or application ranks as “charity proceedings”, and requires the consent of the Commissioners or of a judge of the High Court.9 Even if consent might be obtained, charities naturally do not gen5 See (1994) 2 Decisions 20–1; the reports following two of the Commissioners’ inquiries: Report on War on Want (London, HMSO, 1991), Charity Commission, Report on the Royal British Legion (London, TSO, 1992). 6 CA 1993, s.8. Although the general rule is that charity trustees (like trustees of private trusts) do not have to give third parties reasons for their decisions: Re Beloved Wilkes Charity (1851) 3 Mac&G 440, the Charity Commissioners have a power to call for documents: CA 1993, s. 9. 7 CA 1993, s.18. 8 Ibid., s.32. There is no reported instance of the Charity Commissioners having invoked this new power. 9 See CA 1993, s.33. See also s.4(3) (appeals against the Commissioners’ decision to register or to decline registration of a body as a charity). It remains to be decided whether an individual member

(P) Dunn Ch15

25/1/00

1:48 pm

Page 229

Conflicts of Interest in Charity Law 229 erally care to spend (or to be seen to be spending) the charity’s funds on expensive litigation.10 In practice, therefore, the existence of the Charity Commission acts as a glass ceiling, beyond which matters rarely reach the courts. The lack of specific case law in the charity sector makes it necessary in many instances to draw analogies with cases which have applied the rule against conflicts of interest outside the charitable sphere. This presents its own problems because the precise scope of the rule as it has developed is difficult to determine. The reason for this is that the strictness of the rule varies both according to the fiduciary relationship involved and according to the nature of the transaction itself. As a result, in some circumstances (such as the sale of the principal’s property to the fiduciary), trustees seem to be treated more harshly than other fiduciaries; in other circumstances (such as the awarding of remuneration), a more stringent rule appears to apply to company directors.11 The Self-dealing and Fair-dealing Rules The variations in the strictness of the rule are well illustrated in cases involving purchases and sales between a fiduciary and his principal, and other unauthorised profits. The rule against conflicts of interest includes a prohibition on a trustee being both vendor and purchaser. If the purchaser is a trustee in the strict sense, the transaction is automatically voidable (the “self-dealing rule”).12 This has sometimes been characterised as a disability, since the transaction is voidable without the need to prove a breach of trust.13 Sales to other types of fiduciaries, however, are not automatically voidable: a transaction will be permitted to stand if the fiduciary can show that he made full disclosure, did not abuse his position and paid a fair price (the “fair-dealing rule”).14 If a trustee makes a profit from the purchase of trust property in breach of the rule, the beneficiaries may, alternatively, let the transaction stand, but claim from him the profit under a constructive trust. Sales by a trustee of his own property to the trust appear to be subject only to the fair-dealing rule,15 which rule also applies to sales by other fiduciaries.16 Neither of the rules can be circumvented by purchase or sale through a nominee17; nor can a trustee evade them by retiring from the trusteeship before engaging in the purchase or sale.18 of a charitable company formed under the Companies Acts could bring, as an exception to the rule in Foss v. Harbottle (1843) 2 Hare 461, a personal action, complaining of a conflict of interest, which would not rank as “charity proceedings”. 10 A recent example is British Diabetic Association v. Diabetic Society Ltd. [1995] 4 All ER 812. 11 E.g., Guinness plc v. Saunders [1990] 2 AC 663 (HL). 12 The terms “self-dealing rule” and “fair-dealing rule” derive from Megarry V-C in Tito v. Waddell (No. 2) [1977] Ch 106, 240–1. 13 Ibid.; Movitex Ltd v. Bulfield (1986) 2 BCC 399, 403, 430–2. 14 E.g., Edwards v. Meyrick (1842) 2 Hare 60; Holder v. Holder [1968] Ch 353. 15 Bentley v. Craven (1853) 18 Beav 75. 16 Re Cape Breton Co. (1885) 29 Ch D 795. 17 Silkstone & Haigh Moor Coal Co. v. Edey [1900] 1 Ch 167. 18 Carter v. Palmer (1842) 8 Cl&F 657.

(P) Dunn Ch15

25/1/00

1:48 pm

Page 230

230 Peter Luxton The rule against conflicts of interest also includes a prohibition on a trustee’s making an unauthorised profit. For this purpose, it is not necessary to show that the profit was made at the charity’s expense. The rule was established in the eighteenth century in the context of trustees’ renewing leases in their own names, and it was applied strictly.19 A similarly strict approach is evident in modern cases concerning profits made by a fiduciary through the use of information belonging to the trust,20 or by a director of a company through using his position to make a personal profit.21 In the case of retention by trustees of directors’ fees, however, the modern authorities have not treated this aspect of the rule as absolute, but have admitted evidence to determine if there has in fact been a conflict of interest, e.g. where trustees are paid fees for acting as directors of companies in which the trust has a shareholding.22 Under the fair-dealing rule, the transaction will be upheld if the court is satisfied that the fiduciary did not abuse his position, made full disclosure and (in the case of purchases from his principal) paid a fair price. If the fiduciary is a solicitor to the trust, he should also advise the trust to seek independent legal advice on the transaction.23 In the case of a private trust, the disclosure must probably be made to the beneficiaries, or possibly to the other trustees24; in the case of a commercial company, the consent of all the members (i.e. the shareholders) may be required, although the authorities can be interpreted to hold the consent of the board sufficient.25 If the consent of the other trustees or directors suffices, this is clearly at the expense of the personal and collective rights of the beneficiaries (in equity) or members (both in equity and in contract) respectively. The application of these cases to charities by analogy, however, is not without dangers, since the rule was not developed specifically with regard to charities. At least some adjustments to the rule have to be made if it is to be applied to charities, e.g. the principle that a transaction can be authorised by the unanimous consent of sui juris beneficiaries cannot apply to charities, which do not, as a matter of strict law, have human beneficiaries. A more fundamental danger, however, is to fail to recognise that the reasons which led to the nuances of the rule as developed in the context of non-charitable bodies may not pertain to charities. In the commercial sphere, the parties are essentially free to determine the terms upon which a fiduciary is appointed, and to approve any benefits that he may subsequently receive: in the case of a commercial company, for example, the company can approve such benefits if it is the will of the majority of the 19

Keech v. Sandford (1726) Sel Ch Cas 61. Boardman v. Phipps, supra n.1. 21 Regal (Hastings) Ltd. v. Gulliver [1942] 1 All ER 378, [1967] 2 AC 134n. 22 Re Macadam [1946] Ch 73; Re Gee [1948] Ch 284: Re Dover Coalfield [1908] 1 Ch 65; Re Llewellin [1949] Ch 225. 23 This is desirable to rebut any allegations of undue influence: Barclays Bank plc v. O’Brien [1994] 1 AC 180. See P. Pettit, Equity and the Law of Trusts (8th edn., London, Butterworths, 1997), 428. 24 See Boardman v. Phipps, supra n.1, where there is a variety of opinions on this issue. 25 Regal (Hastings) Ltd. v. Gulliver, supra n.21; Queensland Mines Ltd. v. Hudson (1978) 52 ALJR 399 (PC). 20

