Contracting

A contract is a legally enforceable agreement between two or more parties. A contract exists (regardless of what it is called) when both parties have offered and accepted something; there is an exchange of consideration (anything of material value); and an intention to create a legally binding relationship. 

Contracting is becoming more common in the voluntary and community sector. In particular, public bodies increasingly fund charities to deliver public services under contract rather than by the provision of a grant.

Trustees must ensure that

• any proposed contract fits within the charity’s purposes or objects, as set out in its governing document
• there are powers in the charity’s governing document to do what is necessary to carry out the work 
• legal, regulatory or tax issues have been considered: for example, whether a trading subsidiary is required or the VAT implications of a contract.

Trustees should also consider the wider impact of contracting to provide a service: is it the best way to further the charity’s mission? Does the charity have the resources to fulfil the contract?  Are the terms and conditions of the contract reasonable?

The holding of a contract by a charity depends on its legal status:
Unincorporated charities (trusts and associations) have no legal personality, which means that contracts are agreed in the names of trustees personally, rather than in the name of the charity. Trustees might be able to enter a clause into a contract limiting the personal financial liability of trustees to the assets of the charity.

In a charitable company or IPS, it is the company which is party to the contract, not the trustees. Although this limits the liability of trustees in cases of breach of contract or insolvency, the trustees are still legally responsible for the organisation and must fulfil their formal duties as company directors.