Further memorandum form Harbottle &
Lewis LLP (DCH 246)
CAUSE RELATED MARKETING CAMPAIGNS
On 21 June 2004, Harbottle & Lewis LLP submitted
its written submission to the Joint Parliamentary Scrutiny Committee
on the draft Charities Bill. This supplementary submission comprises
an addendum to that submission.
SUMMARY
In our view there is currently a lacuna in Ss59
and 60 of the Charities Act 1992, since if representations are
made by a commercial partner that monies from a promotional venture
are to be applied to a charity's trading subsidiary, then the
commercial partner will not be regulated by Ss59 and 60. The representations
made, however, even though technically correct, may lead the public
to believe that the sums from the campaign will go directly to
charity, or that an equivalent amount will be paid up by the charity's
trading subsidiary to the charity. This may not be the case.
We believe that the current situation with regard
to Ss59 and 60 is untidy and should be rectified in the draft
Bill. Possible approaches include:
— including charity trading subsidiaries
in the definition of "charitable institution";
— requiring that a trading partner
be a commercial participator even if it contracts with the charity's
trading subsidiary and not the charity itself. As a result, the
trading partner would have to enter into a commercial participator
agreement and make the appropriate statements;
— requiring that, in statements to
be made pursuant to S60, it is made clear to the public that the
payments are being made to the charity's trading subsidiary and
not to the charity itself;
— not requiring that an assessment
of the amounts which will eventually reach the charity rather
than the trading subsidiary be made, since we believe that this
would be too difficult to quantify; but the general policy of
the trading subsidiary about the way in which it makes payments
to the charity should be stated;
— where a trading subsidiary enters
into a commercial participator agreement with a commercial partner,
there should no longer be any obligation for the charity to enter
into a commercial participator agreement too, even if the trading
partner makes a representation in the course of a promotional
venture that sums will go to the charity.
DETAILED CONTEXT—CAUSE
RELATED MARKETING
CAMPAIGNS
A charity may feel that its brand is sufficiently
strong that commercial organisations will want to enter into arrangements
with the charity. These arrangements fall broadly into three types:
— on-pack promotions, where, for instance,
the charity licenses its brand onto a product, such as a cereal
packet, in return for a royalty per product sold;
— sponsorship arrangements, where the
charity licenses its brand to a third party in exchange for a
sponsorship fee;
— product endorsement, where a charity
agrees to endorse a product, for instance a fairly traded chocolate
bar.
Under S59(2) of the Charities Act 1992 it is
unlawful for a "commercial participator" to represent
that charitable contributions are to be given to, or applied for
the benefit of, a charitable institution unless he does so in
accordance with an agreement with the institution satisfying certain
basic prescribed requirements. These requirements are set out
in the Charitable Institutions (Control of Fundraising) Regulations
1994.
For these purposes "commercial participator"
is defined in S58(1) of the 1992 Act. It means any person (apart
from a charity trading subsidiary) who carries on for gain a business
other than a fund-raising business, but in the course of that
business engages in any promotional venture in the course of which
it is represented that charitable contributions are to be given
to or applied for the benefit of the institution. "Promotional
venture" is defined very broadly as "any advertising
or sales campaign, or any other venture undertaken for promotional
purposes". The definition of "charitable contributions"
is defined very broadly, and basically includes any income to
a charity from a promotional venture run by a commercial participator.
"Charitable institution" means a charity
(basically any charity subject to the jurisdiction of the English
High Court) or institution (other than a charity) which is established
for charitable, benevolent or philanthropic purposes. There are
various consequences from this:
— Ss59 and 60 apply not only to charities
in England and Wales, but also to English and Welsh organisations
(for instance, they would cover arrangements with philanthropic
organisations that are not charities incorporated by virtue of
the proposals under the draft Companies Bill as a Community Interest
Company);
— Ss59 and 60 apply to commercial participators
in England and Wales who conduct promotional ventures where representations
are made that sums will be remitted to foreign charitable, benevolent
or philanthropic organisations.
Various other implications arise from the fact
that someone is a commercial participator. By S60(3) of the 1992
Act, where any representation is made by a commercial participator
to the effect that charitable contributions are to be given to
or applied for the benefit of one or more particular charitable
institutions, the representation must be accompanied by a statement
clearly indicating the name or names of the institutions concerned;
the proportions in which the institutions are respectively to
benefit; and, as the case may require, (in general terms), the
method by which it is to be determined:
— what proportion of the consideration
given for goods or services sold or supplied by the commercial
participator, or any of the proceeds of a promotional venture
undertaken by him, is to be given to or applied for the benefit
of the institutions concerned; or
— what sums by way of donations by
the commercial participator in connection with the sale or supply
of any such goods or services are to be so given or applied.
Failure to comply is an offence liable on summary
conviction to a fine not exceeding level five on the standard
scale.
There is a proposal in S35 of the draft Charities
Bill that S60(3) be tightened so that commercial participators
would have to make a statement about:
— the actual amount of the remuneration
or sum, if it is known at the time when the statement is made;
and
— otherwise to the estimated amount
of the remuneration or sum, calculated as accurately as is reasonably
possible in the circumstances.