(P) Dunn Ch15

25/1/00

1:48 pm

Page 231

Conflicts of Interest in Charity Law 231 members, since the company is the beneficial owner of its assets and can mostly dispose of them as it wishes.26 This principle cannot be applied to charities, since the assets of a charity, regardless of its legal structure, are effectually dedicated to charity,27 and neither its trustees nor its members can dispose of such assets except in pursuit of its charitable purposes. Therefore, the duty to avoid a conflict of interest, at least so far as such conflict would result in the charity’s property being applied to non-charitable purposes, such as substantial personal benefits to the trustees or directors, is a duty owed to the public at large. It is this element of public benefit, and the protection of such public benefit by the State in the shape of the Attorney-General and the Charity Commission, which distinguishes charities from purely commercial organisations or clubs, and which should make us cautious in drawing analogies with the non-charitable sphere. As a matter of principle it would be most unsatisfactory if the application of the rule against conflicts of interest were to vary with a charity’s legal structure. It would be equally objectionable as a matter of practice, since it would enable intending trustees, when creating a charity, to select the legal form according to which the application of the rule against conflicts of interest would be the most favourable to themselves. It is therefore suggested that, in relation to charities, the scope and strictness of the rule against conflicts of interest should depend, not on the particular legal structure which that charity adopts, but solely on the nature of the transaction involved. The rule against conflicts of interest should be recognised as a rule deriving from the institution’s status as a charity, not from its legal structure. For the reasons that have been suggested above, the strictness of the rule against conflicts of interest applicable to all charity trustees in a particular set of circumstances should be the same as that which is applicable in comparable circumstances to trustees in the strict sense. There is, however, an added complexity in that many of the statutory provisions designed to regulate potential conflicts of interest are structurally based; so that, if a charity adopts a particular legal structure, it will be subject to those provisions. One of the perennial problems of charity law is that the legal structure which a charity adopts is invariably a structure which has been designed for a different purpose, albeit that it may have been adapted in some ways to make it more appropriate as a vehicle for charity. Most notably, the corporation created under the Companies Acts, which is being increasingly chosen as the legal structure for modern charities, is almost entirely designed as a vehicle for commercial enterprise and profit distribution to shareholders. The minor modifications in the Companies Acts to adapt the structure to the company limited by guarantee (both in the body of the Acts and in Table C28) do little more than tinker with the basic for-profit structure. Under the Companies Act 1985, for instance, company directors are obliged to disclose an interest under any 26 Although this principle is of general application, there are exceptions, e.g. if there is a fraud on the minority: see Foss v. Harbottle, supra n.9, and the exceptions thereto. 27 Liverpool and District Hospital for Diseases of the Heart v. Att.-Gen. [1981] Ch 193. 28 The Companies (Tables A to F) Regs 1985, SI 1985, No. 805.

(P) Dunn Ch15

25/1/00

1:48 pm

Page 232

232 Peter Luxton contract or proposed contract to the board of directors29; and general meeting approval is required for sales or purchases between a director and the company.30 For a company formed under the Companies Acts, therefore, there exist two layers of regulation in respect of conflicts of interest: one structurally based (deriving from the Companies Acts) and one status-based (derived from its status as a charity). The Charities Act 1993 itself imposes status-based duties in regard to some types of conflict of interest. Most importantly, in the case of disposals of charity land the statute supplements the equitable rule against a trustee’s purchasing trust property. Although the previous basic statutory duty on charity trustees to obtain the Charity Commissioners’ consent to disposals of charity land is retained,31 it is subject to qualification in most instances, so that charity trustees who obtain and consider advice from an appropriate person (as there specified) do not need to obtain such consent. In no case, however, can such consent be dispensed with if the disposition is made to a “connected person”, their trustee or nominee.32 “Connected person”33 is widely defined, and includes a charity trustee. Although such disposals to one of the charity trustees would breach the self-dealing rule, they can stand if approved by the Commissioners or the court. In effect, therefore, the Commissioners are in the position of a sole sui juris beneficiary who is able to consent to a dealing which would otherwise give rise to a conflict of interest. In order to ensure that those dealings which are subject merely to the fairdealing rule are not upset, and in order to avoid recourse to the Charity Commission, an appropriate procedure to be followed where there is a potential for conflict should be laid down in the charity’s governing instrument. The Commissioners have long permitted a clause in such an instrument authorising a charity trustee to retain a profit from property sold to the trust, provided that they are satisfied that such a clause is necessary in the interests of the charity’s efficient management.34 The Commissioners have stated that, where the only persons suitable to be trustees of a local charity are also the only persons who can supply the charity with such goods or services as it requires, they will permit the appointment of such persons as trustees on terms which do not prevent them from supplying such goods or services to the charity. The requisite clause provides that the trustee must absent himself from any meeting of the trustees at which they are discussing any transaction in which he is interested in the supply of services, work or goods at the cost of the charity, and also that the other trustees must be satisfied that any transaction arising out of their deliberations is advantageous to the charity.35 29 30 31 32 33 34 35

Companies Act 1985, s.317. Ibid., ss.320–322. CA 1993, s.36(1). Ibid., s.36(2). Defined in CA 1993, Sched 5. [1988] Ch Com Rep 9 (paras 38–39). [1970] Ch Com Rep paras 92–93.

(P) Dunn Ch15

25/1/00

1:48 pm

Page 233

Conflicts of Interest in Charity Law 233

Charity Trustees Who Are Also “Beneficiaries” of the Charity There has, in the last few years, been a growing demand that persons who may themselves be “beneficiaries” of a charity should be able to participate in its management through being appointed to the board of trustees.36 Pressure for this has come particularly from disabled persons who wish to become trustees of charities for the disabled. The Deakin Report noted that “charity law remains something of an obstacle to user involvement in governance”37; and, whilst Deakin does not amplify this statement, it is clear that the main problem is the rule against conflicts of interest. Where there is a real sensible possibility of conflict, the rule undoubtedly serves a useful function. Thus, the rule would preclude a charity trustee of a grant-awarding charity from accepting a grant from the charity when he had both attended the meeting at which the proposal was discussed and voted in his own favour. If there are sound reasons for such a rule in private trusts, there are even stronger reasons for it in relation to charities: public confidence in charities would be severely undermined if the trustees were seen to be exercising their discretion so as to provide direct financial benefits for themselves. Often, however, charity trustees will be exercising their discretions, not in favour of individuals, but in favour of types or classes of objects. A charity for the disabled might, for example, make specialised equipment available to persons with a certain sort and degree of disability. Would a trustee of such a charity, otherwise eligible to receive such equipment, be precluded from doing so? In the absence of reported case law involving charities, an analogy can be drawn with recent case law involving trustee-employees of pension funds, where the strict application of this rule would require the trustee-employee to forego, for instance, any increased pension decided upon by the trustees. The approach of the courts has not been consistent. Vinelott J in two reported decisions38 held that the rule against conflicts of interest should be applied strictly, since he considered it “outrageous”39 that a person with a power to distribute a fund amongst a class that includes himself should be able to distribute any part of it for his own benefit. On the other hand, Lindsay J40 has held that the strict approach should not be applied to trustees who had not deliberately pushed themselves forward as trustees, “but rather were selected as persons able and willing to serve their colleagues in some way”.41 36 See the Deakin Report, Meeting the Challenge of Change, Voluntary Action into the 21st Century: Report of the Commission on the Future of the Voluntary Sector (London, NCVO, 1996), para 4.6. 37 Ibid., para 4.6.7. 38 Re William Makin & Sons Ltd. [1993] OPLR 171; British Coal Corp. v. British Coal Superannuation Scheme [1995] 1 All ER 912. 39 Ibid. 40 Re Drexel Burnham Lambert Pension Plan [1995] 1 WLR 32. 41 Ibid., 42. Ironically, in the light of the Robert Maxwell saga, the Pensions Act 1995 generally requires one third “beneficiary” representation on the board of trustees of a pension fund, and

(P) Dunn Ch15

25/1/00

1:48 pm

Page 234

234 Peter Luxton In light of the uncertainty of the law in this area, it is important that charity trustees who are also “beneficiaries” take appropriate steps to avoid putting themselves into a position of conflict. The Commissioners have in fact given specific guidance on the position of parent-governors of schools,42 who might be in a position of conflict so far as governors’ decisions affect their own children. The Commissioners take the view that, provided certain safeguards are met, the benefits of having such persons as governors outweigh the potential danger of conflicts of interest. The safeguards are: first, that not more than one third of the governors should be parent-governors; secondly, that at no meeting of the governors should the parent-governors form a majority; and, thirdly, that parentgovernors should not take part in decisions concerning the award of scholarships to, or the admission of, their own children. More generally, the Commissioners have stated that where the governing instrument provides for trustees to be nominated by the users of the charity’s facilities, such trustees should not take part in meetings which would involve their participating in a decision which would give rise to an irreconcilable conflict of interest.43

Remuneration and Indemnity Insurance It is a well established principle of trust law that the office of trustee is basically gratuitous.44 Therefore, unless the governing instrument expressly provides otherwise, the charity trustee is not entitled to any remuneration from his position, nor for loss of time or personal trouble45; he is entitled merely to be reimbursed for out-of-pocket expenses incurred in the administration of the trust. Exceptionally, however, the court may be prepared to exercise its inherent jurisdiction to award remuneration, or to increase the level of remuneration, to a trustee or other fiduciary.46 Under a private trust, a trustee remuneration clause is not considered to make the trustee a beneficiary47; but the Charity Commissioners used to consider that the application of a charity’s property in the provision of remuneration or other benefits for its charity trustees was, apart from very exceptional circumstances,48 an application for their private benefit, and therefore forbidden. The system of registration of charities does not confer upon the Charity Commission any discretion: the Commission must register an institution which satisfies the expressly abrogates the no-conflicts principle in the context of pension funds: Pensions Act 1995, s.39. 42 [1988] Ch Com Rep 10 (para 40). 43 [1991] Ch Com Rep 8 (paras 41, 43). 44 Re Duke of Norfolk’s ST [1978] 3 WLR 655; Guinness plc v. Saunders, supra n.11. 45 Brocksopp v. Barnes (1820) 5 Madd. 90 (Leach MR). 46 Re Duke of Norfolk’s ST, supra n.44; Marshall v. Holloway (1820) 2 Swan 432 (Lord Eldon MR). 47 Cf Pearson v. IRC [1978] STC 627. 48 E.g., Re Coxen [1948] Ch 747.

