Debates in Charity Law

John Picton, Jennifer Sigafoos, John Picton, Jennifer Sigafoos

• Publisher: Hart Publishing
• Year: 2020
• ISBN:
  9781509926848
• Edition: 1
• Topic: Law
• Subtopic: Estates & Trusts Law
• Index: Law

Charitable organisations occupy a central place in society across much of the world, accounting for billions of pounds in revenue. As society changes, so does the law which regulates nonprofit organisations. From independent schools to foodbanks, they occupy a broad policy space. Not immune to scandals, sometimes nonprofits are in the news for all the wrong reasons and so, when they are in the public eye, regulators must respond to high profile cases. In this book, a team of internationally recognised charity law experts offers a modern take on a fast-changing policy field. Through the concept of policy debates it moves the field forward, providing an important reference point for developing scholarship in charity law and policy. Each chapter explores a policy debate, setting out the fault-lines in play, and often offering proposals for reform. Two important themes are explored in this edited collection. First, there is a policy tension in charity law between its largely conservative history and the need to keep up-to-date with social change. This pressure is felt acutely along key fault-lines, such as the extent to which a body of law which developed before the advent of legislated human rights is able to adapt to a rights-based world, and the extent to which independent schools – historically so closely linked with charity – might deserve their generous tax-breaks. The second theme explores the law from the perspective of a good-faith regulator, concerned to maximise the usefulness of charities. From the need to reform old organisations, to the need to ensure that charities enjoy the right amount of regulatory freedom in a world of payment-by-result contracts, the book critically charts the policy justifications for regulatory intervention, as well as the costs that such intervention might bring. Debates in Charity Law will be of interest to both academic researchers and students of the non-profit sector, looking to understand the links between law, social change and regulation. It will also help and guide nonprofit employees and volunteers, showing how their sector is shaped and moulded by the law.

1

Fault Lines in Charity Law

JOHN PICTON AND JENNIFER SIGAFOOS

I.Debates in Charity Law

The last decade has seen a period of rapid change in charity (or non-profit) law and policy, both in the UK and across common law jurisdictions. Economic turmoil and austerity have changed the policy landscape. New regulators have been created; others have been significantly empowered; while still others have had their wings clipped. Throughout the common law world, charities are embedded in the daily lives of citizens – through schools, hospitals, parks, museums, etc – both as service users themselves or through volunteering or employment to support others. The public feels ownership of charities, and reform to the field inevitably carries policy controversy with it.

A great many ‘debates in charity law’ have emerged during this period of rapid transformation and public critique. This volume will explore emergent, policy-driven questions in the context of the changed contemporary landscape. We are very pleased to be able to present to you this collection of chapters, each of which considers a contemporary debate in charity law. A major debate that can be seen throughout all of our contributors’ chapters relates to power: what is the right level of state control and regulation of charities? This is explored, from theoretical justifications for legal and regulatory interventions, though implementation, to specific policy contexts. Within this over-arching theme, two secondary themes are mapped through the volume. In the first sub-theme, contributors will explore a fundamental policy tension in charity law between its – largely conservative – history and the necessity for charity law to keep track with fast-moving social change. They will consider some of the theoretical underpinnings for why charities are afforded special treatment under some circumstances, and whether this can be justified or, perhaps, extended. In the second sub-theme, our contributors will delve still more deeply into the regulatory environment affecting charities. A new regulator and expanded regulatory powers over charities will be explored. Other contributors will tackle different issues that might previously have been considered beyond the scope of charity law and will show how this new legal landscape affects charities.

II.Old Law, New Shoes

In the first half of the book, our contributors consider some of the fundamental doctrines underpinning charity law, while venturing far from its equitable roots. The distance travelled from the past is sometimes thrown into high relief when the traditional common law of charity encounters modern legal concepts. The chapters from Matthew Harding and Mark Sidel begin with a key debate that must be resolved in every jurisdiction with a voluntary sector – where should the balance be between preserving the independence of the sector and ensuring adequate state regulatory control over the ordinarily considerable advantages that the sector receives from the state?

