OG516 - Trustees' power to compromise

Last reviewed:
Last updated:
25 September 2013

Policy Statement/Overview

Overview

As of February 2020, because of a technical issue with the website that hosts the operational guidance we cannot make any changes to it. This means the website could include outdated content. We are working on a solution and will update this page as soon as possible.

A compromise is an agreement between two parties to settle a claim without it going through the full legal process. This usually means that a payment, of less than the full amount at stake, is paid to the claimant and this brings the matter to an end.

Charity trustees may decide to enter into a compromise arrangement either:

  • to make a payment to settle a claim against the charity, or
  • to accept a smaller payment to settle a claim the charity has made.

In all cases, trustees will need a power to enter into a compromise (see B1.4). This is because entering into a compromise will involve the charity's trustees agreeing to:

  • use charitable funds to pay money to a claimant that they may not need to if the claim went to court and the charity won (where the claim is lodged against the charity)
  • accept a payment of less than they might be awarded if the claim went go to court and the charity won (where the claim is lodged by the charity)  

In most cases, trustees can exercise a power to compromise without any input from the Commission.

Policy

Our policy regarding a proposed compromise arrangement is that:

  • we will advise trustees to rely on their own powers and decision making when entering into a compromise arrangement.
  • we will not make an Order authorising the agreement simply because trustees are anxious to have protection or to avoid criticism. (This is in line with our policy not to provide comfort Orders to authorise an action where trustees already have the power to take the action themselves.)

The Commission will only become involved in a compromise case where:

  • one or more of the trustees has a personal interest in the claim (as distinct from their interest as trustee). In this case we will need to authorise the compromise and the conflict of interest by s105 Order,
  • the case is particularly complex or potentially contentious to the extent that we might give advice under s110 to confirm that, in entering into the compromise, the trustees are acting in accordance with the charity’s trusts.

Summary of the guidance

This guidance explains what a compromise is and refers to the powers that trustees have to make a compromise. It also sets out when we need to be involved including the situations where we may suggest or prevent a compromise. 

OG Contents (Site map)

Casework Guidance

B1 What caseworkers need to know about compromise

B1.1 What do we mean by a ‘compromise’?

A compromise is an agreement that a particular claim by one of more persons against one or more others should not be decided by the court (or by any other relevant method, eg arbitration). Such an agreement usually involves the payment of an agreed sum by the person(s) allegedly liable to settle the claim to those making the claim. 

A compromise could be considered a type of ‘out of court’ settlement.

There are a number of scenarios that might lead to trustees considering making a compromise, for example:

  • a dispute about the circumstances surrounding the dismissal of an employee
  • a disagreement about the conditions attached to the use or occupation of land
  • a lack of clarity about the parties’ responsibilities under a service delivery contract.  

The power to compromise is available to a charity either as a claimant or a defendant.

By agreeing to a compromise as a claimant, the trustees will be accepting less than the very best amount that the charity might be entitled to if the claim went to court and the charity won.

Where the charity is defending a claim, agreeing to a compromise means the trustees will pay a sum of money that they may not need to, if the claim went to court and the charity won.

In either case, the trustees:

  • will need a power to compromise and, in certain circumstances, our prior consent, and
  • must be able to justify entering into the compromise, having taken appropriate advice (see section B2).

Entering into a compromise is often considered appropriate because it can minimise the effort and expense, and remove the risk of losing, were the claim to go to court. 

B1.2 What is the difference between a compromise and an ex-gratia payment?

Only a claim that has a legal basis can be the subject of a compromise, and a claim of this type should not be confused with paying compensation to settle a moral claim against a charity by making an ex-gratia payment. Ex-gratia payments usually relate to a gift made in a will and need the authority of the Attorney General, or of the Commission, under s106 of the Charities Act (see OG11).

B1.3 Will the compromise pay the full amount of a claim?

Typically the payment will be substantially less than the full amount of the original claim. This reflects the degree of uncertainty as to whether, if the matter actually went to court, the claim would be enforced in full – or even at all.

It is important to realise that circumstances for a compromise only exist when there is real doubt about whether or not a claim might be successful, or the costs of pursuing it are prohibitive; a case for compromise does not arise where the case is clear and rights are easily enforced.

B1.4 Do trustees have the power to compromise?

In most cases, yes.

