Charities and Local Authority Contracts

The last decade has seen an increasing use of contracts to regulate the relationship between local authorities and the charities they pay to supply services. This paper aims to highlight some of the problems encountered in forming and maintaining those contracts; it also shows how charity law affects a charity’s ability to make contracts and, in particular, to accept certain contractual terms proffered by a local authority. This paper focuses on contracts for the provision of care services. Nevertheless, many of the principles outlined here are applicable to other types of contract between charities and governmental bodies.

Although aimed primarily at lawyers - acting for charities or local authorities - who have little specialist knowledge of charity law, we hope that this paper will be useful to charity trustees who are contemplating a contract with a local authority. However, it is not intended to provide a comprehensive guide to contracting with local authorities and trustees should seek specialist advice on contracts that are significant to their charity.

This paper has been prepared by a working party of the Charity Law Association consisting of:-

One of the main problems encountered by charities in their dealings with local authorities is that, when negotiating a contract, it is the local authority - as the party with the money - that holds the power. Local authorities have sometimes used this position to impose harsh contract terms on charities and to restrict their own contractual obligations.

Historically, the relationship of local authorities to charities was that of patron. In such a relationship, it is reasonable for the patron to expect its money to be used in the way it directs and to ensure that its gift has been used both efficiently and in accordance with its instructions. This attitude - which may account for many of the problems detailed below - is inappropriate in a contractual relationship, which is a partnership in which both parties have rights and obligations.

In other cases local authorities present charities with their standard contracts on a “take it or leave it” basis. Charities may feel they have little choice but to accept the contract on whatever terms they can secure, especially where they have no other major sources of funding.

But it is not all bad news for charities. Trustees may find that they have a strong bargaining position by virtue of having skills and resources that a local authority will struggle to find elsewhere.

A charity is not free to contract in the same way as an individual or a commercial enterprise: charity trustees must always act in the best interests of the charity. Furthermore, they must ensure that any activity undertaken by the charity is consistent with the charity’s objects and powers, as set out in its governing document. Local authorities often fail to acknowledge this, and include contractual obligations which are not only inconsistent with the trustees’ duty to act in the charity’s best interests, but are not within the charity’s constitutional powers to perform.

This problem can be partly addressed by including a contractual provision stating that nothing in the contract shall require the charity to act in a way that is beyond its powers. The contract may also recognise that local authorities do not have unfettered powers. Still, such a clause will be of little comfort if the contract contains clauses which, on the face of them, require the charity to act beyond its powers.

Whether a contract is in the best interests of the charity should be judged from the contract as a whole, rather than by reference to single clauses of the contract. If the choice is between accepting a contract with some unfavourable terms and, by rejecting the contract, being unable to provide a service to the charity’s beneficiaries, trustees will need to think carefully about whether the contract will be in the best interests of the charity.

If a charity enters into a contract under which it is obliged to provide services that are outside its objects and powers, the trustees will have acted in breach of trust. Where the charity is an unincorporated association, the trustees will be liable for any losses that result from that breach. Where the charity is a company, the contract will be unenforceable except by a third party who gave full consideration and was unaware that the contract was outside the company’s objects. Additionally, the directors may be liable for breach of warranty of authority.

If a charity wishes to enter into a contract which would otherwise be outside its powers it may consider amending its governing document. This is unlikely to be a quick process, particularly if the consent of the Charity Commission is required.

The contract must also be within the powers of the local authority and should have been properly authorised. Where applicable, the local authority must also ensure that it complies with EC procurement law, by allowing bids from organisations based in other countries in the European Union.

Charities should generally resist any attempt by the local authority to impose such conditions. In the case of the first, because the authority may select users who do not fall within the charity’s beneficiary group. In the case of the second, because allowing the authority to interfere in the day-to-day running of the services not only compromises the charity’s independence, it may expose the charity to liability in respect of, for example, employment matters.

If a local authority insists on including such conditions, it is possible to reduce the risks of the problems outlined above. For example, it may be acceptable for the local authority to select beneficiaries if it agrees that, in doing so, it will abide by selection criteria drawn up by the charity trustees. This route will, however, only work if the charity trustees have sufficient powers of delegation.

Similarly, whilst the charity cannot hand over employment matters to the local authority, it may be appropriate for a local authority representative to sit on an employment selection panel. Given that a local authority has a duty to ensure that the services it funds are of the highest standard, it may also be appropriate to allow a local authority to insist that a “troublesome” charity employee be moved to work unconnected with the local authority. However, any such concession should be subject to the proviso that the local authority will assume responsibility for any legal proceedings subsequently brought against the charity.

Although the matter is currently going through the courts, it is believed that a charity undertaking work for a local authority will be regarded a “public authority” for the purposes of the 1998 Act and must therefore ensure that it does not infringe the rights protected by that Act. Failure to secure those rights for the charity’s service users could result in legal proceedings being brought against the charity or the local authority.

