Before we delve into a charity’s ability to enforce a pledge, let’s discuss what, exactly, a charitable pledge is. From a legal standpoint, a charitable pledge is a contract between a donor and a charity in which the donor promises to make a contribution in the future. Such a pledge may be oral or in writing. Obviously, a written pledge is preferable and charities as well as donors are well advised to reduce all oral pledges to writing as soon as possible. In a disagreement, nothing trumps the written word.
While you may think of a pledge as a promise, it is actually a contract. Therefore, its enforceability is governed by general contract law and more specifically, by the applicable state law. Frequently, a donor is a resident of one state and the charity to which they make their pledge is in another state. In such a situation, it can be somewhat difficult to determine which state’s laws apply. Some states treat philanthropic promises differently than other contracts.
In most cases, the degree of formality of the pledge and the intent of the parties will affect the outcome of a dispute. Courts have shown more of willingness to enforce pledges in the recent past than has generally been the case. In this post, I will address the issue under the general principals of contract law.
A charitable pledge is enforceable if it is a legally binding contract. A legally binding contract exists when there is agreement between the parties and there has been “consideration” given in exchange for the pledge. These are known as the three essential elements of a contract. If any one of the three is missing, the contract is invalid and unenforceable.
The agreement between the parties contains the first two elements: offer and acceptance. The promise by the donor to contribute funds constitutes the offer. The promise should be unconditional or if payment is conditioned upon the occurrence of a specific event, that event should be stated clearly. Acceptance occurs when the charity accepts the pledge. This is usually accomplished by some form of expressed acceptance such as an acknowledgement letter or even the delivery of a pledge card signed by the charity and the donor. It is important for the charity to document its acceptance of a pledge.
The third element of a valid contract—the consideration—is the element most likely to be problematic in the context of charitable pledges, although the law has been drifting in favor of the charities. What does the charity give to the donor that serves as consideration? It could be the written evidence needed by the donor to claim the charitable contribution deduction (although the charity should not issue that until the pledge has been fulfilled). But correspondence indicating that such a valuable document is forthcoming may be useful. Agreement to publicly recognize the donor may constitute consideration; agreement to name a building after the donor is definitely valuable consideration.
The California Civil Code (paragraph 1614) provides that a "written instrument is presumptive evidence of consideration." California (and other) courts have also found valid consideration to exist when a pledge states that the funds contributed are to be "used in securing gifts from others," even though the donor's gift was not conditioned upon the contribution of funds by others, and even though the alleged consideration was supplied after the pledge was made.
The Restatement (Second) of the Law of Contracts is a legal treatise that seeks to inform judges and lawyers about general principles of contract common law. It is one of the best-recognized legal treatises in American jurisprudence, being the frequently cited non-binding authority in all of U.S. common law in the area of contracts. Paragraph 90 of this document indicates that a promise—which the promisor should reasonably expect to induce action or forbearance on the part of the promisee, and which does induce such action or forbearance—is binding if injustice can be avoided only by enforcement of the promise. This means that “consideration” in the usual sense of the term is not necessary. And the treatise goes on the say that a charitable pledge is binding under this theory without proof that the promise actually induced any action or forbearance. That is a powerful statement that benefits charities.
This concept has caused a modern trend of courts concluding that pledges are legally binding whether or not the charity has taken action in reliance on the pledge, and that, as a matter of public policy, injustice can only be avoided by enforcement of the promise. An Ohio court held that a charitable pledge is equivalent to a promissory note valid on its face, and is therefore enforceable against the person making the pledge without any “consideration.” Other state courts have also concluded that no consideration is necessary and that a charitable pledge is legally binding once it has been made.
This goes beyond the well-established principle in contract law of something known as promissory estoppel, or the doctrine of detrimental reliance. When the charity takes some action—such as the construction of a building or the initiation of a program in reliance on the donor’s promise to make the gift—the charity has relied on the promise to its detriment. There are also cases in which state courts have held that the promises by other donors to make gifts to the organization are the consideration for the pledge for which the charity is seeking enforcement.
The concept of promissory estoppel or detrimental reliance can be easily demonstrated. Suppose I promise my nephew that I will pay for a new motorcycle for him. If I renege, can my nephew sue me? Probably not. But if my nephew goes to a dealership and enters into a contract to purchase the new motorcycle, then he has relied upon my promise to his detriment by becoming obligated to pay for the motorcycle. If he sues me, the court will likely decide in his favor.
My conclusion is that charitable pledges, when documented properly, are enforceable.
How do you draft a pledge to be enforceable against the donor? Given what we discussed in the first post on this topic, the more important question may be whether or not you want a pledge to be enforceable. The obvious advantage of an enforceable pledge is that if the donor chooses not to honor the pledge, the charitable organization has the opportunity of seeking enforcement by a court. This advantage must be considered in light of the charitable organization’s willingness to sue the donor in the event of default. In most circumstances, charities are reluctant to sue donors who do not satisfy their pledges.
If the charity does not intend to sue the donor, why make the pledge enforceable? Often, the charity believes that there is no harm in making the pledge enforceable, and that it might perhaps facilitate collection, even if the charity never intends to sue the donor. These charities have not read my first post on this subject.
The Association of Fundraising Professionals' Code of Ethical Principles and Standards of Professional Practice does not specifically mention pledges. A review of the code makes it clear that ethical fundraising concepts are centered upon the donor. However, fundraisers must now also review their obligation to the charity. There is likely an ethical obligation to keep the charity funded equal to the obligation to be accommodating to the donor.
The last item that a charity needs to keep in mind in settling outstanding pledges is that payments from private foundations or charitable trusts and donor advised funds cannot satisfy personal pledges. IRS regulations specifically state that it is an act of self-dealing for a private foundation to satisfy an enforceable pledge of a disqualified person. Accordingly, a donor cannot use private foundations or donor advised funds to satisfy charitable pledges unless the donor accounts for that possibility at the time of drafting the pledge, i.e., by indicating that this is actually a pledge from that entity and not from the donor personally.
What is happening in the real world? The Jewish Federation of Southern New Jersey changed its policy a long time ago, and began suing to collect pledges. The organization felt it owed this to other donors who were faithfully fulfilling their pledges. Phil Knight, founder of Nike, once announced that he would withdraw a $30 million pledge to his alma mater, the University of Oregon. When Oregon President David Frohnmayer aligned the school with a worker’s rights group critical of Nike’s Asian operation, Knight put his wallet back in his pocket. The $30 million pledge to expand Autzen Stadium was put on hold. The university did not sue. A year later, Oregon ceased its participation and Knight started giving again.
What will happen if you renege on your pledge? What should you do if your donor reneges on their pledge? It depends.