In Chapter 2, Matthew Harding offers an elegant argument from the liberal perspective for the independence of the charitable sector from state regulatory control. He first considers the elements of the charity sector that might justify independence from the state. The sector produces a multiplicity of goods, driven by the diversity of purposes that are held to be charitable. The charity sector thus has a hand in a number of different enterprises, from hospitals to schools to the arts, which are publicly beneficial to society. This, on its own, is not enough to sustain an argument for the independence of the sector without two further elements: voluntarism and altruism. Harding notes that there is a special value in liberal thought for voluntary action to produce diverse goods. This value in voluntarism distinguishes the goods produced by the sector from those produced by the state. The last element, altruism, then distinguishes the charitable sector from the for-profit sector, another voluntary producer of plural goods. Although altruism may be expressed elsewhere, in the state or the for-profit sector, or those in the charity sector may not have purely altruistic motives, the demands of charity law uniquely structure the sector towards altruism. In Harding’s argument, this positioning of the charity sector as a site for the altruistic and voluntary production of plural goods justifies considerable independence of the sector from the state. Too much state interference might disrupt this altruism, and without the charity sector this altruism may well not be expressed elsewhere.

Harding then considers whether the types of accountability that the state can offer to regulate the charity sector are well-suited to maximise the voluntary and altruistic production of plural goods. He discusses three types of accountability: constitutive accountability, stakeholder accountability, and governance accountability. On constitutive accountability, the accountability required by the state in terms of determining which organisations may be charities, he discusses a range across various jurisdictions. He considers that the legislative reforms in England and Wales in 2006, and their interpretation in the Independent Schools case, may diminish diversity in the charity sector in England and Wales and could be considered to be excessive government interference with charitable independence. Harding then looks at stakeholder accountability and the rise in new public management or contract culture. The rise in government contracting to charities for the provision of services may also lead to reductions in the voluntarism and altruism of the sector, and direct government provision may be preferred in some situations. Finally, he discusses governance accountability, the various restrictions imposed by the state on how trustees must manage and use charitable assets. Restrictions on how trustees may manage charitable assets could restrict voluntarism in an unacceptable way as the goals of the restrictions become increasingly remote from the overall goal of ensuring that charitable assets are reserved for charitable purposes. The chapter thus unpicks and considers critically many of the assumptions underlying discussions of appropriate charitable regulation.

In contrast, Mark Sidel’s valuable contribution in Chapter 3 illustrates how this debate plays out in a state with a very different political philosophy. He offers insight into how the fault-lines in charity law and regulation look different when viewed through the lens of an authoritarian state, with China as a case study. Sidel begins with a tension that exists in authoritarian countries: they both value civil society and fear it. As a result, the Chinese charitable regulatory system is very tightly controlled, even though China has one of the fastest growing voluntary sectors in the world. Sidel illustrates this by considering the framework that regulates overseas nongovernmental organisations, foundations, think tanks and other non-profits in China. This sector is the most worrisome for the Chinese Government.

China historically engaged with foreign missionary, non-profit and foundation for development and other projects. This was abruptly terminated with the Cultural Revolution. Sidel shows that limited re-engagement began in the 1950s, well before the end of the Cultural Revolution in 1976. The result of this was that China was more open to overseas non-governmental organisation (NGO) engagement in 1977 and 1978 than is generally believed. The subsequent relationship of the Chinese Government to the overseas NGO sector is presented as one of cyclical relaxation and then heightened scrutiny. Through the 1990s there was a period of more relaxed regulation and growth of this sector. The Tiananmen events of 1989 led to some scapegoating of overseas NGOs, and consequent tightening of regulatory oversight.

From 2012, things have changed considerably, with tighter regulatory scrutiny and oversight, a harder position, and an increased role for the state in everyday life. The passage of the Overseas NGO Law set out a new regulatory framework for overseas NGOs, foundations and other nonprofits in China. They must register in China with an approved Chinese partner and report through the Ministry of Public Security. Both of these have proved to be difficult for overseas NGOs to accomplish. Despite all these restrictions, some hundreds of overseas NGOs, nonprofit and foundations have managed to register or to report their activities. Thus, Sidel points out that the system is more nuanced than a mere closing down of this particular policy space. He also identifies some grey areas where there may be limited potential for expansion, especially around academic exchange and cooperation. After describing the new policy space for the non-profit sector in China, Sidel offers a typology of the remaining NGO sector, providing insight into how organisations have adapted and what encompasses their ‘new world’ in China.