(P) Dunn Ch15

25/1/00

1:48 pm

Page 235

Conflicts of Interest in Charity Law 235 criteria for registration as a charity if its purposes or objects are wholly and exclusively charitable.49 A matter which might be considered to involve a potential conflict of interest has therefore been treated by the Commission, because of the way the registration system operates, as one going to the wholly and exclusively charitable nature of the institution itself. The effect of this, until fairly recently, has been to make the rule against personal benefits for charity trustees or directors absolute. The Commissioners used to adopt a similar attitude to indemnity insurance. They have never objected to a charity’s paying the premiums on an insurance policy to cover the loss, damage or destruction of the charity’s property resulting from the acts and defaults of its trustees.50 However, the Commissioners used to consider that a charity’s funds could not be applied to provide indemnity insurance to the charity trustees against their own liability. Insurance for criminal acts is void as against public policy51; but the Commissioners formerly took the view that even insurance for non-criminal acts was impermissible, since the payment of the premiums would comprise an application of charity funds for the personal benefit of the trustees, and not an application of the funds for charitable purposes. In the wake of the changes introduced by the Charities Acts 1992 and 1993, however, and no doubt particularly in view of the heightened awareness in the charity sector of the increased burdens on charity trustees which such legislation imposed,52 the Commissioners effectively modified their view of the law and their policy in relation both to the remuneration of charity trustees53 and to the provision of indemnity insurance. There was also growing public concern that persons might be deterred from becoming charity trustees owing to fear that, through misjudgement rather than malicious intent, their personal assets might be at risk. Although the Commissioners’ stance has not formally changed,54 there is in substance a perceptible softening in their approach to the remuneration of charity trustees. This is evident from the more expansive way in which they specify the circumstances in which they are prepared to authorise such remuneration without considering it to deprive the body of its status as a charity. The Commissioners are prepared to authorise such remuneration where it can be shown, following Smallpiece v. Attorney-General,55 to be both “necessary and reasonable in the interests of the charity”. The Commissioners interpret this to mean that the payment of remuneration must be: 49

CA 1993, s.3. [1991] Ch Com Rep 7 (para 36). Ibid., para 37. 52 [1993] Ch Com Rep 7 (para 18). 53 (1994) 2 Decisions 14–23. 54 [1989] Rep. Ch Com. 24–6 (paras 87–95); [1981] Rep. Ch Com. 23–4 (paras 61–64). For a discussion of the Commissioners’ approach before their recent relaxation, see C. McCall, “Remuneration of Charity Trustees” (1992–3) 1 CL&PR 191. 55 [1990] Ch Com Rep 36, per Judge Paul Baker QC, sitting as a judge of the High Court. 50 51

(P) Dunn Ch15

25/1/00

1:48 pm

Page 236

236 Peter Luxton both necessary to ensure the good administration of the charity and reasonable in relation to the services rendered to the charity by trustees and the income of the charity.56

The level of remuneration must therefore bear some relationship to the services to be undertaken by the trustees or directors.57 The burden of producing evidence that these requirements have been met lies on the trustees, and the Commissioners require “cogent evidence” if such burden is to be discharged.58 A clause which merely provides that the trustees may award themselves such remuneration as they shall determine, or that the directors of a charitable company are entitled to receive such remuneration as may be voted to them in a general meeting of the members, will not meet the Commissioners’ criteria. If the charity is already in existence and the governing instrument contains no power of remuneration, the trustees59 or directors60 are not entitled to be paid, since they are not permitted to make an unauthorised profit from their fiduciary position. The same principle also precludes the trustees or directors from seeking to use any power contained in the trust instrument or memorandum and articles of association to alter its provisions to include a remuneration clause.61 Neither can the principle be circumvented by appointing the trustee as a salaried employee of the trust or company, since such a position would flow from the trusteeship.62 If authorisation to charge is not contained in the original instrument, the trustees will need the approval of the court or of the Commissioners to amend the instrument or to retain the remuneration. The overriding consideration is the good administration of the charity.63 In Smallpiece v. Attorney-General,64 however, Judge Paul Baker QC refused permission to a charitable company to amend its constitution so as to permit a small amount of remuneration for the charity trustees (its Council members). The judge emphasised that remuneration would be awarded only exceptionally. The Commissioners have since enumerated a number of factors which might justify their approving the award of remuneration.65 In practice, the Commissioners deal with such applications themselves, and will not authorise applications to the court directly.66 Authorisation to amend 56 (1994) 2 Decisions 18. See also Re Coxen, supra n.48, where the court held that the provision in the trust instrument for an annual dinner for the charity trustees to be paid for out of the charity’s funds did not deprive the trust of its exclusively charitable nature, since such provision tended to promote the charity’s efficient administration. 57 (1994) 2 Decisions 15. 58 Ibid. 59 Robinson v. Pett (1734) 3 P Wms 249; Re Thorpe [1891] 2 Ch 360; Re White [1898] 2 Ch 217. 60 Hutton v. West Cork Rly. Co. (1883) 23 Ch D 654; Re George Newman & Co. [1895] 1 Ch 674; Guinness v. Saunders, supra n.11. 61 Re French Protestant Hospital [1951] Ch 567. 62 Cf Re Macadam, supra n.22. 63 Re Duke of Norfolk’s ST, supra n.44; Re Smallpiece Trust, supra n.55; Re Charlesworth (1910) 101 LT 908; Marshall v. Holloway, supra n.46; Bainbridge v. Blair (1845) 8 Beav. 588. 64 Supra n.55. 65 (1994) 2 Decisions 19–21. 66 Such an application would be “charity proceedings” within the CA 1993, and therefore requires the consent either of the Charity Commissioners or of a judge of the High Court.

(P) Dunn Ch15

25/1/00

1:48 pm

Page 237

Conflicts of Interest in Charity Law 237 the terms of a charitable trust could be given by the Commissioners either by way of a scheme67 or by an order.68 A scheme (because it amends the instrument itself) is more appropriate where a continuing power to charge is sought; an order may be made to sanction an exceptional payment. If the charity is a company, the consent of the Charity Commissioners is needed to amend the memorandum and articles of association.69 With regard to indemnity insurance, the Commissioners’ stance has been similarly modified following their review of this area.70 It may also be surmised (although the Commissioners do not acknowledge it) that the changes made to the companies legislation in 1989 provided an additional spur to modifying the Commissioners’ approach, in that an amendment was made to the Companies Act 1985,71 permitting a company to purchase liability insurance (inter alia) for its directors,72 and such amendment did not exclude charitable companies. This is in itself a further example of the difficulties caused to charities by legislation affecting a legal structure which is essentially designed for commercial organisations. In their report for 1991, the Commissioners stated that they would have no objection if, in appropriate cases, a charity paid for insurance, either directly or by reimbursing the trustees for the premiums, to cover a trustee against personal liability for acts either properly undertaken in the administration of a charity or undertaken in breach of trust but under an honest mistake. They added that the charity trustees would need to satisfy themselves that the degree of exposure to liability, and the cost of effecting insurance, justified the expenditure.73 Where the governing instrument of an existing charity contains no power to pay for indemnity insurance, the Commissioners have stated that they are willing to approve an amendment to the constitution to provide for it only if they are satisfied that such insurance is expedient in the interests of the charity.74 The Commissioners have since reaffirmed75 their views, and, to some extent, have refined and expanded upon them.76 Subject to certain limitations, a charitable company may now insure its directors against liability for wrongful trading.77

67

CA 1993, s.16. Ibid., s.26. Ibid., s.64(2). 70 See [1990] Ch Com Rep 3 (para 11); [1991] Ch Com Rep 7 (para 34). See generally C. Baxter, “Trustees’ Personal Liability and the Role of Liability Insurance” [1996] Conv 12. 71 Companies Act 1985, s.310(3)(a), inserted by the Companies Act 1989, s.137(1). 72 Companies Act 1985, s.310(1). 73 [1991] Ch Com Rep 7 (para 37). The provision of indemnity insurance for trustees of an unincorporated charity is discussed, para 40. 74 [1991] Ch Com Rep 8 (para 39). 75 [1993] Ch Com Rep 8 (paras 19–20). 76 (1994) 2 Decisions 24–7. 77 I.e. under the Insolvency Act 1986, s.214. See (1994) 2 Decisions 27. 68 69

