The Charity Commission regards Serious Incident Reporting as an important element of its regulatory approach. As a matter of policy, it expects charities to report all 'serious incidents' promptly.
Legacy income represents approximately £4 billion annually for charities. Inheritance disputes are a growing phenomenon and so it is unsurprising that charities are on the receiving end of a wide range of challenges. If trustees are to comply with their obligations, then it is inevitable that a small proportion of those challenges will see a charity with legacy income end up in Court. Given the uncertainties of litigation, some of that small proportion may go badly.
Is losing a probate dispute a serious incident? For the reasons set out below, we suggest it is unlikely to be so in a well-run charity.
What is a Serious Incident?
Serious Incident reporting is intended to give the Commission an opportunity to determine whether trustees are acting appropriately in response to an incident, whether any immediate regulatory intervention is required, and – increasingly commonly – to identify whether there are wider issues in connection with the charity that the Commission might wish to probe.
But what exactly are serious incidents? The Commission has published guidancethat says:
'A serious incident is an adverse event, whether actual or alleged, which results in or risks significant:
- harm to you charity's beneficiaries, staff, volunteers or others who come into contact with your charity through its work (who are collectively referred to throughout this guidance as people who come into contact with your charity through its work)
- loss of your charity's money or assets
- damage to your charity's property
- harm to your charity's work or reputation'
Significant means 'significant in the context of your charity, taking account of its staff, operations, finances and/or reputation'.
There is a helpful table setting out examples of types of incidents that are potentially reportable. The range is quite broad. Reportable incidents could involve safeguarding children or adults at risk of harm, governance issues such as a mass resignation of trustees leaving the charity unable to operate, fraud within a charity, or reputational damage.
Disputes involving a charity can be reportable in some circumstances but a straightforward dispute – whether or not including litigation – would not meet the threshold to be reportable. This is because charities are very often involved in disputes of one sort or another in the ordinary course of running a complex organisation; the Commission does not have a regulatory interest in interfering. The Commission is explicit in its guidance that routine litigation is not in itself reportable unless losing 'threatens the charity's ability to operate and serve its beneficiaries, or where the charity's financial reserves are not sufficient to cover the loss'.
This doesn't mean that disputes are never reportable, but the chief issue is the ultimate financial impact on the charity. The regulatory concern here is the impact rather than the dispute per se.
It may also be necessary to report if a dispute has possible wider ramifications, particularly any likelihood of, or actual, damaging coverage in social or traditional media. In the case of harmful coverage, the Commission prefers that the charity reports the matter itself as a serious incident, rather than allowing the Commission to learn about it online or in the newspaper.
Finally, there is a suggestion that losses above £25,000 should be reported which, on the face of it, undermines references to context and impact. For reasons set out below, that figure does not change the analysis.
Is there a legacy context?
A significant level of legacy income invariably involves the occasional dispute. Charity trustees cannot comply with the Commission's guidance on their duties and simply acquiesce whenever faced with a challenge.
If trustees act within the parameters of legal advice, is it possible that a probate dispute can turn into a Serious Incident that requires reporting? And if so, at what stage?
It is very rare for charities to end up having to go all the way to a probate trial. But let's road test a bad outcome.
Legacy dispute goes wrong
A classic scenario might be a disappointed nephew challenging the validity of his aunt's will which leaves her estate valued at say £1 million equally between two charities.
It is reasonable to assume the two charities, working together, will adhere closely to the Charity Commission's guidance on litigation :
'The commission expects trustees to consider legal action only after they have explored and, where appropriate, ruled out any other ways of resolving the issue in dispute.'
In this instance the nephew rebuffs (whilst paying lip service to) exploring settlement through alternative resolution.
The charities' legal advice is that they have the stronger claim (counsel assesses prospects of success as being 65%) but success cannot be guaranteed (by definition, the main witness, your benefactor, is not available in a probate dispute, which adds to the uncertainty inherent in any litigation).
Attributing a 65% assessment of success (a crude measure but nevertheless a helpful guide to what might be a commercial settlement) equates to £650,000. The nephew offers say £100,000.
Bearing in mind the Charity Commission's guidance, the charities soldier on.
