Legal pitfalls of charity pledges

You don’t usually hear about the unenforceability of pledges. This is because the vast majority of pledges to charity are honoured. They are simply paid by the donor without dispute.

But promises to donate to charity are not enforceable. A promise to make a gift speaks to a future event. The gift is incomplete until there is delivery of the associated monies or items. Accordingly, the law considers such promises to be unenforceable. In addition, a promise to do something doesn’t include consideration, defined as the exchange of something of value between two parties that will entitle the other party to enforce — a quid pro quo. The absence of consideration means there is no binding contract in law.

There are several situations when people do not honour their promise to donate. The most common is financial reversal: the donor’s financial situation has changed and he or she no longer has the available funds to make the pledge. A donor can also change his or her mind. This may arise as a result of a misunderstanding between the donor and charity, a desire for the monies pledged to be used for a restricted purpose that is not available or not practical, or simple capriciousness on the part of the donor.

There can also be a change in the status of the donor between the date of the pledge and the date of delivery of the monies or items comprising the gift. For instance, if a donor becomes mentally incapable, he or she cannot complete the gift. The donor’s substitute deciders may not be obligated to honour the pledge. If they want to honour it, they should balance the donor’s capable wishes against the absence of a binding contract in deciding how to proceed, as well as the applicable legislation in the jurisdiction. They should also take into consideration the prospect of complaint by those with a financial interest in the incapable person’s estate — the residual beneficiaries under a will, or those who take on an intestacy where there is no will.

Similarly, upon the death of a donor, his or her executors and trustees may not be obligated to honour a pledge, but may wish to do so. They, too, must take into consideration the prospect of complaint by those with an interest in the deceased’s estate, if they make payment on what may not be an enforceable obligation. The payment of an outstanding pledge will reduce the value of an incapable donor or deceased’s estate.

A change in status of a charitable donee may also interfere with the implementation of a pledge. For instance, if the charity undergoes a name or mandate change, or ceases to exist, the destination of the pledge becomes unclear. If the donor is alive and capable, he or she can either redirect the pledge or not pay it. If the donor is incapable or deceased, and the donee has ceased to exist, his or her representatives will probably not pay the pledge, or may seek directions from the court.

There are several ways to ensure a pledge is enforced. Shortening the time between a pledge and actual payment minimizes the chances of a change in status of the donor or donee. Another option is to include a statement on the pledge form noting it is a binding contract, or a statement such as, “In consideration of x, an act by the charitable donee, the donor pledges $y.” This relates to the donor and the donee bargaining for, and the donor receiving, some form of consideration or a quid pro quo for the pledge being made.

If it is too late to do any of the above, and an issue arises as to the enforceability of a pledge where the donor is incapable or deceased, there are several things that can be done. The donee can seek the consent of those with an interest in the estate of the donor as to payment of the pledge. In addition, the courts can decide whether the pledge is enforceable and whether it should be paid. A charity may also apply to the courts for a decision when a donor is alive but has reneged on payment of a pledge.

There can be a fine line between an unenforceable promise and a binding contract. In other words, what constitutes sufficient consideration is debatable. Textbooks often refer to the exchange of a peppercorn as sufficient. As regards the case law on pledges, the preparation of a financial statement that reflects a change in the financial position of a donee, and giving up certain rights against the donor, has been seen as sufficient consideration to support a pledge.

Typically, mere gratitude on the part of the donee will not suffice as consideration. Even many of the things a charity does to recognize donors do not suffice, such as erecting a plaque recognizing the donor, a donor specifying the purposes for the funds pledged, or allowing the donor to have some continuing oversight as to the use of the funds. The granting of naming rights in favour of the donee may constitute sufficient consideration for the pledge.

However, there have been instances where a donor has made a pledge in exchange for naming rights, reneged on the pledge, and the charitable donee has forgone or declined to pursue recovery. In situations of financial reversal, there may be no point. As well, public relations considerations may play a part.

Donors may wish to have the opportunity to hold off on, or even retract, a pledge up until the moment of delivery so they can adjust the amount or timing of the pledge. Delivery is an act that can give donors pause. Once delivery occurs, the gift is complete. The current state of the law as regards pledges allows for that flexibility, absent consideration.

A pledge form is usually a simple document of no more than a line or two. Making a pledge form into a contract can add a considerable level of formality. Charities may feel uncomfortable, and many may have been advised against, having donors enter contracts without their first obtaining independent legal advice. The necessity of obtaining such advice may put off donors or dissuade them from making a pledge. In short, both parties to the pledge may prefer that the process remain informal.

The current practice regarding pledges may actually encourage people to make them. That being said, an inability on the part of a charity to enforce pledges can cause it considerable hardship. This is particularly so where the monies to be received from a pledge are significant and have already been committed to a particular purpose or project which is then jeopardized by non-payment. The more that is bargained for or received by the donor in exchange for a pledge, the more likely a court will recognize that as consideration giving rise to a legal obligation.