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Charities - navigating a new landscape

15 May 17

With financial pressures and the shift from grant funding to contracts, social care charities are operating in new legal territory

by Alastair Keatinge, Paul Harper

Charities’ work touches almost every facet of civic life, according to a new report from the House of Lords Select Committee on Charities. If the environment in which they operate alters dramatically, the consequences are likely to be felt across society.

The House of Lords report, called Stronger Charities for a Stronger Society, warns that charities face “greater operational and environmental pressures than ever before”. These pressures apply particularly to charities involved in social care – squeezed on the one hand by growing demands on their services, and on the other by funding challenges and changes.

As a result, many charities are entering unfamiliar legal territory. Worryingly, some have little or no inkling of the threats that lurk in this new landscape.

Shift to contract funding

The changes to the landscape stem from the trend of replacing public-sector grant funding with contracts, often involving complex commissioning processes, competitive tenders and unduly prescriptive contract requirements. According to the House of Lords report, grant funding from government stood at £6.1 billion in the UK in 2003-04, but just £2.8 billion a decade later. Conversely, charity income from government contracts was £5.8 billion in 2003-04, but £12.2 billion 10 years on.

So the switch to contract funding is not new, but what has changed is the operating environment, for care providers particularly. Faced with paying national living wage, some social care charities say they cannot provide services for the fees offered by councils. A BBC Panorama investigation (20 March 2017) found that 95 UK councils had had care organisations cancel contracts, saying they could not deliver services for the amount they are being paid. According to Panorama, some providers were being offered up to £2 per person per hour less than they needed to cover costs.

Among the unenviable choices facing such providers are to risk breaching minimum wage requirements or Care Inspectorate standards, to terminate contracts, or to decline to re-tender for contracts when they expire.

Unfamiliar territory

In this environment, charity managers and trustees should, as a matter of urgency, make themselves fully aware of their position and obligations under existing contracts, and review their approach to new contracts and tenders.

Our own extensive experience of working with Scottish charities of varying sizes shows that many have signed service contracts (usually service level agreements), or tried to terminate or renegotiate them, without taking any legal advice beforehand. As a result, these charities are too often unaware of legal precautions, requirements or pitfalls that would be familiar to many commercial businesses.

In an ideal world, good legal advice before the contracts were finalised would have prevented some of the problems that are coming home to roost in 2017. But even at later stages, there are steps that charities can take to prevent their legal or contract delivery problems escalating.

Take a situation that is likely to increase in frequency. A charity has a contract to deliver services at £x an hour, but to do so will cost it £x + £2 an hour. The charity decides to give notice on the contract, but the council insists it is required to continue providing the service – perhaps because the charity failed to give notice in precisely the way specified in the contract, perhaps because of other contractual provisions or precedents. A legal standoff may ensue.

Such a scenario may be familiar to many businesses, but new and worrying for many charities. And unaccustomed to contract disputes, charity trustees or advisers may be unaware of how to protect their legal position.

Using caveats

In a dispute between local authority and charities, one option available to the council would be to apply for an interim interdict preventing the charity from walking away from the contract. There is an obvious protection available here for the charity – obvious, that is, for those accustomed to litigation. Charities tend not to be.

The protection in question is a caveat, giving the charity warning of any attempt by the council (or any other organisation) to obtain an interim interdict or other interim order in a Scottish court. The charity’s solicitors would be informed of the application for the interim interdict and would have the opportunity to defend it. Without a caveat, the interim interdict could be granted without the charity even knowing about it.

Caveats can be lodged at the Court of Session and/or sheriff courts across Scotland – the choice will depend on where the charity operates. Our usual recommendation is that organisations take out caveats annually; however, a charity without caveats in place may well have time to lodge one if there is a suggestion of a contract dispute (or other issues) arising – doing so is quick and easy.

The point to emphasise here is not that caveats are a panacea for every contract dispute – they are not. But precautions such as caveats are seen by many businesses as a core element of their risk management. Charities – now operating in a world of contracts rather than grants – must adopt the same mindset in assessing their risk.

Break clauses

When entering new contracts too, it is imperative for charities to learn lessons from the commercial world, including taking legal advice about contract terms before signing the contract.

For example, one lesson from the past few years is the benefit of inserting break clauses. A long-term contract at a rate that appeared feasible at the outset may seem less so when costs have been pushed up sharply by inflation, the introduction of the national living wage, or other factors.

Mechanisms such as break clauses must permeate the thinking of charity executives, trustees and their legal advisers – not just in terms of asking for them in contracts, but around understanding the legal terrain of when and how they can be activated, enforced or blocked.

More power than assumed

Finally, charities may need to toughen their negotiating stance. Our experience of the current landscape is that councils are being assertive or even aggressive in enforcing contract terms. This is understandable given the financial pressures they face and the crisis in provision of social care. It is perhaps not surprising if they are confrontational and hope that social care charities will roll over when faced with legal notices about their obligations.

But charities may be in a stronger position than many of them realise. First, in our experience, some of the legal arguments put forward by councils can be readily countered by experienced lawyers familiar with interpretation of contracts.

Secondly, given that councils are statutorily required to provide care, and may struggle to find alternative providers for current contracts, charities should be prepared to bargain hard – whether it is a question of defending an interim interdict or negotiating break clauses or warranties and indemnities over TUPE in a new contract. The more charities that adopt this approach, the stronger their collective bargaining position will become.

Obviously, the legal and contractual issues are not the only ones that charities must consider when walking away from or negotiating contracts – they will also consider their obligations to service users and the reputation of the charity, to name but two. However, as the House of Lords Select Committee stated, charities form a vital part of civil society, and with stronger charities, we get a stronger society. To make this happen, charities must learn some legal lessons from outside their sector.

Alastair Keatinge is partner and Head of Charities, Paul Harper is a partner in dispute resolution and litigation, both at Lindsays, Edinburgh. 

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