Essential Law – Funding relationships

An arts organisation?s relationship with its funders is vital to its survival and long-term viability. However, a number of important legal issues are often overlooked. Sean Egan investigates.

Grant agreements are often vague and not particularly legalistic, combining a flexibility of approach with considerable protection for the funder. The aim is generally for specific work to be delivered in the context of an ongoing relationship; this enables the funder to raise concerns as they arise. In order to be effective, a good working relationship and trust is vital but legal issues can still arise.

Boards need to understand the strings attached to a grant and, where appropriate, request changes. Of course, the terms of funding may be non-negotiable ? but it?s still worth asking! The Charity Commission has stated that it expects trustees of charities to stand their ground when negotiating agreements. Any decision to conclude a grant agreement needs to recognise the element of dependency that the organisation bears to a single funder, whether the relevant arts council, local authority or another body. Such dependency skews any relationship and will affect future decisions. Boards must always bear in mind the organisation?s potential position if funding is reduced or completely cut. This happens from time to time, with painful results. In most grant agreements, for example, the funder may reduce funding at any time if, in turn, its funding has been reduced. Failure to contemplate this possibility may well leave trustees in breach of their duties.

In general, grant agreements should be treated like any proposed contract. It should also be borne in mind that, technically, the funder may not be contractually bound to comply with the terms of a grant, as there may be no legal consideration. If that is in fact the case, the organisation is in effect assuming that the funder will abide by the ?agreement? for a combination of practical reasons ? and that may not always be a safe assumption. That aside, the Board needs to review and approve the terms, irrespective of whether they are perceived to be non-negotiable. Boards should not delegate this crucial decision even if the decision heavily depends on advice from officers of the organisation.

Grant agreements may also include conditions that are subjective or uncertain. For instance, a funder may reserve the right to impose additional conditions, or activities may be subject to ?satisfactory? review. Boards should not accept these sorts of provisions without specifics. A number of issues arise in relation to such provisions:

– Additional obligations will usually contain an additional cost that the organisation cannot and the funder may not meet
– The conditions may be a source of argument that could undermine the relationship with the funder
– Trustees are not entitled to fetter their discretion. In the case of organisations that are charities, trustees must retain the ability to exercise their discretion to apply the charity?s resources for the charitable objects of the charity. If a funder is exerting control over the management of an organisation, it may be that the trustees will fail in their duties. There is a fine line between a funder enforcing grant conditions under an agreement and ?telling? the trustees what to do. But if the funder oversteps the mark there is the prospect of the funder or its officers being shadow directors and having their own fiduciary duties to the organisation as a result. These may well conflict with their duties as employees of the funder.

Funding bodies have traditionally favoured having ?representatives? on the boards of arts organisations as a means of knowing what is happening and keeping some control. Some constitutions provide for council nominees to hold a specified number of places on the Board. Aside from the specific Local Government Act issues, an individual may end up in an untenable position if duties as a board member conflict with the duties owed to his/her employer. The moment an individual is appointed as a board member and/or trustee that person is under an obligation to exercise those duties regardless of other ?hats? and has a positive duty to resign if there is an actual or potential conflict of interest. This is not just a question for the employee, the employer will be liable for acts of the employee undertaken as part of their job. Arts councils routinely require clients to allow officers to attend all board meetings. In my experience this is constructive and the arts officers fulfil a supportive role. But if the officer becomes more than just an observer this could cause legal difficulties for both the arts council and the board.

Necessarily, this article focuses on difficult areas that, by and large, are avoided through good practice. But the fact that there are so few disputes or legal cases relating to funding agreements suggests that organisations are often motivated by the need to secure funding in current and future years rather than evidence that no such issues ever arise.

Sean Egan is Head of the Arts & Media Department at Bates, Wells & Braithwaite Solicitors e: [email protected]