(P) Dunn Ch15

25/1/00

1:48 pm

Page 238

238 Peter Luxton

General Procedures in a Charity’s Governing Documents to Avoid Conflict In 1997, the Charity Law Association published model documents for the constitutions of various forms of charity: a charitable trust, a charitable unincorporated association, and a memorandum and articles of association for a company limited by guarantee.78 These model documents are of particular importance because they carry the express approval of the Charity Commission. Each of them contains a general procedure which must be followed where a trustee has a personal interest in a matter to be discussed at a meeting of the charity trustees. The procedure requires the trustee to declare an interest before discussion on the matter begins, to withdraw from the meeting for that item unless expressly invited to remain in order to provide information, not to be counted in the quorum in that part of the meeting, and to withdraw during the vote and have no vote on the matter.79 The model documents relating to charitable trusts and charitable unincorporated associations also include a suitable trustee remuneration clause, but only if the charity trustee who is to be remunerated complies with the foregoing general procedure.80 Subject to this, the model documents expressly exclude the payment of money or other material benefits to the charity trustees except in a number of specific instances, including indemnity insurance, interest at a reasonable rate on money lent to the trust, and a reasonable rent or hiring fee for property let or hired to the charity.81 The memorandum of the model constitution for a company limited by guarantee also contains an express provision authorising a charity trustee, if specified conditions are fulfilled, to contract with the charity for the supply of goods or services for a consideration.82

CONCLUSIONS

The difficulty in determining the extent to which a charity’s constitution can provide internal procedures to avoid a conflict of interest is part of a broader problem in charity law: namely, the extent to which the courts or the Charity Commissioners should need to involve themselves in a charity’s affairs. The courts faced a similar problem in the field of company law in the early nine78

The model documents were drafted on behalf of the CLA by Francesca Quint of Counsel. See Trust Deed for a Charitable Trust, cl 6.3; Constitution for a Charitable Unincorporated Association, r 9.3; Memorandum and Articles of Association for a Charitable Company Limited by Guarantee, cl 5.4 of the memorandum of association. 80 See Trust Deed for a Charitable Trust, cl 6.1; Constitution for a Charitable Unincorporated Association, r 9.2.6. 81 See Trust Deed for a Charitable Trust, cl 6.2; Constitution for a Charitable Unincorporated Association, r 9.2; Memorandum and Articles of Association for a Charitable Company Limited by Guarantee, cl 5.1, 5.2 of the memorandum. 82 Memorandum and Articles of Association for a Charitable Company Limited by Guarantee, cl 5.3 of the memorandum. 79

(P) Dunn Ch15

25/1/00

1:48 pm

Page 239

Conflicts of Interest in Charity Law 239 teenth century, when Lord Eldon LC was adamant that the general rules of company law should not lead to the court’s having to take “the Management of every Playhouse and Brewhouse in the Kingdom”.83 This led to the emergence of the rule in Foss v. Harbottle,84 which precludes many minority actions where the wrong is done to the company itself. In the context of charities, it is equally important to establish, on the one hand, which matters can be dealt with by the charity’s governing documents or by the charity’s trustees or general meeting; and, on the other, which matters cannot be so determined, but require the involvement of the courts or the Commissioners. With nearly 200,000 registered charities in England and Wales, it would be impractical if every proposed course of action by charity trustees which gives rise to a potential conflict of interest, however remote, were to require the advance approval of the Charity Commissioners. The Commissioners themselves (and sometimes the courts) would be inundated with numerous trivial matters where there is no really serious risk to the charity in question. Whilst the shortage of case law makes it difficult to determine where the precise boundary lies between those conflicts that can be dealt with by internal procedures and those which cannot, the analysis in this essay suggests that, in the context of charities, there are essentially three different sets of circumstances in which conflicts of interest may arise. First, in circumstances where the rule against a conflict of interest is absolute, the conflict cannot be avoided by any provision in the governing instrument or by any act or decision of the trustees or members of the charity. If the transaction is to proceed, there will need to be full disclosure to the Charity Commission, and its express authorisation will need to be obtained. Even if the application of an absolute rule in some circumstances outside the charitable sphere is not beyond criticism, where charities are concerned it is easier to justify an application of an absolute rule, where it is open to the charity trustees to seek the Charity Commission’s approval to proceed with the offending transaction. Furthermore, as the rule against conflicts of interest in the context of charities should be based on an institution’s status as a charity rather than its particular legal structure, the rule should be applied uniformly to all charity trustees, whether they be trustees in the strict sense, committee members or directors of a charitable company. Where existing case law reveals that some transactions impose a stricter rule on some fiduciaries than on others, it is suggested that the stricter rule should be applied to charity trustees. Into this first category fall all instances in which the courts have held that the rule against conflicts of interest is absolute: these include the sale of the charity’s property to one or more of the charity trustees, and the renewal of leases of a charity’s land by the charity trustees personally. Also included are certain other benefits to the charity trustees personally, the provision of which cannot be considered to be expedient in the interests of the charity. An example would be incidental profits 83 84

Carlen v. Drury (1812) 1 V&B 154, 158. Supra n.9.

(P) Dunn Ch15

25/1/00

1:48 pm

Page 240

240 Peter Luxton made by the charity trustees from the use of the charity’s property, such as knowledge acquired in their capacity of charity trustees.85 In the case of sales of charity land to one of the trustees, the need to obtain the consent of the court or the Commissioners is backed up by a statutory obligation.86 In some instances there may be additional statutory requirements if the charity is a company incorporated under the Companies Acts.87 Secondly, in those cases where the rule against a conflict of interest is not absolute, where the court is willing to hear evidence to decide whether the fiduciary has in fact taken advantage of his position, breaches of the rule can be avoided if the governing instrument contains an appropriate procedure (which is followed) for dealing with them. Into this second category fall, for example, purchases by the charity from one of its trustees, the payment of reasonable interest on money lent to the charity by one of its trustees, and decisions by charity trustees where one or more of their number includes a nominative or representative trustee, or one of the “beneficiaries” of the charity itself. Thirdly, the governing instrument may, within the parameters which the Commissioners have laid down, provide remuneration or indemnity insurance for the charity trustees. Such provision effectively removes the charity trustee from a position of conflict in regard to those specific matters. Even though the adoption of a procedure to avoid a conflict of interest does now permit “beneficiaries” to act as charity trustees, compliance with such procedure inevitably results in the exclusion of such trustees from many of the important decisions taken by the trust, and thereby excludes from the decisionmaking a voice which has at least some moral claim to be heard. The Charity Commissioners have recently noted the problem of “beneficiaries” as charity trustees in the social housing market, and have indicated that they are presently undertaking a review of their policy in this area; they hope to consult widely on this matter.88 A statutory abrogation of the rule against conflicts of interest in relation to charity trustees who are also “beneficiaries” analogous to that applicable to pension funds under the Pensions Act 1995 is probably also worth considering; but, given the variety of charities that exists, and the greater opportunity for direct benefit under some types of charities as compared with pension funds, there might well be difficulties in drafting legislation which could adequately define the limits of the abrogation.

85 86 87 88

cf Boardman v. Phipps, supra n.1. CA 1993, s 36. E.g., Companies Act 1985, ss.317, 320–322. See [1996] Ch Com Rep 7 (paras 22–25).

(Q) Dunn Ch16

25/1/00

1:50 pm

Page 241

16

Voluntary Action and the Future of Civil Society NICHOLAS DEAKIN 1

THE CONTEXT

One of the most sharply contested as well as the longest running debates about voluntary action has been around the issue of independence. Critics from all points in the political spectrum have expressed continuing anxieties about the form that the relationships between the voluntary and community sector, the State and business have taken. As they have seen it, the autonomy that is one of the distinctive qualities that characterise voluntary action in this society has been heedlessly put at risk, either (in one version) by too close an involvement in provision of services through public funding or (in another) by the intrusion of commercial values into a sphere of activity where altruism should prevail. None of these anxieties is new. William Beveridge in the mid-twentieth century was especially emphatic in his rejection of commercial values, as Charles Loch of the Charity Organisation Society was at the century’s beginning, in his concern about the overbearing State asserting its financial control.2 But the sharpness of the dispute has a new edge, as the debate acquires a new vocabulary and new terms of reference. The furore triggered off by Robert Putnam’s claim that civil society in the United States was threatened by a decline in active social relations, symbolised by his image of the solitary individual in the bowling alley, has spread to this country.3 It finds expression in the idea that the accumulation of social capital should be a major objective of public policy and that the role of voluntary and community organisations can best be judged by the extent of the contribution that they make to the stock of such capital. It is a far cry from the terms in which eminent visitors once used to laud their audiences with praise in their ritual appearances at annual general meetings of charities. 1 An earlier version of parts of this text was presented to a Research Seminar of the Independent Sector, Washington DC, 23 Apr 1999. 2 J. Lewis, The Voluntary Sector, the State and Social Work in Britain (Aldershot, Edward Elgar, 1995). 3 R. Putnam, “Bowling Alone: America’s Declining Social Capital” [1995] The American Prospect 13.

