Q&A #60 – When are pledges enforceable?

Question: Several months ago, a wealthy individual recently stated on social media that he would donate $100,000 to my charity. Thus far, this individual has not followed through on this promise and has not responded to the organization’s attempts to reach him. Was this a binding pledge, and would this be enforceable in court?

Answer: This answer to this complicated question depends largely on the applicable state law, as courts in different states have somewhat different approaches to the issue. Many courts have taken a favorable view of the enforceability of pledges, holding donors liable for pledges on the basis of public policy or various traditional contract law principles. However, nonprofit organizations are well-advised to bolster the enforceability of pledges through carefully drafted written agreements.

Under traditional contract law principles, a promise is generally not binding unless: (1) there is “consideration” provided by both sides (in other words, a promise to do something or refrain from doing something); or (2) the person or entity to whom the promise was made shows “detrimental reliance” (in other words, reasonably incurring costs or suffering some other loss or harm in anticipation of the promise being fulfilled).

Many courts have relaxed these requirements somewhat in the context of charitable pledges. Some courts have found pledges to be binding on the basis of an implied promise by the charity to use the funds in accordance with the donor’s wishes. Other courts have loosened the concept of detrimental reliance, finding that an organization’s citing the pledge as an inducement to other donors was sufficient to make the pledge enforceable. Lastly, some courts have held pledges to be binding as a matter of public policy, since charities depend on voluntary promises and we don’t want people evading these commitments.

Nonetheless, there are a couple of reasons why it is risky to count on these favorable rules in the absence of a carefully drafted agreement. First, many states still strictly adhere to traditional contract law standards and will not enforce pledges in the absence of consideration (for example, an agreement to provide certain recognition of the donor) or a clear showing of detrimental reliance (for example, commencing work on the project that was to be funded by the pledge). Second, the question of which state law applies (this is called a “conflict of laws” analysis) is itself quite complicated if the donor and the organization are based in different states, and you cannot necessarily be assured that the laws of a favorable jurisdiction will govern.

These uncertainties can be minimized by following up with a written pledge agreement that is signed by the donor and the organization. When done right, this will maximize the enforceability of the pledge and clarify important issues such as the timing of payment and the use of the funds.  

When possible, it is helpful to specify in the agreement: (1) the restricted purposes for which the donation will be used; (2) the ways the organization will rely on the pledge (for example, enabling the organization to commence the program earlier than expected, increasing the organization’s program budget, or using the donor’s example to induce donations from others); and/or (3) a promise by the organization to provide recognition of the donor (for example, agreeing to name the donor at an event or in one of the organization’s newsletters or publications).

Planning Tip – Make sure your organization’s gift acceptance policy addresses pledges and make it a standard practice to follow up with the donor to execute a written pledge agreement. With some forethought and strategic guidance from your legal counsel and fundraising consultants, this step can be framed in a way that is positive for donors. Emphasize that you want to clarify the terms so that the donor’s wishes are honored and to give the donor an opportunity to get guidance from his/her tax and legal advisors.

Your case sounds like one that would have an uncertain outcome, since it appears this was an offhand comment on social media without any further communication by the donor. The result would depend on the specifics of what exactly the donor said, what (if anything) the organization did in reliance on the promise, and which state law would apply.

And of course, the organization would have to carefully weigh the costs and benefits of seeking to enforce the pledge in court (including the reputational risks of litigating a dispute with a potential donor). Organizations are often hesitant to sue to enforce pledges, especially when the case is potentially a difficult one and might be highly visible to the general public. 

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