  • The power to compromise may be set out in the charity’s governing document

or

  • The trustees of an unincorporated charity may be able to rely on the power conferred by s15(f) of the Trustee Act 1925 (this applies unless entering into a compromise is specifically prohibited by the governing document)

or

  • Although the provisions of s15 of the Trustee Act 1925 do not apply to the directors of a charitable company or the trustees of a CIO (except in connection with any property the company or CIO holds on trust), in our view, the wide powers of management typically conferred on the directors of a company, and the trustees of a CIO, include the power to enter into a compromise.

For more information about the powers trustees have to compromise, see section E1.

If there is any doubt about whether or not trustees have a power to compromise, the trustees should take legal advice.

B1.5 What if there is an express prohibition in the charity’s governing document?

In the unlikely event that a charity’s governing document prohibits the trustees from entering into a compromise it would usually be possible for the trustees to amend the provision using the statutory power of amendment.

Top of page

B2 What do we do when asked to advise about a proposed compromise case?

If we are asked to advise trustees who are considering entering into a compromise arrangement we must set out our limited role with compromise cases. The standard text set out in G1, 2 & 3 will help to do this.

In most cases, trustees can rely on their power to compromise, either explicit or implied (see E1), to enter into the arrangement without any further action on our part. We will only become involved:

  • where there is a conflict of interest; the compromise cannot be made unless we authorise this
  • where the case is particularly complex or potentially contentious; using our Risk Framework might indicate that it is an appropriate use of our powers to provide formal advice under s110 of the Charities Act. Providing s110 advice will give assurances to the trustees that they are acting within their trusts.

The decision to compromise, rather than to press or defend a claim, should be based on a reasoned assessment of what the probable outcome would be and the balance of likely advantage to the charity. Factors which trustees should take into account are:

  • the legal strength of the claim
  • the cost of pressing or defending the claim, bearing in mind the amount at stake

and

  • in the case of a claim by the charity, the ability of the other party to pay.

B2.1 When might we make an Order under s105 of the Charities Act?

Our policy is that we will not make a comfort Order confirming a power that trustees already have, this means that, in most cases, we will not make any Orders authorising trustees to enter into a compromise.

We will only make an Order authorising a compromise where there is a conflict because one or more of the trustees has a personal interest in the claim being compromised (other than their interest as trustee).

Before we can agree to make the Order, we must be satisfied that it is expedient in the interests of the charity to enter into the compromise. To do this, we will need to see copies of any relevant advice and opinions the trustees have obtained and details of how the conflicts will be managed. We also expect the trustees to make a convincing case why entering into the compromise is in the interests of the charity.

The Order granting authority should be kept as brief as possible but the key points to include are:

  • the circumstances of the case, and
  • the trustees’ proposal(s).

There is a model Order for authorising a compromise where one or more trustees have a personal interest (as opposed to interest as a trustee) available in the Order Drafting Manual.

B2.2 Giving advice under s110 of the Charities Act

We can give advice under s110 of the Charities Act if there is doubt as to whether or not a proposed compromise is consistent with the proper performance of the trustees’ duties. If we are asked to provide s110 advice we must assess the case against our Risk Framework, then, if this indicates that providing s110 advice is an appropriate use of our powers, we will consider the circumstances of the particular case. We will need to see copies of any advice the trustees have taken when doing this.

Before providing s110 advice we need to be satisfied that entering into the compromise is something the trustees:

  • can do, and
  • should do,

in the interests of the charity.

The decision to compromise, rather than to press or defend a claim, should be based on a reasoned assessment of what the probable outcome would be and the balance of likely advantage to the charity. The trustees should make their decision in line with our web guidance It's your decision. Factors which trustees should take into account are:

  • the legal strength of the claim
  • the cost of pressing or defending the claim, bearing in mind the amount at stake

and

  • in the case of a claim by the charity, the ability of the other party to pay.

lawyer_referIf trustees have taken, or are required to defend, court proceedings, and they are applying to us for s110 advice before deciding to compromise the proceedings, the case officer should seek legal advice and offer no comment until he/she has obtained that advice.

Top of page

B3 Can we suggest a charity should/could make a compromise?

Where we have an ongoing case that involves a particularly complex, difficult or potentially costly legal dispute, we may decide to suggest that a compromise would be in the interests of the charity.

lawyer_referWe should only do this after consultation with Legal Services.