(Q) Dunn Ch16

25/1/00

1:50 pm

Page 242

242 Nicholas Deakin This new trend towards seeing voluntary activity and “third-sector” organisations as part of civil society necessarily involves some attempt at clarity of definition. Protagonists of the significance of civil society tend to view activity outside the State and the market and at a scale above that of the family as performing (at least potentially) three different sorts of functions. First, and simplest of all, there is the contribution that this type of activity makes to promoting and sustaining stable communities. This is the communitarian vision, of mutually reinforcing actions providing an environment in which child-rearing, education and neighbourhood self-help can flourish and the vocabulary and practice of social responsibility and mutual obligation will inculcate a lasting sense of trust.4 Trust is also at the root of the second function that voluntary association can perform. It is frequently asserted that there is a close connection between networks of mutual trust among market actors, enterprise, innovation and market development. Putnam’s earlier work on Italy seems to show a clear relationship between the backwardness of the Mezzogiorno and the prosperity of the cooperatively based economy of Emilia-Romagna.5 The third function of voluntary association is political. The development of face-to-face relationship in co-operative endeavour acts as a school for democracy. Inculcating values and providing the opportunity to acquire skills that can be employed competitively in the electoral arena.6 The organisations in which the individual citizen participates need not necessarily have political objectives; but a healthy civil society depends upon their existence and a totalitarian one will show its true colours by proceeding to snuff them out.7

THE UK CASE

The different roles that voluntary associations can expect to be called upon to play in promoting the future of civil society emerges with particular prominence in the various propositions put forward in support of the political project know as the Third Way. As White has put it, this project is: provisional shorthand for an attempt to revive the fortunes of left and centre left parties in advanced capitalist societies.8

In this usage, the third way is common to most Western European countries and the United States, though with significant variations produced by the contours of domestic political circumstances. There has also been a fair amount of cross-fertilisation between the different “projects” (the term is unfortunately 4

A. Etzioni, The Spirit of Community (London, Fontana Press, 1995). R. Putnam, Making Democracy Work (Princetown, NJ, Princetown University Press, 1993). 6 S. Verba, K. L. Schlozman and H. Brady, Voice and Equality (Cambridge, Mass., Harvard University Press, 1995). 7 W. S. Allen, The Nazi Seizure of Power (London, Eyre and Spottiswoode, 1976). 8 S. White, “Interpreting the Third Way” (1998) 6 Renewal 2 (Spring). 5

(Q) Dunn Ch16

25/1/00

1:50 pm

Page 243

Voluntary Action and the Future of Civil Society 243 inescapable), with a continuous dialogue taking place on the subject between politicians, administrations, officials and policy analysts in the United States and Britain. When President Clinton told his fellow-Americans in his State of the Union message that “we have found a Third Way”, with “the smallest government in thirty-five years but a more progressive one” he was using terminology that precisely reflects that being used in Britain. The philosophical basis of the Third Way in Britain stems largely from the work of the sociologist Anthony Giddens. He presents the Third Way as a fusion of two major traditions in British political thought, the Liberal and the Social Democratic. This fusion leads to an emphasis on three different principles that can be employed to shape political action: opportunity, responsibility and community.9 Taking these in turn, opportunity implies providing equal access to key assets in society—education, jobs, health care—that centrally affect life chances. This emphasis validates government policies designed to combat “social exclusion”, the term now increasingly used to cover not just material poverty but other forms of obstacles that block access to the mainstream of society. However, opportunity must be linked to responsibility, which involves reducing the emphasis on a body of rights guaranteed by the State and placing increased significance on the role of the individual citizen and their obligation to discharge certain key tasks in the home and neighbourhood and at work. But this is a civic obligation to the wider collectivity and as such must be distinguished sharply from the “self-reliance” of autonomous individuals central to Margaret Thatcher’s neo-liberalism. This leads to the emphasis being placed on community, which is seen as a socially cohesive environment based on the successful accumulation over time of social capital and providing the basis for amassing further stocks. Taken together, the combination of these three elements should lead to a situation which provides, in White’s summary, “real opportunity for all, based in shared, equitably enforced civil responsibility”.10 How have these very general principles, which could be readily adopted by any political party occupying the broad centre ground in the current political spectrum, been translated into action? “New” Labour came to power in Britain in 1997 with a parliamentary majority sufficiently large to guarantee that there will be no significant external political obstacles to the implementation of their programmes. In the two years since its election we have seen, in broad terms, a decisive downgrading in the role of the central State as a provider of services to the public. This continues a process begun under the Conservatives, but it is linked to increased intervention by the central State, designed to improve the distribution of skills and jobs, access 9 A. Giddens, The Third Way: The Renewal of Social Democracy (Cambridge, Polity Press, 1998). 10 Supra n.8.

(Q) Dunn Ch16

25/1/00

1:50 pm

Page 244

244 Nicholas Deakin to which is seen as the key distinctive feature of New Labour’s approach. It is combined with a strong emphasis on the “modernisation” of the machinery of government, in part through the importing of values from the private sector. This reform process, sometimes branded as “the New Public Management” can be encountered on both sides of the Atlantic. It links to and is in part designed to facilitate a turning away from raising resources for government programmes from direct taxation. Most of the special programmes described below have been funded by special taxes or from saving from other spending programmes. To the extent that redistribution through the tax system is taking place at all, it is “redistribution by stealth”. In addition there is a new emphasis on the importance of local government—a significant break with the policies of Labour’s predecessor—and on the voluntary sector as a provider of services. There has also been a search for other hybrid forms for delivery—partnerships between the local state and the local voluntary sector, involvement of local business, and support for mutual aid organisations (credit unions, community trusts). This has run alongside a continued programme of privatisation, inherited from the Conservative government. This is one of several signals of a sharp change in Labour’s attitude towards business. New Labour seeks to present itself as an undogmatic modernising party, friendly towards business enterprise and anxious to promote collaborations and develop ideas like “social entrepreneurships”, which draw on business expertise. The New Labour project, which is held together by rhetorical use of the term “modernisation”, has produced a number of specific programmes which are now in the course of being implemented. Those particularly relevant to Third Way thinking can be divided into three broad streams: first, work-based programmes. The emphasis on work as the main means of “reconnecting” the socially excluded has produced a suite of new policies, including the New Deal for the unemployed—welfare to work programmes with a special emphasis on the young unemployed and now the older workers—tax credits for working families and a national minimum wage. Secondly, there is a “social justice” stream of activity. This has involved a series of special measures designed to improve the health and education chances of the socially excluded, mostly concentrated on specific geographical areas (in zones); a range of special projects (a New Deal for communities) and the creation of a Social Exclusion Unit, located at the centre of government with responsibility for driving this whole range of policies. Thirdly, there is also a less explicit underlying emphasis on sustaining traditional values. This has found expression in some of the government’s measures to reinforce their predecessors’ measures for stricter control of crime and disorder and more positively in attempts to devise “family-friendly” policies, a “Sure Start” programme for the under-fives, new measures designed to promote parental leave and a decision not to phase out or tax child benefit. Some of these policies bear the imprint of a long-dormant tradition in the centre left, Christian socialism, to which the Prime Minister is known to be strongly attached.

(Q) Dunn Ch16

25/1/00

1:50 pm

Page 245

Voluntary Action and the Future of Civil Society 245

THE ROLE OF VOLUNTARY ACTION

What is the nature of the contribution that the voluntary and community sector have been asked to make to these various lines of policy development? New Labour’s position since before coming to power has consistently been that voluntary organisations are part of the “project”; and since entering office this theme has been repeated on a number of occasions, most notably in the Prime Minister’s speech to the National Council for Voluntary Organisations in January 1999. This follows a pattern set by his predecessor, Margaret Thatcher, who made an equivalent position statement to the Women’s Royal Voluntary Service conference at the same stage in her first term of office, in 1981. In his speech, Blair sets out the background to the Third Way project in the following terms:11 In the first half of the century we learnt that the community cannot achieve its aims without the help of government providing essential services, and a backdrop of security. In the second half of the century we learnt that government cannot achieve its aims without the energy and commitment of others—voluntary organisations, business and, crucially, the wider public. That is why the Third Sector is such an important part of the Third Way.

