Analysis
The Dove Trust (the trust) was established by a declaration of trust dated 16 June 1983 for such charitable purposes as the trustees should in their discretion from time to time think fit. It was subsequently registered as a charity.
In 2004 a website for charitable giving called www.charitygiving.co.uk (the website) was established for the purpose of facilitating members of the public to make donations to the trust for the benefit of other charities or good causes of their choice. Donations which were charitable could then be augmented by gift aid, which the trust would claim subject to an administration fee of 3.99%. Unfortunately, the terms and conditions applicable to the website was silent as to the legal relationship between the trust and the donors, though it was at least clear that the former was acting as principal, not merely as agent for the intended ultimate recipients of the donations.
In the event, through maladministration, a situation developed where the trust found itself obliged to have recourse to incoming donations in a later month in order to fund the payment of donations made in a previous month to the intended recipients. This caused delays in filing the trustees’ annual reports and financial statements. Complaints began to be received from members of the public and on 25 August 2011 the Charity Commission (the commission) was obliged to open a statutory enquiry into the affairs of the trust. Though the trustees’ annual reports and financial statements for the years ending 5 April 2007, 2008 and 2009 were signed, the auditors qualified their reports with a statement that they were unable to form an opinion as to whether they gave a true and fair view of the trust’s affairs.
On 6 June 2013 the commission appointed the first defendant as interim manager of the trust ‘to act as receiver and manager in respect of the property and affairs of the charity’ – donations which had been made by members of the public were held as ‘restricted funds’ (ie they could only be used for specified charitable purposes and were not at the disposal of the trustees in the exercise of their general charitable discretion) and it had been found that loans in excess of £300,000 had been made out of those funds to companies associated with the fourth defendant. On 27 June 2013, an interim report was made to the commission to the effect that there was a substantial shortfall between what was available in the restricted funds and the total amount received by way of donations but not yet paid to the ultimate recipients. The commission made an order the next day freezing the trust’s bank accounts and, after further investigations and discussion, it was decided to shut down the website on 12 July 2013. The final distributions to nominated recipients of donations made via the website had been made just before 6 June 2013. However, donations continued to be received via the website thereafter until it was closed down. The latest financial position of the trust showed that the aggregate balance of its bank accounts amounted to £709,529, whereas the total owed to 1,812 charities and good causes (including gift aid claimed from but not paid by HMRC) was £1,680,231.
The commission sought declarations and directions in relation to the following issues: (i) whether the arrangements under which the website was operated gave rise to a trust or trusts and, if so, of what nature; (ii) whether the arrangements gave rise to a contract between the donor and the charity and, if so, upon what terms; and (iii) how the remaining funds of the charity which were referable to the donations received via the website should be distributed amongst the recipients nominated by the donors and, in particular, whether this should be in accordance with the rule in Clayton’s Case (Devaynes v Noble) (1816) 1 Mer 572, on a pari passu basis or in accordance with a simplified version of the rolling charge whereby two pools of assets should be created depending on whether donations were made before or after 6 June 2013.
Held (granting the declarations and directions sought)
There was no doubt that the arrangements under which the website operated did give rise to a trust and the better view was that this was a global sub-trust, whereby each donor was a separate settlor and the trusts on which their donations were held were separate from the general charitable objects of the trust, subject only to a residual discretion of the trustees where for one reason or another the ultimate destination specified by the donor could not be achieved.
The terms of the website constituted an offer by the trustees to enter into legal relations with potential donors, which matured into a contract as and when a donor made a payment to the trust in accordance with the specified machinery, thereby accepting by conduct the offer made on the website. There was no reason in principle why a single transaction could not give rise to both a trust and a contract at the same time. The terms and conditions, which made provision for the governing law, actually referred to ‘this agreement’ and, even if it was wrong to regard the website as containing an offer to potential donors, it was at very least an invitation to treat. Whatever the precise stage at which the contract was concluded, its terms were that – in return for the donation – the trust would process it in the way explained on the website and ensure, so far as reasonably possible, that payment would be made (together with any available gift aid) within a reasonable time to the charity or good cause nominated by the donor.
In principle, there were three techniques which could be applied in order to determine how the shortfall in the notional blended fund that comprised the trust’s bank accounts should be borne by the ultimate recipients. The first, according to the rule in Clayton’s Case, was that payments out of an account were attributed to payments into the account in the order in which the payments in were made (ie on a ‘first in, first out’ basis). The second technique was to divide the remaining funds between the recipients in proportion to the amounts which were owed (ie on a rateable, or pari passu, basis). The third technique, never yet applied in practice in this jurisdiction, was to apply the ‘rolling charge’ or ‘North American’ methodology, which combined the pari passu approach with the lowest intermediate balance principle.
The authorities established that, although the rule in Clayton’s Case was probably still the default rule in England and Wales which had to be applied in the absence of anything better, it was relatively easy to displace it where there was an alternative solution which produced a fairer result and, in this case, it was common ground that the rateable, or pari passu, basis for distribution should be applied unless it was displaced by the simplified version of the rolling charge approach. In this respect, it was accepted that it would be completely impractical to apply the rolling charge in respect of all periods before 6 June 2013. The problem was not so much the complexity of the calculations but rather the reconstruction of the raw data which would be needed in the absence of any computerised record-keeping that was adequate for the purpose. Thus, the proposal was to divide the available funds into two pools, one constituting the sum available for distribution after the final distributions were made on or before 6 June 2013, and the other constituting all donations received after that date until the closure of the website. However, despite the initial attraction of the two pool approach, it should be rejected in favour of a single pari passu distribution of the entire fund – the most important point being that the website operated in precisely the same way, so far as donors were concerned, both before and after 6 June 2013. In those circumstances, the fairest solution was to regard all unpaid recipients as participants in a common misfortune brought about by the way in which donations to the trust via the website had been managed.
JUDGMENT HENDERSON J Introduction [1] In this action, which I heard on 3 July 2014, the Charity Commission for England and Wales (the Commission) seeks declarations and directions in relation to a fund comprising donations paid by members of the public to an unincorporated charity called the Dove Trust. The claim is brought under s78 …