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Company Law

Q: Court action against withdrawal of grant

What criteria would an arts company need to fulfil to have a chance of winning a court action against a funding body for withdrawal of a grant?

A: The general principle is that the law will not complete an incomplete gift and a gift is not completed until the subject matter of the gift is transferred into the possession of the donee and nothing remains to be done by the donor to complete it. Thereafter it cannot be revoked but prior to that, the intended donor is at liberty to change his mind.

To put it another way, a bare promise (whether written or oral) which is unsupported by consideration (ie by the recipient of the promise giving something of value in return) will not be enforceable in law. Even the issue by the donor of a cheque for the amount of the grant will not complete the gift unless the cheque is met by the paying bank on presentation.

However, there are exceptions to the general rule. If the promise of a grant was made by deed, which is now unusual but at one time was not uncommon (remember the days of the seven-year covenant now made largely redundant by the Gift Aid Scheme), it will be enforceable without the need for consideration. A deed is a document executed under seal, or one which is expressly "signed as a deed" by the party concerned and witnessed, or in the case of a corporation is signed "as a deed" by two of its officers, that is to say by two directors or by one director and the company secretary or otherwise in accordance with its constitution.

Furthermore, if the intended donee of the grant has suffered some detriment or liability in reliance on the promise of a grant so as to alter its position for the worse and if this was within the reasonable contemplation of the intended donor as a possible consequence of its promise, then the promise can be enforced up to the extent of the obligation incurred by the intended donee in reliance on it. Thus if, for example, the funding body were to have promised a sum of money to pay for a particular piece of hospital equipment, in reliance on which the hospital had proceeded to purchase the equipment concerned, having indicated its intention to do so, or been encouraged by the funding body to do so, the latter could be made to pay up. Similarly a promise to pay or contribute to the cost of building work by instalments as the work progresses cannot be cancelled with impunity in midstream after some but not all instalments have been paid, and the building contract entered into by the grantee.

On the other hand, if the intended grantor were to have reserved an express right to revoke the grant in whole or in part prior to payment, or if the promise of a grant were to have been induced by false or misleading information, then even if detriment were to have been incurred as aforesaid, the promise will not be enforceable.

In passing, although it can hardly apply to the "funding body" to which you refer, it is worth mentioning that a gift contained in a will is enforceable (once the will is admitted to probate) since the subject of the gift is deemed to have been vested in the personal representatives of the testator on his death "upon trust" to apply it for the purpose intended. Further, a declaration of trust by a donor during his lifetime will also be enforceable, even before the subject matter of the trust has passed into the possession of the "beneficiary", because the donor has evinced an intention to make himself a trustee of the money or property concerned.

Thus, as a general rule a gift will be enforceable if made by Will, by Deed, by Declaration of Trust, or by actual delivery into the possession of the donee.

If the intended donor attaches a condition precedent to the grant, which the donee then fulfils, it is arguable that the fulfilment of the precondition may itself be sufficient consideration to turn the promise into a contractual one. For example, if the intended donor were to say in effect, "if you raise 75% of the project cost from other sources we will pay you the balance" or "we will make you a grant if you promise to use it for installing new seats in the auditorium of your theatre", then if the donee in each case were to do as requested, that arguably may be enough to make the promise enforceable, despite the absence of any actual detriment to the donee, provided that such a precondition falls within the constitutional objectives of the intended donor. Arguably there may be sufficient consideration in the donee promising in return to help the donor achieve one of its constitutional objectives. However, I have been unable to find a case where such an argument has been tested in Court (perhaps due to the prohibitive legal cost), so it must be regarded as a grey area.

If the funding body concerned here is a statutory one, set up by the government to distribute government money for a particular purpose within clearly defined parameters, it will have a statutory duty to act fairly in accordance with its terms of reference and any failure to do so will expose it to an application to the Court for judicial review, which is a process for review by the Courts of an alleged abuse of power by a public body. It is conceivable that such process could be initiated by an aggrieved potential grantee on the ground that a refusal to make or a decision to withdraw a grant is in the particular circumstances either perverse or in violation of established obligatory, administrative procedures. Indeed just such an application against Arts Council England has recently been reported in this newspaper. On an application for judicial review (which only applies to public bodies) the Court's power to grant relief is very wide ranging.

First published 3rd November 2005