Are Nonprofit Pledges Legally Binding?

by John Cromwell

    People make promises a lot, especially to support a good cause. In light of this, the following question often arises: When a person makes a promise, is she legally obligated to follow through on it? Whether a nonprofit pledge is legally binding depends on the circumstances of the promise and the response of the nonprofit when it hears of the pledge.

    Definition of Nonprofit

    When a person refers to a nonprofit, she is generally talking about a 501(c)(3) organization. A 501(c)(3) organization is an IRS-approved organization that does not have to pay taxes on what it receives in specific types of income and donations. Further, donors can deduct most donations they make to a 501(c)(3). To qualify as a nonprofit, the organization must have either a charitable, religious, educational or public safety purpose.

    Contract Basics

    If a nonprofit pledge qualifies as a contract, a person may be legally required to follow through on its terms. A legally binding contract is defined by several characteristics. First, a person must propose an exchange of goods, services or promises. The promises can be to do something or to not do something. The other person must then accept the proposal. Both people must understand the consequences of the exchange. This means neither party can be drunk, a child or mentally challenged in any way. The agreement must also not require either party to do anything illegal. Lastly, both parties must have intended to follow through on the terms of the agreement when it was made. For example, assume a university promises that in exchange for $5 million it will name a new library after a donor. If the donor agrees, there is a valid contract.

    One-Sided Promises

    Often, a person makes a pledge to a nonprofit without the organization promising anything in return. In these cases, generally the person making the promise is not legally required to follow through. There is no valid contract because the nonprofit does not offer any consideration in return for the promise of the donation. Examples of consideration a nonprofit might offer to a donor to make a valid contract includes naming a building or grant after them or hosting a party in their honor.

    Promissory Estoppel

    There are some situations where a nonprofit can enforce a pledge despite the lack of a valid contract. To enforce this type of promise, the nonprofit must sue the donor under the doctrine of promissory estoppel. To prove promissory estoppel, the nonprofit must show that the person making the pledge reasonably expected the nonprofit would act, or not act, based on his promise. The nonprofit must then act, or refrain from taking an action it has a right to engage in, based on that promise. Finally, it must be unjust for the donor to not follow through on his promise.

    Example of Promissory Estoppel

    A donor goes on national television and promises $5 million to a university for the construction of a new library. The university begins breaking ground and incurring significant expenses to build the new structure, such as engaging architect to design the building. The donor then refuses to pay. The donor must have reasonably expected that the university would rely on that promise and the university acted reasonably in reliance on that promise by taking the initial steps to build the library. Since it would be unjust for the donor to not follow through, or at least compensate the university for its expenses, the university could sue under promissory estoppel.

    About the Author

    John Cromwell specializes in financial, legal and small business issues. Cromwell holds a bachelor's and master's degree in accounting, as well as a Juris Doctor. He is currently a co-founder of two businesses.