This amendment is intended to deal with vague
statements of application to charity such as, for instance, "all
net profits", which are arguably permissible under the "in
general terms" test. There are difficulties with this new
proposal, however, because at the commencement of the relevant
campaign it may not be possible easily to calculate the estimated
amount of remuneration, and attempts to do so might mislead the
public more than the current "in general terms" test.
Under S59(3), where on the application of a
charitable institution the court is satisfied that the requirement
to have a commercial participator agreement is being contravened
and that contravention is likely to continue, then the court may
grant an injunction.
Under S59(4), if a commercial participator agreement
does not meet the prescribed requirements, then the agreement
is not enforceable against the institution except by court order.
One difficulty with this regulatory regime is
the issue of charity trading subsidiaries. Since charities usually
cannot trade unless that trade is directly within, or ancillary
to, the charity's objects, if a charity licenses its brand in
consideration of a royalty (in respect of an on-pack promotion,
say) it will usually be necessary for the commercial partner to
contract with a charity trading subsidiary, which will have been
set up to enable the charity to enjoy the benefits of non-primary
purpose trade. Routing trade through a trading subsidiary also
helps the charity to ring-fence its charitable assets from trading
risk.
The difficulty here, however, is that the definition
of "charitable institution" does not include a charity's
trading subsidiary. Arguably, therefore, the provisions of Ss59
and 60 of the 1992 Act could be avoided by making a representation
that sums from the promotional venture concerned will go to the
trading subsidiary, which may nevertheless give the public the
impression that the sums concerned are going to charity. For instance,
one could say that "All net profits will go to Charity X
Enterprises Limited, a wholly owned trading subsidiary of Charity
X". The public might consider that this amounted to a donation
to charity: but even if the trading subsidiary habitually gifts
its profits after tax to the charity, all of the trading subsidiary's
operating costs will have to have been deducted before its pre-tax
profits can be calculated. This will almost certainly mean that
the amount donated to the charity will be almost certainly be
less than the public anticipates.
Even if a statement is made by the trading subsidiary
to the effect that "all net profits will go to Charity X",
there are problems. While this statement possibly creates an implied
constructive or resulting trust in favour of the charity once
the sums are received by the trading subsidiary, if the sums received
by the trading subsidiary on behalf of the charity are not kept
either in a restricted fund or, better, in a discrete designated
trust account, the monies received may become mixed with the general
monies of the trading subsidiary so that the trust will almost
certainly fail.
These are clearly difficult issues; but unfortunately
they do not appear to have been addressed at all in the draft
Charities Bill.
The Charity Commission has published some guidance
on these issues, which is worth reviewing. First of all, Publication
CC20—Charities and Fundraising—states at Paragraph
42 in relation to the trading subsidiary issue that:
"The [commercial participator] rules do
not apply to fund-raising by a charity itself or, for most purposes,
by a connected company, ie one wholly owned or controlled by one
or more charities. However, we recommend that the company comply
with the legal requirements as a matter of good practice. For
example, a subsidiary trading company which operates a number
of shops on behalf of a charity, might display at the till of
each shop a notice stating that all the profits are paid to the
charity."
Equally, Publication RS2—Charities and
Commercial Partners—states that, while there are no adverse
statutory implications for a charity not to comply with Ss59 or
60, since all the statutory legal burden is on the commercial
participator or professional fundraiser, it remains a charity's
moral duty to inform them about the legal position and ensure
they comply. While, because of the remedies available to a charity
for non-compliance with Ss59 and 60, there might be a superficial
attraction to allowing the commercial participator or professional
fundraiser to err, this is more than offset, first, by the unattractiveness
of bringing injunctive and other proceedings against the "hand
that feeds" the charity; secondly, by the legal hoops and
requirements for Charity Commission consent which bringing out
proceedings attracts; thirdly, by responsible trustees' legitimate
concerns about spending charitable sums on litigation, and the
public perception about that, even if the merits of the case are
overwhelmingly in the charity's favour; and fourthly, by the fact
that trustees should be ensuring that charities enter into comprehensive
agreements with their commercial partners in any event.
SUBMISSION
In our view the current situation with Ss59
and 60 are very untidy, and create scope for considerable misunderstanding.
We submit that the Bill should address the situation. Possible
approaches include:
— including charity trading subsidiaries
in the definition of "charitable institution";
— requiring that a trading partner
be a commercial participator even if it contracts with the charity's
trading subsidiary and not the charity itself. As a result, the
trading partner would have to enter into a commercial participator
agreement and make the appropriate statements;
— requiring that, in statements to
be made pursuant to S60, it is made clear to the public that the
payments are being made to the charity's trading subsidiary and
not to the charity itself;
— not requiring that an assessment
of the amounts which will eventually reach the charity rather
than the trading subsidiary be made, since we believe that this
would be too difficult to quantify and so may mislead the public;
but the general policy of the trading subsidiary about the way
in which it makes payments to the charity should be stated;
— where a trading subsidiary enters
into a commercial participator agreement with a commercial partner,
there should not longer be any obligation to enter into a commercial
participator agreement with the connected charity too, even if
the trading partner makes a representation in the course of a
promotional venture that sums will go to the charity itself.
July 2004
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