 

If we decide that it is appropriate to suggest that the trustees consider entering into a compromise we should point out that:

  • the trustees need a power to enter into the compromise arrangement, the trustees could rely on:
    • a power set out in the charity’s governing document
    • the existing powers to compromise provided by s15 of the Trustee Act 1925
    • in the case of companies or CIOs the wide powers of management typically conferred on the directors/trustees, which, in our view, include the power to enter into a compromise
  • The trustees are unlikely to be held liable for any loss to the charity which may result from the use of those powers, provided they are exercised properly in accordance with their powers and duties. In particular, the trustees will need to show such skill and care as is reasonable in the circumstances of the case, having regard to his or her knowledge, experience or skill
  • as a matter of good practice, trustees should normally take adequate legal and, if appropriate, other professional advice before exercising powers to compromise claims
  • the trustees should only accept a compromise to settle a claim they have made if the claim can be seriously disputed; they ought not to compromise if the claim is enforceable without difficulty.

Top of page

B4 Can we prevent a compromise?

Where we have evidence that trustees are contemplating entering into a compromise that appears not to be in the interests of their charity, we can make an Order under s76(3)(f) of the Charities Act to prevent them from doing so.

lawyer_referIf it appears that making a s76(3)(f) Order might be appropriate, caseworkers should take legal advice. 

Top of page

Case studies

D1 When a charity could use its powers to compromise – no Order needed

The trustees of a charity had asked for authorisation to make an ex gratia payment to settle an employment dispute. The former employee had raised grievances about actions taken during the employment and was proposing to begin employment tribunal proceedings. After negotiations facilitated by ACAS, the two parties agreed a settlement figure. The charity sought authorisation from us to make an ex gratia payment on the basis that time spent by staff should the matter go to court would exceed the agreed payment.

However, upon closer inspection, we concluded this was not an ex gratia payment so the charity could use its powers to compromise to make the payment without the need for our consent. 

 

D2 An Order where the trustees had a personal interest/conflict of interest

A charity was advised that the widow of a former employee, who was herself a former trustee, could make a claim against the charity for wrongful dismissal of her late husband. The chances of success of the claim were high and the charity’s trustees were advised that a compromise of an appropriate sum would be in the best interests of the charity.

There was doubt over whether the trustees could validly enter into a compromise because of the conflict of interest arising from their association with the former trustee. We agreed to make an Order to authorise the compromise and set a limit on the amount of the payment.

Top of page

Legal/Policy/Accountancy Framework

E1 Trustees’ powers to compromise

E1.1 Trustees of an unincorporated association

The constitution of an unincorporated association might contain an express power to compromise. Even where there is no such power, the trustees can rely on the power conferred by s15 of the Trustee Act 1925 (unless entering into a compromise arrangement is specifically prohibited by the constitution, see B1.5). This power must, in all but exceptional cases, be exercised under the statutory duty of care (see E2.1). 

E1.2 Directors of charitable companies

The provisions of s15 of the Trustee Act 1925 do not apply to the directors (trustees) of charitable companies, except in connection with any property that the company holds on trust. This means that the directors cannot rely on this power to enter into a compromise. However, the articles of a charitable company usually contain an express power to compromise. Even when they do not, in our view, the wide powers of management conferred upon company directors by the articles of association may be taken to include such a power. The power must be exercised in accordance with the duties of the directors under sections 170 to 177 of the Companies Act 2006 which include a duty to exercise reasonable care, skill and diligence (see E2.2).

E1.3 Trustees of a CIO

The provisions of s15 of the Trustee Act 1925 do not apply to the trustees of a CIO, except in connection with any property that the CIO holds on trust. It is also unlikely that the governing document of the CIO will contain explicit powers to enter into a compromise. However, in our view, the wide powers of management conferred upon the trustees by the CIO’s governing document may be taken to include such a power. The power must be exercised in accordance with the duties of the trustees under sections 221 & 222 of the Charities Act, and regulation 34 of the CIO regulations, which include a duty to exercise reasonable care and skill (see E2.3).

Top of page

E2 Statutory duty of care

E2.1 Trustees of unincorporated charities

Section 15 of the Trustee Act will usually have to be exercised under the duty of care set out in s1(1) of the Trustee Act 2000. The duty of care set out in the Trustee Act 2000 requires a trustee to show such skill and care as is reasonable in the circumstances of the case having regard to his or her:

  • special knowledge
  • experience

and/or

  • professional status

The duty does not apply in cases where the governing document of the charity specifically limits or excludes the duty.

E2.2 Charity trustees of charitable companies

A power to compromise will have to be exercised in accordance with the duties set out in sections 170 to 177 of the Companies Act 2006. These include under section 174 a duty to exercise reasonable care, skill and diligence.  This means the care, skill and diligence which a reasonably diligent person with:

  • the general knowledge, skill and experience that may reasonable be expected of a person carrying out the functions carried out by the charity trustee in relation to the company, and
  • the general knowledge, skill and experience that the trustee has.