'Trustees have a general duty to act in the best interests of their charity. They have a duty to protect, and where necessary, to recover, assets belonging to the charity. The decision whether or not to initiate or defend a legal action must only be made in the best interests of the charity and be balanced against the risks and consequences that any legal action could bring.'
Ultimately, after around eighteen months, the dispute goes to trial by which point the charities' legal costs will very likely be into six figures.
During the trial a court reporter publishes a story reflecting the nephew's version of events and critical of 'grasping charities'. The story is widely syndicated across publications and provokes a number of hostile social media posts, including from individuals claiming to be (erstwhile) supporters of one or other of the two charities.
After the trial the judge hands down a judgment in draft (as is usual practice, the judgment is strictly embargoed on pain of contempt of court). The charities have lost.
A week later the judgment is made public, and the charities are ordered to pay the nephew's legal costs on the basis that costs follow the event (i.e. loser pays).
Is this a serious incident and, if so, when did it become one?
Here the charities between them have 'lost' an inheritance worth £1 million, have spent a six-figure sum on legal fees, but also been ordered to pay a six-figure sum to the nephew. They have also been on the receiving end of some adverse publicity in the press and on social media.
However – while this would be a matter for the trustees to consider and decide upon in context – in our view this is not a Serious Incident for reporting purposes provided the charities have acted within the parameters of legal advice, decisions have been made following best practice (and in accordance with each charity's scheme of delegated authority), and the loss does not threaten the charities' ability to continue.
Timing issues
The vast majority of probate disputes settle before trial (often without a claim even being issued). Even if a claim is issued, it can take well over a year to get to a trial.
Going to trial itself cannot sensibly be a Serious Incident given the Commission says that losing does not necessarily qualify.
Negative and inaccurate press reporting of inheritance disputes is an occupational hazard. There is very little evidence that legacy income is adversely impacted by press reports of charities defending legacy income.
The draft judgment is embargoed – so at the point the charities know they have lost, it would be contempt of court to notify the regulator. By that point they will be able to estimate their liability for the nephew's costs (almost certainly more than £25,000 each).
Whether the charities choose to report immediately the judgment becomes public may depend on the judgment itself, for instance if it is critical of the charities, and the extent to which there has already been press interest.
Reference to £25,000
Confusingly the guidance states the Commission would expect charities to report any loss of funds 'totalling £25,000 or more'. As in the example above, legal costs are likely to be significantly more than that. Does that figure trump the text which suggests that, unless it has a material impact on running the charity, losing a probate dispute is not a serious incident?
We have sought guidance from the Commission and received confirmation that, if the trustees' view is that losing that probate dispute (and incurring a liability for the other side's legal costs) does not in any way threaten the charity's ability to operate and can easily be covered from the charity's funds, the decision not to report may be in the range of decisions a reasonable trustee body could make.
Demonstrating regulatory compliance
The charities should be able to demonstrate that they have followed the principles set out in the Commission's guidance on decision making as well as its guidance on litigation.
It is important for both charities to show a proper chain of delegation and reporting.
They will need to show they have had legal advice on appropriate parameters and have taken into consideration the factors identified in the guidance on litigation.
Importantly, charities will want to be able to show that they have budgeted for the risk of an adverse outcome.
One point to note is that legacy disputes regularly involve different charities sharing residue. What is relatively routine in terms of value for a major charity might be significant for a smaller charity, yet by definition involves precisely the same facts. So, it is possible the two charities have different reporting responsibilities – if one charity decides that it should report it would be courteous to at least flag to its fellow charity.
Conclusion
Gifts in wills are the nation's favourite way to give to charity. Legacy income is fundamental to the operation of many charities. But inevitably there will be occasions when your benefactor's generous gift upsets others who hoped to inherit. And sometimes you have to litigate to preserve what is intended for your charity.
One can, and should, assess risk in every dispute and act accordingly. Ultimately litigation is uncertain, and charities need to accept they may lose from time to time.
Provided they have acted in line with Commission guidance it is unlikely that the requirement for a Serious Incident Report will be triggered. Nevertheless, the charity should have a documented record of its decision-making process.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.