Here is an article that appeared in Valuation Law Review entitled “Innovative Gifting Inc. and the House of the Good Shepherd, et al.” on the issue of enforcement of fundraising contracts.  It is very important that charities obtain legal advice before entering into substantial fundraising contracts.

“Valuation Law Review Volume 17, Issue 2, copyright by The Canadian Institute of Chartered Business Valuators, www.cicbv.ca 277 Wellington St. West, Suite 710, Toronto, ON, M5V 3H2, is reproduced with permission.”

Editor:
Dennis Turnbull, CBV
September 2011

Innovative Gifting Inc. and the House of the Good Shepherd, et al.

Ontario Superior Court of Justice [2010] O.J. No. 2210

Innovative Gifting Inc. (“Gifting”), the applicant, sought to enforce a written agreement with the respondents for the payment of fees for services rendered. Gifting was in the business of fund-raising for charitable organizations through its network of donors. Gifting promised to secure donations of cash and shares for the charities with which it contracted in exchange for a fixed percentage of the donations provided to those charities. The respondents were charitable organizations and their senior officers. All except the House of the Good Shepherd had paid Gifting a portion of the invoiced fees. The respondents that paid fees to the Gifting brought counter-applications to retrieve the monies paid.

The respondents’ principal complaints were that Gifting had made material and fraudulent misrepresentations to them about the nature of the donations, the legality of its gift-giving program, and the fees to be charged. They stated, in uncontested evidence, that Gifting had represented orally and in writing that it would raise donations for the charities in the form of cash and shares and that the shares would have a value at least four times the value of the cash. Gifting claimed that the shares would come from a non-resident Swiss philanthropist who would match cash gifts from Canadian donors with an additional gift of shares. The respondents claimed that these representations were false and the shares were worthless. Additionally Gifting had failed to deliver all of the promised shares and had requested that the respondents provide false tax receipts to the donors for the value of shares that were never donated.
While Gifting had represented to the respondents that its fundraising initiatives and agreements were legal and in compliance with Canadian tax laws they found that Gifting’s invoices for 90% of the amount of the cash donations were in contravention of the Income Tax Act and well in excess of the respondents’ allowable disbursement quota thereby threatening their charitable tax status.

At trial Gifting asserted that its agreements should be enforced and that the evidence submitted by the respondents was extraneous and should be ignored. The Court found otherwise and concluded that the remedy of rescission was available to the respondents. In the reasons for judgment the Court stated that the uncontested evidence established that Gifting had made material misrepresentations to the respondents concerning the nature and legality of its gift-giving scheme, including the form and amount of the donations to be made and the amount of its fees, which were clearly false. The evidence established that Gifting had made those misrepresentations either knowing of their falsity or with flagrant disregard or indifference to their truth or consequences.

The Court stated that Gifting’s scheme was clearly in contravention of the Canadian Income Tax Act and put the respondent charities at risk of losing their charitable status. As evidenced by Gifting’s invoices, the aim of the scheme was to claw back to Gifting the value of the cash donations on the misrepresentation that shares would also be donated and that Gifting’s fee would be taken from the aggregate value of the cash and shares. As the shares were not donated the applicant’s invoices comprised almost the entirety of the cash donations. Finally, the agreements were not fully executed by Gifting because Gifting failed to provide the donated shares. The donation of shares was a fundamental part of the agreements with the respondents and the applicant’s failure to perform the agreements disentitled it to any fees.
The Court concluded that the agreements between Gifting and the respondents were void or voidable because they were contrary to public policy. The Court stated that Gifting’s scheme of promising to secure donations of allegedly valuable shares which were worthless or never provided was clearly fraudulent. The cash donations received by the respondents were part and parcel of this fraudulent scheme. To allow Gifting any fees would be contrary to the well-established principle that a fraudulent wrongdoer should be deprived of the profits of its fraud. Therefore, in consequence, the Court held that no fees were payable to Gifting and that any fees already paid to Gifting should be returned to the respondents.