After commenting on past mistaken attitudes on the left, which “was seen as belittling voluntary activity, seeing it as a poor alternative to direct state provision”, Blair launched out on a catalogue of actions taken by the government since coming to power, instancing in particular: the compact between the government and the national voluntary sector, signed in November 1998; the New Deal for Communities and its explicit emphasis on “putting community organisations in the driving seat”; new government programmes to encourage volunteering—the “Millennium Volunteers”; the creation of a new technological infrastructure to facilitate community action, using advanced information technology and a shake-up in the organisational arrangements, located in the Home Office, for co-ordinating government policy towards the voluntary sector. With the addition of the Treasury’s recent review of the tax regime for charitable activity, designed to simplify the process of donation and promote what the Chancellor has called a “democracy of giving”,12 Blair’s catalogue neatly summarises the government’s current position on the Third Way–Third Sector agenda.

11 12

T. Blair, Speech to the Annual Conference of the NCVO, London, 21 Jan 1999. Review of Charity Taxation Consultation Document (London, HM Treasury, Mar 1999).

(Q) Dunn Ch16

25/1/00

1:50 pm

Page 246

246 Nicholas Deakin

THE ROOTS OF NEW LABOUR POLICIES

The current (1999) agenda of the government has not, of course, emerged fullyfledged from a newly devised, Third Way perspective on voluntary action; rather, it owes a good deal to past history and the enduring impression left by certain previous events. To take one crucial example, relationships between the central government and voluntary sector are still strongly marked by episodes from the 1980s, when the Conservative approach was to fund voluntary bodies to take on increased responsibility as part of their wider project of slimming down the welfare state and removing responsibilities from statutory agencies. In this approach, there was no place for the advocacy and campaigning role of voluntary and community bodies, and government funding was often made contingent upon refraining from such activity, as in the case of funding of schemes to address unemployment.13 At the local level, the crude application of central government reforms designed to introduce market discipline into service delivery through imposition of a “contract culture” also impacted heavily on local voluntary bodies. Here, the problem was compounded by traditional suspicions on the part of local authorities towards voluntary bodies and a past history of mutual hostilities, generated in part by a history of confrontational environmental campaigns. This past history fed into the negotiations for the signing of the compact, which was originally proposed by the Commission on the Future of the Voluntary Sector14 and then endorsed by a Labour Party working group. The likely future significance of this document is not easy to assess; one independent observer, Hargreaves, recently commented rather tepidly that: it is easy to overlook the significance of a treaty which states in clear terms the sector’s right to an independent voice and which offers an open framework for resolving difference between the voluntary sector and government.15

But he adds more optimistically that the compact: is but the first step on a lengthy journey. The hoped for destination, from the Third sector’s point of view, is that it emerges as a partner of truly equal significance to the public sector and business, rather than as a partner of last resort.

What is likely to be of greater importance in the medium term is that constructive relations should be developed at the local level. New Labour’s reform of local government is one of its most significant departures from its predecessors’ practices. The enhanced role that elected local authorities are expected to 13 T. Addy and D. Scott, Fatal Impacts? The MSC and Voluntary Action (Manchester, William Temple Foundation, 1998). 14 Meeting the Challenge of Change, Voluntary Action into the 21st Century: Report of the Commission on the Future of the Voluntary Sector (London, NCVO, 1996). 15 I. Hargreaves, “Third Way—Big Ideal or Big Deal?”, NCVO News, Feb 1999, 14.

(Q) Dunn Ch16

25/1/00

1:50 pm

Page 247

Voluntary Action and the Future of Civil Society 247 play in community governance is coupled with a greater emphasis on coordination and partnership with other agencies. There is a significant opportunity for voluntary and community organisations here, reflected in the scramble to produce local compacts on the same broad basis as the national document.16 The other area of potential significance, as Hargreaves implies, is relations with business. The New Labour emphasis on the importance of engaging with the business sector at national and local level and its interest in the concept of “social entrepreneurs” makes this an especially pressing issue. The difficulty is that there is no significant tradition of corporate philanthropy to draw upon: there are exceptions (the Quaker industrialists, some individual corporate tycoons, often first- or second-generation immigrants) but the concept of social responsibility in business is still far from being established. It remains to be seen whether in Britain, as in the United States, new money being made from new technology will be attracted towards philanthropy. For the voluntary sector, there is also an issue around values: in the business-friendly environment cultivated by two successive governments, the pressure to adopt practices based on corporate models has steadily mounted. The consequences are yet to be properly assessed.17 On another flank, there is the question of the “citizen space”, the arena of activity to which Blair, again like his Conservative predecessors, is inviting his fellow citizens to make a more active contribution. There are some contradictions to be resolved here. The British public has a strong positive emotional response to the concept of “charity”, even though the term is not at all well understood. A succession of high-profile public events held to support charitable endeavour have provided ample evidence of a willingness to respond generously when issues are put across with the help of all the marketing expertise available. One extreme example of the public’s response has been its willingness to accept the National Lottery as legitimated through the contributions it has generated to “good causes”; the other—and by contrast spontaneous, not manipulated—was the initial response to the death of Princess Diana. Yet the truth is that these sentiments are not reflected in the overall pattern of giving to charity, rather the opposite. There has been a steady decline in the level of charitable giving18; the New Labour government is now hoping to address this through reforms in the tax regime and active promotion of the “democracy of giving” stimulated by the activities of another of its many task-forces. This is also the basis of its approach to the issue of volunteering, where there has recently been something approaching a panic about the decline in the rate of participation in voluntary activity among the young. There is a striking and rather curious contrast here with the vitality of some protest movements that have successfully tapped the idealism of the young—organisations concerned 16 L. Gaster, History, Strategy or Lottery (London, Improvement and Development Agency, 1999). 17 B. Knight, Voluntary Action (London, Centris, 1993). 18 G. Leach, The End of Altruism? (London, Institute of Directors, 1999).

(Q) Dunn Ch16

25/1/00

1:50 pm

Page 248

248 Nicholas Deakin with poverty in the developing world and in particular environmental groups.19 Even the political right’s Hayekian hostility to pressure groups has been suspended long enough to allow former Conservative ministers to participate in demonstrations held, ostensibly at least, to defend the integrity of the countryside and its “traditional values” (increasingly also a focus of political activity in continental Europe).

POSSIBLE FUTURES FOR VOLUNTARY ACTION

The extent to which any realistic predictions can be offered is, of course, strictly limited (the literature is full of examples of carefully devised and professionally executed forecasts that have gone drastically astray). But whatever unanticipated developments may lurk out of sight and so far unobserved, it is legitimate to suggest that the future of voluntary action will be determined in three principal arenas, the political, the economic and the social and technological environment. Taking the political arena first, the future for voluntary bodies is likely to be strongly affected by the extent to which the current impetus behind the New Labour’s Third Way strategy is sustained. If it is not, the degree of prominence now attached to voluntary activity at national level and the attention given to issues related to the interests of voluntary and community bodies will also diminish. This is not to say that the fortunes of the sector are necessarily bound up with one political party rather than another or that only political activity taking place at UK national level can have any real impact—rather the opposite. Economic stability is an obvious precondition for a healthy sector and the impact of globalisation poses particular questions about whether it can be sustained. The way in which increased prosperity is distributed also has obvious implications for the priorities for voluntary action. Social change will throw up new issues and also new opportunities—for example, the contribution of citizens in the third age to voluntary action and the potential for further expansion as the healthy life span lengthens. Technological change, as has been the case before, will both offer opportunities and attract suspicions. To assess how these questions are seen within the voluntary and community sector, we have the benefit of the “Third Sector Foresight” exercise conducted by the NCVO. This study found voluntary and community organisations predicting greater government spending on public services by concerns about fundraising from the general public; a likely increase in demand for services and stronger pressure from users for better quality services and from contributors for value for money. Respondents thought that mutuality and self-help would increase and that cross-sectoral partnership would be an increasing feature of both local and national scenes.20 19 J. Davis Smith, “Continuity or Change? Volunteering and the Third Way”, Paper to LSE Third Way Conference, 7 June 1999. 20 NCVO, Third Sector Foresight (London, NCVO, 1999).

