A. INTRODUCTION
Generally speaking, most directors and officers of
charities, as well as non-profit organizations when such organizations are involved in raising
funds for a charitable purpose, consider the legal responsibility for
fundraising to lie either with the professional fundraisers who are retained as
independent contractors or employed by the charity, or with the management of
the charity. Board evaluations of the charity’s fundraising efforts may often
be based upon monetary performance instead of exercising the necessary due
diligence required of them at common law to review the appropriateness of the
various fundraising vehicles that are utilized to achieve the monetary goals
set by the boards of directors.
Directors and officers can face serious legal consequences
if they allow a charity to become involved in an improper fundraising practice.
It is therefore essential that the board of directors and officers of charities
understand their legal obligations to ensure that the fundraising programs
undertaken by a charity are carefully scrutinized in order to document that the
board has exercised the due diligence required of it in its fiduciary capacity
to manage and protect the charitable property that has been entrusted to the
board members. This Charity Law Bulletin provides a brief overview of the common law duties and liabilities of directors
and officers of charities in relation to fundraising.
B. COMMON LAW DUTIES
The following is a selection of key decisions from the
last 15 years that help to articulate what the common law duties and
liabilities of directors and officers of a charity are in relation to
fundraising:
1. Ontario (Public Guardian & Trustee) v.
AIDS Society for Children (Ontario)
The seminal 2001 decision of Ontario (Public Guardian
& Trustee) v. AIDS Society for Children (Ontario) (“AIDS Society for Children”) underscores the high fiduciary duty that is
placed upon directors of charities with regard to fundraising programs. The
Court ultimately found the AIDS Society for Children and its three directors
personally liable for unreasonable fundraising costs of $736,915.71, and
imposed a further $50,000.00 penalty on the directors of the charity.
The decision followed complaints that the AIDS Society was
not applying its funds for its stated charitable purposes. It was discovered
that despite raising $921,440 through public donations, no funds had been
expended on charitable programs and the Society was in debt. In a motion by the
Office of the Public Guardian and Trustee (“OPGT”) to have certain questions of
law determined prior to the passing of accounts, the Court held that directors
of a charity, although not strictly trustees, have a fiduciary obligation to
the charity and the property held by the charity. Further, the AIDS Society
and its directors were required to account for “the gross amount received from
the public and not for a net balance received under some agreement with a third
party,” as well as to utilize such monies to further the objects of the
charity. While the AIDS Society had the power to require the fundraising
company to account for the monies raised, any accounting between the AIDS
Society and the fundraising company did not derogate from the AIDS Society’s
“obligation to account fully to the public to whom it stands in a fiduciary
relationship.”
As well, the Court held that a fiduciary relationship can
be breached whether or not a loss occurs. As a result, the mere fact that a
charity and its board of directors may have entered into an improvident
fundraising contract may in and of itself be a breach of the fiduciary duty,
regardless of whether or not a loss subsequently occurs.
The Court also considered whether the fundraising
contracts were void ab initio or voidable by declaration of the Court at
the behest of the OPGT. In the case at hand, more than 76% of the monies raised
had been paid to the fundraising companies for fees. The Court held that the
fundraising contracts were voidable as being contrary to public interest. The
voidability of the contracts was based upon breach of public policy, as well as
misrepresentation to donors concerning the amount of money raised that was
actually going to fulfill the charitable purposes of the charity.
2. Ontario (Public Guardian & Trustee) v.
National Society for Abused Women and Children
In another third-party fundraising contract decision, Ontario
(Public Guardian & Trustee) v. National Society for Abused Women and
Children (“National Society for Abused Women and Children”), the Court came to many of
the same conclusions as in the AIDS Society for Children case. In the National
Society for Abused Women and Children decision, the directors of the charity
entered into fundraising contracts with businesses they either owned or with
whom they were employed, and approved commissions between 75% and 80% of the
gross funds raised, together with additional monthly administrative fees.
Although the fundraising efforts raised close to $1 million, only $1,365.00
made its way to charitable work.
The Court found that the contracts between the fundraising
companies and the charity were improper and void ab initio, as the
amount of compensation paid to the fundraising companies was unconscionable.
The profit earned by the fundraising companies had to be paid by the directors
to the OPGT. Each director was required to repay all monies received from the
National Society if demanded by the OPGT, and once the monies had been paid
over, then the directors could seek compensation only if such claims for
compensation were properly documented and received, subject to approval by the
Court.
The Court found that the three directors of the National
Society were in a clear conflict of interest when they arranged for the
National Society to enter into the contracts with fundraising companies that
they either owned or by whom they were employed. The Court held that by
entering into these contracts, the directors breached their fiduciary duty as
directors of the National Society. Requiring the directors to repay the monies
received from the charity in this case reinforces the principle that where
directors of a charity are found to be in breach of their fiduciary duties, the
directors will be personally liable to repay the monies to the charity that they
had received from a breach of their fiduciary duty, whether such monies had
been received directly or indirectly, including monies received through
fundraising contracts.
The Court in the National Society for Abused Women and Children
decision was particularly critical of the fundraising arrangement that allowed
a fundraising company to “speak for the charity” and receive 75% to 80% of the
gross receipts but failed to disclose what those costs were to donors and as
such what the charity was actually receiving. This aspect of the decision
emphasizes that directors and officers of a charity have a fiduciary obligation
to ensure that fundraising expenses are kept within the reasonable expectations
of donors or alternatively that donors are advised what those fundraising
expenses are before being asked to donate. What the reasonable expectations
concerning fundraising expenses are was not identified by the Court. However,
what is clear from the decision is that fundraising costs of 75% to 80% of
gross receipts is much higher than what the Court was prepared to consider as
reasonable in the circumstances.
3. Public Guardian and Trustee v. Canadians
Against Child Abuse Society
Charities must also remember that if they are fundraising
in another province, they will likely become subject to the jurisdiction of
regulating authorities in that province concerning the affairs of the charity
in the province. In Public Guardian and Trustee v. Canadians Against Child
Abuse Society, the OPGT obtained a restraining order against a Nova Scotia charity operating
in Ontario. The OPGT was successful in effectively shutting down the charity’s
operations in Ontario. The charity argued that the Court did not have
jurisdiction to make such an order because the organization was incorporated
and had its head office outside of Ontario. The Court, though, rejected that
argument. The decision effectively expands the OPGT’s role in Ontario in
protecting charitable interests so that even out-of-province charities operating
in the province will be subject to its jurisdiction.
C. CONCLUSION
All three of the cases referred to above underscore the
need for charities and their board of directors to carefully review contracts with
third-party fundraising companies to ensure that the contracts comply with the
courts’ expectations with regard to compensation and the need to provide
disclosure to potential donors concerning the cost of fundraising. The need for
public disclosure found under the common law is also set out in the CRA’s Fundraising
by Registered Charities Guidance, which outlines the CRA’s understanding of the legal principles that relate to
fundraising under the Income Tax Act and at common law. Consequently,
there needs to be caution exercised by directors and officers of charities with
regard to fundraising, particularly since directors, as well as officers, could
be faced with personal liability for having permitted unreasonable fundraising
costs or having failed to have properly disclosed excessive fundraising costs
to the public. As well, charities should consult with their legal counsel to
monitor both new and existing fundraising programs and particularly the use of
third-party fundraisers that may be retained by the charity.