E2.3 Trustees of Charitable Incorporated Organisations

A power to compromise will have to be exercised in accordance with the duties set out in sections 221 and 222 of the Charities Act 2011 and regulation 34 of the Charitable Incorporated Organisations (General) Regulations 2012 (SI 2012/3012). These include a duty to exercise such care and skill as is reasonable in the circumstances having regard in particular

  • to any special knowledge or experience that the charity trustee has or purports to have, and
  • if the charity trustee acts as such in the course of a business or profession, to any special knowledge or experience that it is reasonable to expect of a person acting in the course of that kind of business or profession.

Top of page

Q&A

F1 What is a compromise?

A compromise is an agreement that a particular claim by one of more persons against one or more others should not be enforced in court (or by any other relevant method, eg arbitration) (see B1).

F2 Can a charity agree to a compromise?

Yes, in most cases any charity can agree to a compromise (see E1).

F3 Do charity trustees need a power to compromise?

Yes, this may be set out in the charity’s governing document. If it is not, the trustees of an unincorporated charity can rely on power in s15(f) of the Trustee Act 1925, while the directors/trustees of a charitable company/CIO have an implied power to compromise as part of their general management powers (see E1).

F4 What is our role in compromise cases?

We have a limited role in compromise cases, usually, trustees can make a compromise arrangement without any input from the Commission. However, we might be required to provide authority under s105 of the Charities Act (see B2.1), or we might decide to give formal advice under s110 of the Charities Act (see B2.2).

F5 Can we suggest a charity should/could make a compromise?

We can do this in appropriate circumstances (see B3).

F6 Can we prevent a compromise?

Where we consider it is not in the interests of the charity to enter into a compromise arrangement we can make an Order to prevent the trustees from exercising their power to compromise (see B4).

Top of page

Model text

G1 Unincorporated charities: model paragraphs

In addition to any specific powers set down in the governing document of their charity, trustees have the power to compromise provided by section 15(f) of the Trustee Act 1925. In considering whether and how to use these powers, the trustees must act objectively and in the interests of the charity.

Provided the powers are exercised with what section 1(1) of the Trustee Act 2000 calls ‘the duty of care’, trustees are unlikely to be held liable for any loss to the charity that might result. To discharge the duty, a trustee will need to show such skill and care as is reasonable in the circumstances of the case, having regard to his or her special knowledge, experience, or professional status.

We recommend that the trustees take legal and other appropriate professional advice before deciding to make a compromise arrangement.

[If any one of the trustees has a personal interest in the claim which it is proposed to compromise (as distinct from that person’s interest as a trustee), please provide us with the relevant details, since in those circumstances, our authority is necessary for a compromise to be legally effective.]

Note: the words in square brackets should only be included if there is a possibility that one or more of the trustees may have a personal interest in the claim. This format should not be used if we actually know that there is a personal interest.

Top of page

G2 Charitable companies: model paragraphs

The directors of a charitable company have wide powers to compromise, either under explicit provisions in the company’s articles of association, or under their general powers of management.

In considering whether and how to use these powers, the directors must act objectively, and in the interests of the charity in accordance with the duties set out in sections 170 to 177 of the Companies Act 2006.

We recommend that the directors take legal and other appropriate professional advice before deciding to make a compromise arrangement.

 [If any one of the directors has a personal interest in the claim which it is proposed to compromise (as distinct from that person’s interest as a director), please provide us with the relevant details, since in these circumstances, our authority is necessary for a compromise to be effective.]

Note: the words in square brackets should only be included if there is a possibility that one or more of the directors may have a personal interest in the claim. This format should not be used if we actually know that there is a personal interest.

Top of page

G3 Charitable Incorporated Organisations

The trustees of a CIO have wide powers to compromise under their general powers of management.

In considering whether and how to use these powers, the trustees must act objectively, and in the interests of the charity in accordance with the duties set out in sections 221 and 222 of the Charities Act 2011 and regulation 34 of the Charitable Incorporated Organisations (General) Regulations 2012 (SI 2012/3012).

We recommend that the trustees take legal and other appropriate professional advice before deciding to make a compromise arrangement.

[If any one of the trustees has a personal interest in the claim which it is proposed to compromise (as distinct from that person’s interest as a trustee), please provide us with the relevant details, since in these circumstances, our authority is necessary for a compromise to be effective.]

Note: the words in square brackets should only be included if there is a possibility that one or more of the directors may have a personal interest in the claim. This format should not be used if we actually know that there is a personal interest.

Top of page