An in-depth discussion of the 1998 Act is beyond the scope of this booklet, but both local authorities and charities providing services under contract with those authorities must be aware of their obligations under the Act and take specialist advice where necessary.

20. In our experience charities have two main complaints about their contractual negotiations with local authorities which are

21. Many local authorities attempt to impose their standard contracts upon charities, without reference either to the requirements of charity law or to the specific services to be provided by the charity.

22. A contract should give as true a picture as possible of the relationship between the parties. Although a local authority may be restricted in the amount of time it can dedicate to negotiating the terms of any one contract (and may appoint someone to negotiate on its behalf who does not have authority to agree to the removal or amendment of standard clauses) , it is not in the interests either of the local authority or the charity to have a contract which it is difficult to interpret or enforce. Time spent on negotiations may well be time and/or money saved later in the day.

23. Some of the problems relating to negotiations may be eased by:-

24. Some local authorities have tended to treat an invitation to tender as an offer and the charity’s submitted tender as acceptance of that offer. This unfairly allows the local authority to dictate the terms of the contract without negotiations. It may be possible to avoid problems on this front by labelling tender documents “subject to contract”. However, depending on the wording of the invitation, this may disqualify a bid. Charities should follow the tendering requirements in the invitation to tender, but be careful that they do not fall into the trap of accidentally accepting all the terms in a tender invitation.

25. The following issues have been contentious in local authority/charity contracts.

Many local authority service contracts are only for one year. The argument for this has been that local authorities depend on central government funding, which is allocated on an annual basis. However, it hampers charities in their efforts to provide a service and potentially exposes them to ongoing liabilities after the contract has ended. For example, a charity may need to take a lease of premises, in order to provide its contractual services. If the local authority decides not to renew the contract after one year, the charity may be left to fulfil its obligations under the lease. Trustees of unincorporated charities will be personally liable to meet those obligations when the charity’s funds run out.

It is common practice for landlords to require the directors of charitable companies to act as sureties for the lease, and in this way they will be exposed to the prospect of personal liability. This may be less of a problem where the charity takes a lease from the local authority, but many trustees feel that this compromises the charity’s independence.

28. It is difficult for a charity to develop any long-term (or even medium-term) strategy for improving services, where it only has a one-year contract in which to work. It is also administratively inefficient, as both parties will spend more time renegotiating terms.

Recently, there has been an encouraging move towards three year contracts. Length of contract was mentioned in the 1998 Compact between the Government and the voluntary sector which, in its section on best practice, referred to the “value of long-term, multi-year funding”. Although the Compact was initially aimed for use by central Government, some local authorities have now produced their own Compacts, based on the principles of the 1998 document. It is to be hoped that this trend will continue.

30. In our experience standard specifications often cause problems because they can leave the charity in the dark as to what is expected of it. Whilst any terms that are unclear will be construed against the party that offered them (in this case, the local authority), it is pointless to have a specification that bears little relation to the services the charity is to provide. The specification should deal with the following matters:-

31. The specification should, ideally, be self-contained and not incorporate, by reference, other documents, such as local authority standards (which are often not supplied to the charity).

32. Charities should always resist clauses which allow a local authority to make unilateral alterations to a contract specification.

33. Under the Local Government Act 1999, local authorities must provide “best value” in their services. This is defined in the Act as “making arrangements to secure continuous improvement in the exercise of all functions undertaken by the authority, whether statutory or not, having regard to a combination of economy, efficiency and effectiveness”.

34. The contract should clearly outline the local authority’s expectations and state how the local authority will assess the charity’s performance. In particular the contractual provisions on performance should deal with the following points:

35. The local authority should also agree to collaborate with the charity in deciding any improvements to the service.

36. Monitoring provisions should not permit a local authority to intervene unreasonably in a charity’s affairs. It is reasonable for the authority to be able to request information or to visit a charity’s premises to assess the services from time to time but in our view it is not reasonable for the authority to insist on the right to access information or charity premises at any time. Having said that, the charity should not necessarily refuse point blank to allow the local authority to make “spot checks”. For instance, the authority’s auditors may need to carry out impromptu visits to fulfil their obligations.

Like all charity contracts, contracts with local authorities should contain appropriate dispute resolution provisions. Often it will be appropriate for a contract to allow for disputed matters to be referred to an independent third party. Appointing a local authority officer (such as the Director of Social Services) as final arbitrator offends the principle that no-one should be a judge in his own cause.

38. Both court action and arbitration under the Arbitration Acts are costly and therefore unlikely to be practical, although they may be appropriate at times.

39. Many charities are not as careful as they should be when it comes to pricing their services - they calculate the direct costs of the service but forget to include indirect costs such as legal fees, management and training costs, the cost of preparing bids etc.