The chapters written by John Picton and John Tribe both touch on the historic equitable doctrine of cy-près – the power of courts to amend a charitable trust where the original purpose cannot be carried out to apply those funds in a manner as near as possible to the original intent of the settlor. Picton and Tribe have taken this traditional doctrine and used it in distinctly modern ways. Picton prises open and examines the perpetual character of charitable trusts, using donative economics theory as a lever. Tribe advocates for a modified form of cy-près to ensure that charitable assets are preserved in the event of charitable insolvency.

In Chapter 4, John Picton argues that the drive to create a perpetual foundation is per se egoistic. Donors who are motivated to create an entity which will last forever are often in the vain pursuit of personal legacy. Rather than being driven by a desire to do good in the world, or to increase social utility, they wish to establish a perpetual memorial to themselves, and to project their character and values into the future.

Picton thinks that legal perpetuity, in the form of the ever-lasting charitable trust, can be justified at law because it encourages donors to part with capital. This is true even though the primary motivation might be an egoistic desire to achieve a type of legal immortality. This is an extremely powerful drive and the legal system would do well to attempt to harness it for the public good.

Yet the perpetual trust is certainly a double-edged sword. The problem is that donors who are motivated by the projection of their own character and values into the future are unlikely to create trusts with high social utility. Their vanity crowds out more useful applications of the capital. So, it can be said that, although the law is right to try and capture the egoistic drive to perpetuity, there is also an opposing policy imperative to permit the legal reform of perpetual organisations so that their usefulness can be increased.

This leads the analysis to a dilemma. On the one hand, a legal system that allows perpetuity increases donation, but on the other hand, it proactively encourages the establishment of vain and wasteful organisations. Picton suggests a method to reform the law of perpetuity in a way that might balance these conflicting concerns. He argues that trusts might enjoy a period of immunity in which they cannot be reformed, but after that period has passed, funds should be directed towards social utility by the state. This would represent a compromise between the donor’s drive to egoistically project her image into the future, and the state’s interest in ensuring that charitable funds are spent effectively.

John Tribe’s Chapter 5 looks at the incorporated charitable form through a lens of heated debate in the for-profit world – ie, the extent to which organisations should be ‘rescued’ upon insolvency. There has been a real dearth of research into charitable insolvency, and Tribe’s chapter goes a long way towards correcting that omission. He argues that communitarian rescue culture, which is now very well-entrenched in company law thinking within the Academy and which strives to maintain insolvent businesses as going concerns, might be applied to the charitable context.

Similarly fitting old doctrine into a new frame, Tribe shows that communitarian rescue is the correct approach in the profit-making context, disposing of free-market arguments to the contrary. It flows from this that communitarianism must be of at least equal value in the non-profit sector, which has as its sole purpose the pursuit of public benefit. In turn, it can be said that the law should strive, in circumstances of charitable insolvency, to ensure that the charitable purposes inherent to the insolvent organisation can continue to be carried out. It is also necessary to think carefully on questions of priority, so that upon insolvency, the charitable purposes are carefully protected against claimants. For Tribe, the tool to make sure that purposes do continue is the venerable charitable cy-près doctrine, adapted to a new insolvency context.

The growth of the incorporated charitable form is only rarely commented upon. However, it marks, from the perspective of a lawyer interested in legal mechanisms and the interplay of different case-law and statutory principles, one of the most profound shifts in the way that charity is regulated. In this intriguing and under-researched context, Tribe’s analysis seeks to make the two sets of legal thinking ‘speak’ to each other – so in this instance, company law, might learn from the older cy-près rules developed in relation to charitable trusts.

Adam Parachin and Jennifer Sigafoos offer differing takes on to what extent a charitable purpose should reign supreme when it is contrary to public policy or discriminatory. This is a debate that we see played out repeatedly in the contemporary scene. Charities and controversy are no strangers.

In Chapter 6, Jennifer Sigafoos explores a topical social debate: can a charity exclude transgender women from its women-only services? There is a complex interaction between equality law and charity law in the UK. Equality law is a relative latecomer to the scene, and sometimes is an uneasy fit with the centuries of common law development of charity. Charities have been discriminating for a long time. Many charities define whom they help by reference to a specific protected characteristic under the Equality Act 2010, such as sex or race. Sometimes this discrimination is lawful under the Equality Act, while at other times it is not, requiring interpretation of a complicated framework of exceptions. Conflict thus arises between charity and equality law, and it is difficult for charities and their beneficiaries to navigate this legally complex area.

