The legal status of unincorporated associations
Under the current law in Scotland, an unincorporated association does not have a separate legal personality (unlike a company or a partnership). This means that the law does not recognise an unincorporated association as a separate entity, distinct from its members or its management committee, and one of the consequences of this is that an unincorporated association cannot (in its own name) enter into contracts; sue or be sued; take on a lease; own property; or employ staff. Often, therefore, members of the management committee enter into contracts or carry out transactions on behalf of the association which they represent, and this can cause difficulties, especially when things go wrong with those contracts or arrangements.
The law here can have unintended (or rather, ill-understood) and rather alarming consequences, as shown by the case which caught our eye. In short, Mr Davies was a member of the management committee and the president of his local rugby club. The club’s treasurer signed on behalf of the club a contract with a building company for work to the club’s premises. The treasurer’s signature was witnessed by Mr Davies. The contract provided for payment by the club to the building company of an agreed sum, plus such other sums which might become payable under the contract. On completion of the work, the agreed sum was paid but the building company served a statutory demand on Mr Davies in respect of an additional sum of £147,000 for agreed variations. Mr Davies argued that it was not him but the club’s treasurer (who signed the contract) who was personally liable to pay the additional sum. Unfortunately for Mr Davies, the court disagreed – the outcome of the case was that Mr Davies along with the other members of the committee was personally liable under the contract for the £147,000 additional sum. An important point to note is that the court placed weight on the fact that the rules of the club specifically gave the committee the authority to act as agents on behalf of all the members of the club, and liability therefore lay with the committee members.
Minimising the risk for members
From the case of Mr Davies above, it is clear that committee members (and in some situations, ordinary members) can unwittingly end up being personally liable for the acts of other members within an unincorporated association. However, there are some ways that a committee member can minimise the risks when entering into contracts and other obligations on behalf of an association:-
- check what the constitution says about liability and whether any indemnity has been given – but an indemnity is only of value if there are funds available to meet an indemnity claim;
- ensure you have authority to enter the contract under the rules of the association, and that you have been authorised to do so by the committee – that does not exclude personal liability but ensures that all committee members are liable;
- check whether the risk is insured; and
- ensure that the contract specifically excludes the personal liability of the committee members and the association’s members.
Alternative structures
Any unincorporated association should assess the risks that the members and committee members are exposed to and take reasonable steps to minimise them. Should the committee members of an unincorporated association decide that the risks are too great, then they may decide that using, or converting to, an incorporated structure would be prudent. Vehicles such as a company limited by guarantee, or the new SCIO, both of which afford the benefit of limited liability may be appropriate.
Will the law ever change?
The Scottish Law Commission carried out a review of the law on unincorporated associations in 2009. The Commission concluded that there was a great deal of uncertainty, and that the law had unintended consequences. They recommended that the law be changed so that an unincorporated association should benefit from separate legal personality if it satisfied certain conditions. Such a change would mean there would be less uncertainty about who would be liable under a contract. Unfortunately though, any change in the law will require to be instigated by the Westminster Parliament, so there has been little development on these discussions, and any change is unlikely to happen soon.
Conclusion
If you are a committee member or members of an unincorporated organisation, then you need to be aware of your responsibilities, and the potential issues surrounding personal liability. The level of risk will be different in each case and should be assessed appropriately in each case. Unincorporated associations remain a popular structure in the UK for charities and member organisations, usually without any great drama. Occasionally however, a case comes to light, or we are asked to advise on a situation, which brings home the potential risks. Forewarned is forearmed!
Morton Fraser’s Corporate Team has considerable experience providing ongoing advice to unincorporated associations in Scotland, advising on the liability of members and acting in relation to the conversion of such associations to incorporated bodies.