(Q) Dunn Ch16

25/1/00

1:50 pm

Page 249

Voluntary Action and the Future of Civil Society 249

The Political Context In the political arena, the main development which is likely to impact directly on the voluntary sector in the near future is the next stage in the debate on welfare reform. As the NCVO survey suggests, the organisation and management of welfare and questions of how it is funded and administered raise issues in which the voluntary and community organisations are necessarily closely implicated. The Prime Minister has referred to welfare as his government’s major domestic challenge and he has underlined the significance of his own commitment by such devices as a personal pledge to end child poverty within 20 years. Yet the government’s record over the first two years in office has been distinctly patchy. The Green Paper on welfare reform issued in 199821 met with a less than enthusiastic response and the two senior ministers associated with it lost their jobs in the summer reshuffle of that year. A sense has developed, and not just among the government’s political opponents, that the emphasis on work to the almost complete exclusion of other forms of intervention might not necessarily work to the benefit of all those whom the government is pledged to assist—the disabled, the elderly, single parents.22 This links to a parallel criticism that the government, which has accepted the need to take a robust line in addressing problems related to race, has tended to neglect gender issues, which are so central to poverty and potential routes out of it.23 As already indicated, New Labour has significant individual policies in place to address many of these issues and voluntary and community organisations are closely involved with almost all of them. But since the loss of the ministerial team behind the 1998 Welfare Reform Green Paper no coherent strategy has yet emerged. The danger here is that the current emphasis on partnership may export the burden of responsibility to another ill-defined entity, “civil society”, the arena where solutions are expected to bubble up spontaneously and be implemented by selfless collaborations. There is an echo here of Margaret Thatcher’s declaration in 1981 that the voluntary sector should take responsibility for leading and the role of the state must be to support, not direct. The general issue here is that of convergence—the likely outcome of the development of a partnership approach to the delivery of services which links voluntary and community organisations at all levels with government agencies at all levels. The anxiety here is that too close an engagement will result in a distortion of the mission of voluntary bodies and lead to a loss of their distinctive 21

A New Contract for Welfare, Cm 3805 (London, Stationery Office, 1998). J. Benington and D. Donnison, “New Labour and Social Exclusion” [1999] Social Policy Review 11. 23 A. Coote, “Gender Parity and the Third Way in British Politics”, Paper to Gender Parity Conference, Centre for European Studies, Harvard, 10 Apr 1999. 22

(Q) Dunn Ch16

25/1/00

1:50 pm

Page 250

250 Nicholas Deakin characteristics through incorporation into a “shadow state”.24 On the other hand, the emphasis on the third sector as “policy entrepreneurs”, carrying important messages from the field into the policy-making arena, could provide welcome opportunities, if “intelligent government” (another New Labour slogan) is able to interpret these messages properly and implement them imaginatively. Developments on all these fronts may be affected by New Labour’s constitutional reforms, which have been in many ways the most radical changes to have taken place over the course of the government’s first two years in office. The United Kingdom is becoming a federal State, through devolution downwards to Scotland and Wales (and prospectively Northern Ireland) at the same moment as the central State is losing power upwards to Brussels as the EU agenda expands to cover more areas of governance previously the responsibility of nation States. The result is a significant and accelerating loss of power in the places where it has traditionally been located in our system, Whitehall and Westminster and the growth of importance of alternative locations, in the capital cities of the other nations of the UK, Edinburgh, Cardiff and perhaps soon Belfast, and quite likely also those of the English regions. The significance of these developments for the voluntary sector is not yet fully clear; but at the minimum it should offer organisations operating in partnership with state bodies a situation with a different dynamic, with more spaces within which to operate and alternative strategies to follow. Those with a campaigning focus will have to work out new means of putting their case across effectively, just as bodies who have involved themselves with EU activities have had to do.

Some Economic Issues The pressures on resources identified in the NCVO survey will need to be addressed, whatever the overall economic situation of the country may be. Creating a more sustainable funding environment will involve not just stopping the decline in charitable giving but tapping alternative sources of funding, developing the sector’s capacity to generate earned income and encouraging the corporate sector to invest in local community development.25 The government’s review of charity taxation provides an opportunity to promote giving across a wider spectrum of donors. But the issue is not only one of tapping a wider range of resources. It is also about the organisational structure which could support the “democracy of giving”. The interest expressed by the NCVO’s respondents in mutual forms has particular resonance here, at a time when the future of some of the largest “mutuals” is in doubt. William Beveridge’s report on voluntary action,26 which 24 25 26

R. Whelan, Involuntary Action (London, IEA, 1999). NCVO–Business in the Community, Task Force 2002 (London, NCVO, 1998). Voluntary Action (London, George Allen & Unwin, 1948).

(Q) Dunn Ch16

25/1/00

1:50 pm

Page 251

Voluntary Action and the Future of Civil Society 251 is currently experiencing something of a rediscovery, distinguishes philanthropy from mutual aid, as the two main forms of voluntary action. Beveridge leaves his readers in little doubt about which of them is his preference: he sees in the Friendly Societies and co-operatives based on active membership a model for human organisation that transcends organisational forms and exemplifies the highest virtues of human behaviour. Whether these forms of mutual aid organisation have ever quite lived up to these impossibly high standards is open to some doubt. Theorists of civil society have seen them as a ready source of social capital and a proving ground for democracy27; but in practice, at the time at which Beveridge wrote, the mutual model had already entered a long phase of decline. The largest remaining group of mutuals in the UK, the Building Societies, is now under siege. Many of the larger societies have been turned into limited companies, translated into this new status through use of the device of allocating “windfall profits” to members who vote to surrender their collective ownership. The particular significance of this new development is that it risks losing a device which has in the past spanned the third sector and business worlds at a time when such connections are being eagerly sought after, by Third Way theorists and by local entrepreneurs seeking to break free of the restrictions of nonprofit status.

The Question of Trust Finally, one particularly striking aspect of the debate about civil society has been the emphasis that has been placed on the issue of trust.28 Some, though by no means all, analysts have argued that a loss of trust in most institutions and professions has been one of the major social changes of the past two decades. Opinion-poll evidence appears to validate this claim, which especially affects the public’s view of politicians and public institutions. There is no clear indication yet of a loss of trust in voluntary and community organisations, though the eagerness with which the press is now pursuing stories about mismanagement and corruption in the sector suggests at the least an appetite for bad as well as good news.29 There is also ample evidence of public uncertainty about some of the functions that voluntary organisations perform and the questions thrown up by the expansion of the activities of the sector. One such question that these developments raise is the current state of charity law. There is now a basic mismatch between public understanding of charity and the way in which charity law has developed over almost four centuries, since the statute of 1601. Potential reformers are traditionally rebuffed with the 27

Putnam, supra n.5. A. Seligman, The Problem of Trust (Princetown, NJ, Princetown University Press, 1997). 29 F. Tonkiss and A. Passey, “Trust, Confidence and Voluntary Organisations” [1999] Sociology 33, 2 May. 28

(Q) Dunn Ch16

25/1/00

1:50 pm

Page 252

252 Nicholas Deakin claim that system based in common law can provide sufficient flexibility to adapt to new circumstances. In practice, the flexibility has been arthritic, at best. Even recently, under a reforming Chief Charity Commissioner, the progress made in bringing the activities of newer groups addressing newly emerging issues in new styles within the scope of charitable status, welcome though it has been, has not been spectacular. The case for fundamental reform based on more effective application of the concept of public benefit is once again being pressed: one example often cited is the need for an “exit strategy” for groups serving purposes whose relevance to charity has long since expired. The particular significance of this issue is that it raises in acute form, at a time of general expansion in the activities of voluntary and community organisations the questions of who legitimately belongs in the “big tent”—and who should be expelled from it. All these three areas involve unfinished business; in all of them the voluntary sector’s involvement is being determined in part by events over which it cannot expect to exercise direct control. But in each instance the opportunity for independent action is also clearly present. Voluntary and community organisations are not the prisoners of commercial forces or puppets of the State but active players with a wide variety of different contributions to make in the different arenas briefly explored in this essay. In these and other cases, it will be fascinating to see what the next chapter of the story contains, but for the moment my crystal ball has clouded over and I must leave the task of writing it to future historians.