In the chapter, Sigafoos uses a case study of a hypothetical charity that wishes to restrict its services to exclude transgender women. She evaluates the charity’s position under the various exceptions to the prohibitions against discrimination in the provision of services under the Equality Act. This case study also raises issues about the broader justifications for charitable discrimination more generally. When does the discrimination that is widespread in charities (some might call it specialisation) become ‘real’ discrimination?

Using different perspectives on the theoretical justifications that underlie equality law, Sigafoos expands from the case study to consider this broader debate in charity law. When should it be acceptable for charities to exclude potential beneficiaries based upon a protected characteristic, and when should this be unlawful discrimination? She argues that we should expect more from charities – charitable discrimination should be lawful only when it is advancing equality in a substantive way, by redressing disadvantage, challenging stigma and stereotype, enhancing voice and participation, or achieving social change.

In Chapter 7, making a refined conceptual argument, Adam Parachin delves deep into the DNA of charity law. It is a peculiarity of the common law that each charitable organisation is said to pursue a purpose. This is no more clearly seen than in The Commissioners for the Special Purposes of Income Tax v Pemsel.¹ There, the court famously divided the law of charity into four distinct ‘divisions’, with the conceptual effect that judges do not question the particular ways in which organisations carry out their mission – ie, the law does not, as a matter of structure, investigate charitable activities, so long as the charity falls within a Pemsel head.

Taking the famous case of Bob Jones University v United States² as a case-study, Parachin shows that a purpose-focused conceptual legal structure has real-world effects. In the case, where a university carried out religious purposes in a racially discriminatory way, the court reached to public policy in order to find against charitable status. Yet Parachin argues that the judicial use of public policy arguments is a blunt tool for dealing with such complex issues. That the court had to resort to policy is a consequence of the purpose-driven DNA of charity law which, as a general rule, permits organisations to carry out their charitable objects in any way that they wish, reining them in only in extreme circumstances.

The traditional purpose-focused legal structure has worked satisfactorily for a long period, but it is now under pressure, as the nature of charity has changed in the modern world. Such pressure emerges from the hybridisation of charities with businesses, issues surrounding charities and political campaigning, the charging of fees, and heightened political consciousness with regard to racial discrimination. Parachin argues that there might be a legislative solution. Surgical and precise statutory interventions could isolate the circumstances where the traditional purpose-focused approach is under pressure, while at the same time maintaining the common law’s traditionally relaxed and enabling posture in relation to the greater bulk of organisations.

III.Specific Regulatory Contexts for Charities

This second half of the book explores regulation and specific regulatory contexts for charities. Where once research in nonprofit law turned upon the decisions of Equity judges, in more recent times, some authors have focused on the growth of the regulatory state and its consequences for the charity sector. Here our contributors consider closely the regulatory mechanisms that affect charities, beginning with the regulators themselves and then moving on to specific areas where the wider regulatory state has impacted on charities. This type of work brings policy and regulatory guidance to the fore. It requires close attention to how the rules work in practice. This is true for the chapters contributed by Oonagh Breen, Patrick Ford and Eddy Hogg.

In her Chapter 8, Oonagh Breen expertly details the regulatory impact of the new Irish Charities Regulatory Authority. She makes the perceptive point that regulators do not arrive into a legal vacuum, but instead must fit themselves into a complex and interlocking pre-existing regulatory system. Her case study, which focuses on Ireland, is timely, as much of the common law world has recently shifted towards the creation of specialist regulators for charities. This global sweep includes New Zealand in 2005, Scotland in 2006, Northern Ireland in 2009, Australia in 2012 and Ireland in 2014.

In the Republic of Ireland, a truly complex regulatory picture has emerged. That jurisdiction has gone from a fractured situation where no single body had exclusive responsibility over charities, to one in which the Charities Regulatory Authority is now making its presence felt upon the scene. The first task for this new kid on the block was inevitably the ‘nuts and bolts’ task of managing the new register, created from existing data, by sweeping it of dormant charities. Failure to register while operating a charity is now an offence in Ireland. There have even been prosecutions, so for example in 2017, the Charities Regulatory Authority took action agains...