Charitable pledges are powerful fundraising tools that enable donors to make meaningful contributions to causes they support over an extended period. However, if a donor fails to meet their commitment, and their pledge is not legally enforceable, it can have significant repercussions for the charity relying on that pledge to fund a project or program. By taking steps to ensure that their pledge agreements are enforceable under the law, charities can better position themselves to avoid such an outcome.
What Is a Charitable Pledge?
A charitable pledge is an agreement between a donor and a charity in which the donor promises to make a future donation or series of donations to the charity. In simple terms, it can be described as a promise to make a gift. Under traditional contract law principles, a promise to make a gift to another does not, by itself, form a contract. To create a legally binding contract between two parties generally requires: (1) a valid offer by one party; (2) an acceptance of the offer by the other party; and (3) adequate consideration on both sides, meaning that each party must receive something, or agree to do (or not do) something, in exchange for entering into the agreement.
So how does a charitable pledge become a legally binding contract?
Creating a Legally Binding Charitable Pledge Agreement
As a starting point, a charitable pledge agreement, like any contract, should be in writing. Oral pledges often are not legally enforceable and are more susceptible to misunderstanding.
The written pledge agreement should describe the offer by the donor, the acceptance by the charity, the terms of the pledge, and any conditions. To establish consideration, the agreement should state what the charity will do in exchange for the promised donation. However, a pledge agreement that lacks consideration by the charity may still be enforceable, as discussed below.
The enforceability of a charitable pledge agreement is governed under state law, and thus it varies by the particular state. In general terms, the courts apply one of the following theories when considering the enforceability of a written charitable pledge agreement against a donor.
Bilateral Contract Theory
The donor and the charity create a legally enforceable contract by agreeing that the donor will make a contribution to the charity at some point in the future in exchange for a return benefit from the charity (e.g., the charity will name a scholarship or building after the donor).
Unilateral Contract Theory
The donor and the charity agree that the donor will make a contribution to the charity at some point in the future. However, the agreement does not become legally enforceable until the charity signifies its acceptance of the donor’s offer by taking actions or incurring liability in reliance on the donor’s pledge.
Doctrine of Promissory Estoppel or Detrimental Reliance
In the absence of an enforceable contract (e.g., where the charity has not provided consideration for the donor’s contribution), a court still may enforce a pledge if the charity has acted to its detriment in reliance on the pledge or would be damaged if the pledge was not enforced.
The Enforceability of Charitable Pledge Agreements in New York
Historically, New York courts have most often applied the unilateral contract theory to charitable pledge agreements, though bilateral contract theory and promissory estoppel are recognized as valid grounds for enforcement as well.
A charity seeking to enforce a written charitable pledge agreement in New York should be prepared to point to evidence of actions it has taken in reliance upon the donor’s pledge. New York courts historically have taken a broad view as to the types of actions sufficient to demonstrate reliance by the charity. Examples have included: soliciting other donors based on the pledge; incurring costs; undertaking capital improvements or construction; or borrowing money on the expectation that the donor’s promised contribution will be made.
If a charity cannot point to any actions it has taken in reliance on the donor’s pledge, it will likely be challenging to enforce the pledge agreement. In 2016, the Appellate Division of the New York Supreme Court upheld a lower court’s dismissal of a charity’s claim against an estate on the grounds that the charity had failed to demonstrate that it had taken any actions or incurred liability in reliance on the decedent’s pledge. Matter of Kramer, 140 A.D. 3d 768 (2d Dept 2016).
Make Your Pledge Enforceable
Before your charity undertakes its next major fundraising campaign, it is advisable to consult experienced legal counsel to review or prepare a form pledge agreement. For significant gifts, donors will likely have their own legal counsel, and the specific terms will need to be negotiated. Understand how such agreements are viewed under applicable state law, be aware of any particular terms and conditions that your charity must satisfy to receive the pledge, and act accordingly after the agreement is signed.
