A contract will specify the work to be completed and the charity is legally obliged to deliver the service to the required standard. The funder may sue the charity for breach of contract if it is not satisfied with the standard of the work or considers that the work is not complete.
In situation (a), there is no legal necessity for the agreement to contain a clause requiring the charity to repay the funds in the event of an underspend. However, it can be included for clarity and would be needed if the recipient was not a charity.
In situation (b), the contract would need to be specific about when funds would have to be repaid. However, it would not be appropriate to require a clawback of unspent monies if the work has been completed to the required standard.
“Charges or clawback terms would not be applicable in the procurement of goods and services (where any liability would have been adequately discharged once the goods and services have been provided), or where a grant is provided for research and the successful conclusion of the research might be regarded as an adequate return.” Paragraph 7.10 of Improving Financial Relationships with the Third Sector: Guidance to Funders and Purchasers.
Where funding has been provided to buy an asset such as a building, then the funder may wish to claw back funding in the event of a sale of the asset. In the past, it had been a requirement that if public sector funding had been used to help purchase or refurbish a building, the organisation could not use the building as collateral for further loans and it had to repay the proceeds if the building is sold. In addition, there was often a requirement that if the organisation earned income as a result of a grant or contract, the income had to be repaid to the public body. Since February 2005, the Treasury has allowed greater flexibility and assets can be used as collateral, and the funder can allow the organisation to keep income generated, provided the income is used to achieve the same general outcomes as originally agreed.