40. The contract should set out the local authority’s funding obligations (with dates). Funding should not be contingent on the local authority being satisfied with the charity’s performance. Where the authority has such concerns, these should be hammered out within the framework of the contract. Whilst it may occasionally be appropriate for payment to be suspended while the local authority investigates a serious problem with the service, suspension should be for a limited time only and payment should recommence as soon as any investigation is complete. If the authority is so dissatisfied that it is no longer willing to pay the charity, it should invoke termination provisions. Termination of the contract may prevent the charity from meeting the needs of its beneficiaries and should usually be seen as a last resort. However, suspension of payments for an unlimited period leaves the charity in an uncertain and financially precarious position. Termination of the contract clarifies matters and frees the charity to seek alternative funding.

42. Where the local authority requires a charity to take out insurance specifically in relation to the contract, the authority should usually pay for that insurance as part of the fee.

43. The contract should be capable of amendment only by the written agreement of both parties. There should be no scope for unilateral variation by the local authority.

44. There is an implied clause in service provision contracts that the services will be carried out “with reasonable care and skill” and in contract for the supply of goods that the goods supplied will be “of satisfactory quality”.

45. In our opinion, express representations and warranties are usually inappropriate in local authority contracts, although this will depend on the nature of the charity’s service. For example, where the charity is providing residential care, the local authority may reasonably require the charity to warrant that it has all the necessary registrations and is complying with all relevant statutory requirements.

46. Under the NHS and Community Care Act 1990, service users have the right to complain about services to the local authority. Although this legislation only applies to certain types of contract, parties should consider whether it is helpful for the charity to be under a general duty to report any complaints to the local authority as they arise. The local authority will be expected to answer for the service it provides, but in some cases requiring the charity to report all complaints may achieve nothing other than increase paperwork on both sides.

If indemnities are to be included in the contract, the starting point should be mutuality. Often, local authority contracts provide that only the charity is liable to indemnify the authority. This may reflect the fact that the charity is more likely to involve the local authority by breach of contract rather than vice versa but in our opinion a local authority should not impose obligations on a charity which it is not prepared to accept itself.

If the charity gives an indemnity to a local authority, the contract should give the charity the authority to settle any relevant claims on whatever terms it considers appropriate.

In our view, where a charity is unincorporated, contracts should limit the trustees’ liability to the net value of the charity’s assets. If the contract does not contain a provision in these terms and the charity is in breach of contract, the trustees may have to make good any losses from their own pockets, despite having acted to the best of their abilities.

51. However, local authorities have frequently sought to silence charities, insisting that all information relating to the service and its provision be confidential. This is unduly prohibitive and may stifle healthy discussion with third parties as to how services may be improved.

52. Some authorities try to include clawback provisions (under which part of the fee is refunded in specified circumstances). Although standard in grant conditions, we consider provisions of this kind inappropriate in charity contracts. With grants, the charity agrees to provide a full service for an agreed price that can be chipped away if the charity provides the service for less than the amount of the grant. A contract is for agreed services at an agreed price; it is inappropriate for a local authority to attempt to reclaim part of its payment for those services.

53. It is possible that a condition labelled as “clawback” is, in reality, a right for the local authority to reclaim some of its money where the charity has breached its contractual obligations. Such a provision is not truly “clawback”. Whether or not is it fair will depend on matters such as the circumstances in which the clause can be invoked and whether the charity has any time in which to rectify the relevant breach.

54. The contract should distinguish between termination for breach of contract and termination for other reasons. All termination provisions should be exercisable by both parties.

55. We recommend that both parties be entitled to terminate the contract on:

56. Model standing orders for local authorities require contracts to include a “prevention of corruption” clause, allowing the authority to terminate the contract if an officer of the charity has been found guilty of corruption. Charities should ensure that such clauses are phrased so that any assessment of guilt is made objectively and reasonably.

57. It will only rarely be necessary (or reasonable) for a local authority to be able to terminate the contract on other grounds.

58. Sometimes local authorities demand that charities comply with the terms of the authority’s contract with the service user. Charities should see (and understand) such contracts before accepting such a condition. Can the charity comply on a practical level? Can it comply without stepping outside its objects and powers?

59. Other points to consider include:-

60. The following are some of the issues faced by charities undertaking work for a local authority. Where charities are concerned about such issues, they should seek specialist advice.

61. The courts have held that, where a charity pays a person anything other than reimbursement for out-of-pocket expenses, that person may be an employee of the charity, with the attendant rights of an employee (including the minimum wage) and subject to the same tax and National Insurance obligations. Paying a “volunteer” expenses in advance or at a fixed level and/or making one-off payments for services may invoke those rights.

62. Under TUPE, an organisation that takes over the running of another business has obligations towards the employees of that business. If the charity is taking over service provision from another provider, it may inherit the employees of that provider. If the charity seeks to bring in its own staff or to alter the contracts of the “inherited” staff, it may face costly legal situations e.g. redundancy payments.

63. Under these Regulations, workers have certain entitlements, such as paid holidays. The Regulations also require employers to keep records. These matters increase the cost of service provision and the fee should reflect this.

All workers for the charity, except genuine volunteers (as defined in the National Minimum Wage legislation) will be entitled to the minimum wage. The charity should budget for this.