(R) Dunn Index

25/1/00

1:50 pm

Page 253

Index accountability 2–3 charities, and 1–42 Church of England, and 194 contracts, and 125 housing associations, and 62–4, 65–8, 116–18 judicial review, and 25–37 accounts 93–4, 101, 191 Scottish charities 88, 91, 97–9, 99–101, 102, 191 advertising 155 advocacy (see campaigning) campaigning (see also political activities) 2, 143–59, 161–75, 246, 248, 250 affiliated organisations 152–3 citizenship, and 144–5, 243, 247 conflict of interest 213, 216, 222, 223–4 consultation, and 155–6, 159 democracy, and 144–5, 159, 172–4 European Union initiatives 143–6, 153 freedom of expression 156–8 protests 154–6 restrictions 134–6, 151–9 single issue campaigning 156–8 UK initiatives 146–51 capital gains tax (see taxation) charitable companies (see also companies) 75–85, 100–1, 129 charitable trusts (see trusts) charities as law enforcers 211–26 as substitutes for Local Authorities 136–9 in Scotland (see Scottish charities) conflict of interest, and 213, 215, 227–40 private prosecutions, and 212–18 trading 177–92, 227–8 Charity Commission advice 50, 53, 124, 137, 152, 166, 169, 170, 188–9, 221–2, 224, 226, 231, 232, 234–7, 238 legal proceedings 228–9 schemes 131, 226 Church in Wales 198 Church of England 193–209 accountability 194 as a voluntary body 194, 195–6, 198–201, 208–9 Church Commissioners 198, 201 conservation and historic buildings, and 202–3 constitutional significance 201–4

democracy, and 202 ecclesiastical law 200 origins and development 196–8 Parochial Church Council 201–2 Partnership with the State 203–4 rites of burial, and 207–8 rites of marriage, and 206–7 schools 204–6 State, and 196–8, 200–1, 203–4 civil society 144–5, 149, 241–52 clergy 195–6 compact vii, 140–1, 148–50, 156, 158–9, 246–7 companies (see also charitable companies and local authority companies) 16–18, 75–85, 100–1, 129, 191, 230–2, 237 local authority companies 16–18 local housing companies 107 subsidiary companies 191, 192, 228 companies limited by guarantee 61, 75–85, 251 corporate personality 80–2 directors’ liability 71–2, 83–5 European Union law 77 formation 76–7 limited liability 80–2 memorandum 81–2 restrictions on profit participation 78–9 trust analogy 80–1 conflict of interest 213, 225, 227–40 fiduciary duties 227, 229–32 indemnity insurance, and 234–7 legal structure 231–2 remuneration, and 234–7 user involvement, and 233–4, 240 Conservative government 114, 205, 213, 244, 245, 246, 247 contract culture vi-vii, 2, 123–141, 151, 163, 227, 246 compact vii, 140–1, 148–50, 156, 158–9, 246–7 dependency, and 126–27 development 124–5 legal implications 129–36 organisation structure, and 133–4 political activity, and 134–6, 148, 153 selection criteria, and 131–2 volunteer vetting, and 48–9 Deakin Commission vii, 104, 126, 135, 140, 147–8, 153, 156, 233 democracy 1, 144–5, 159, 172–4, 202, 242 discrimination 44–6, 200

(R) Dunn Index

25/1/00

1:50 pm

Page 254

254 Index education (see also schools) 197, 204–6 employment 3 European Union law, under 45–6 health and safety, and 45 minimum wage, and 43–4 tribunals 44–6 volunteers, and 44–6 European Commission 143–6, 156, 158–9, 190 European law 45–6, 77, 111, 194, 223 FICO 89–92, 191 fiduciary duties 68, 227, 229–32 freedom of expression 156–158 fund-raising vii, 96–97, 102–3, 114, 172–3, 227–8 Local Authority grants 13–15, 123, 124–5 housing association grant 107, 108, 109, 112, 113, 114 funds 133, 153, 155, 246, 250–1 private prosecutions, and 221 Goodman committee 165, 169 harassment 154–6 housing associations 2, 59–73, 107–19, 129, 195, 196, 240 board members 61, 68–9, 71 central government 109, 110 grant 107, 108, 109, 112, 113, 114 local authority, and 60–1, 110 management committee 59, 61, 68–9, 70, 71 privatisation 108, 109, 113, 114, 116 housing corporation 60, 62–4, 72, 107, 108, 109, 110, 112, 113, 114, 115, 116 human rights 111, 156–8 194, 200, 204 income tax (see taxation) independence vi, 2–3, 158, 172, 241 campaigning groups, and 143–59 housing associations, and 109–11 partnership 146 under contracts 123–41 industrial and provident societies v, 61 inland revenue (see taxation) intention of donor 174 judicial review 25–37, 65–8, 215, 222 accountability, and 28–32 housing associations, and 65–8, 111, 115 obtaining judicial review 32–5 role of discretion 35–6 Kemp Commission 92, 104, 147, 153, 156, 163, 173, 174 Labour government 140, 149, 205, 243–9 law enforcement (see private prosecutions)

law, promoting change in (see campaigning and political activities) local authority 9–24 companies 16–18 contracts, and 132–6 (see also contract culture) grants 13–15, 124–5 local governance, and 9–24, 246–7 partnerships 15–20 statutory plans 19–20 ultra vires rule 20–3 voluntary sector, and 9–12 local government (see local authority) Nolan Committee 61, 65, 71, 110, 115 objects 131, 162, 171 partnership 2, 3, 244 Church of England, and 203–204 community planning and consultation 19–20 compact vii, 140–1, 148–150, 156, 158–9 consultation, and 155–6, 159 contracts, and 123–41 legal constraints for local authorities 23–34 local authorities 15–20 personal partnerships 207 political activity, and 143–51 problems 152–3 Police Act 1997 54–7 political activities (see also campaigning) 11, 143–59, 161–75 Goodman Report 165, 169 private prosecutions, and 211–26 restrictions 134–6, 151–9 political purposes (see also campaigning) 161–75 reform 163–5 taxation, and 165–8 politics 143–59, 161–75, 242, 248–50 poor (see relief of poverty) private prosecutions 211–26 guidance 214–15 resolving conflict 222, 223–4, 225 restrictions 214–15 public benefit 89, 129–30, 231, 252 regulation judicial review, and 25–37 of political activities 161–75 of Scottish charities 87–105 of trading 177–92 of trustees 227–40 relief of poverty 117, 137–8, 183 Roman Catholic Church 197, 199, 207 schools 204

(R) Dunn Index

25/1/00

1:50 pm

Page 255

Index 255 schemes (see Charity Commission) schools 197–8 Muslim schools 206 religious schools 197–8, 204–6 religious worship, and 205–6 voluntary schools 204 Scots law 40–1, 46, 49, 50–1, 87–105 Scottish charities 87–105 accounts 88, 91–2, 93–4, 97–9, 99–101, 102 FICO 89–92 Lord Advocate 94–5 mismanagement 94, 95–7 public benefit 89 recognition 88–9 register of charities 92–4 regulation 87–105 Scottish Charities Nominee 97–9 Scottish Charities Office 95–7 taxation, and 88–9 social landlord 39, 60, 61, 64, 108, 109, 112, 112, 114, 115 State 109, 139, 151, 163, 171, 241, 242, 243, 244, 250 taxation 88–9, 130–1, 161, 166–7, 177–92, 244, 245 avoidance 184 capital gains tax 179, 190 FICO 191 income tax 181–8 Inland Revenue 180, 181, 182, 184, 186, 188, 189 trading, and 177–92 ‘third way’ 149, 158, 242–6, 248 trading 177–92, 227–8 badges of trade 179, 181–2 business, c.f. 178 definition 178–80, 181 reform 190–2 taxation exemptions 190–2

trustees conflict of interests 227–40 fiduciary duties 227, 229–32 indemnity insurance 234–7 liability 129–32, 133, 152–3, 162 remuneration 234–7, 238 trusts device used by local authorities 18–19 legal form 76 model documents 238 ultra vires doctrine 12, 17–18, 36, 162, 175 reform 20–3 user involvement 233–4, 240 voluntary sector diversity v–vi central government, and 246, 249 future 241–52 judicial review, and 25–37 local government, and 9–24, 244, 246–7 policing 39–57 political activity 143–59 size of v, 1 volunteer (see also volunteer vetting) 3, 39–57, 59, 109, 195 criminal records 55–6 definition 42–6 legal controls 39–40, 46–9 liability 51–4 minimum wage, and 43–4 Police Act 1997 54–7 vicarious liability 53–4 volunteer vetting 39–57 codes of practice 47 express provision 46–7, 48–9 legal controls 39–40, 46–9 legal obligation 46–9 Police Act 1997 54–7