The recent government decision to award a contribution agreement to the charitable organization known colloquially as WE has created a great deal of political controversy. While much of the controversy will ultimately play out in newspapers and ballot boxes, it raises certain questions about the way charities, and WE in particular, handle liability and risk. We wanted to break down the overall structure of the WE Group (defined below), what this contribution agreement was and how it would have worked within the WE Group structure.
On June 25, 2020, the federal government announced the Canada Student Service Grant, a program that would allow students to volunteer their time in exchange for money. The government entered into an agreement called a contribution agreement with one of the entities in the WE Group, the WE Foundation. Pursuant to the agreement, excerpts of which have been made publicly available, $19.5 million was to be allocated for the initial cohort of 20,000 placements of students. If successful, additional funds would be allocated for up to $43.53 million out of the total budget of $912 million. The terms of this agreement were scrutinized by opposition parties, members of which raised a series of ethical, political and legal questions, culminating in a review by the Standing Committee on Finance of the House of Commons (FINA) into these matters.
While we are not ethicists or politicians, we do have an interest in the shape and form of charitable law, so we wanted to separate the legal questions raised during this process and offer our analysis of them. We identified three major questions that were legal in nature that we wanted to review:
- Is there a difference between a “contribution agreement” and a “contract” at law?
- Is the use of WE Foundation as the party to the agreement a reasonable approach?
- Were the safeguards against personal gain contained in the agreement standard for commercial agreements?
Is there a difference between a “contribution agreement” and a “contract” at law?
During the review conducted by FINA, some of the individuals testifying were keen to clearly distinguish between a “contract”, as members of FINA were describing the agreement, and a “contribution agreement”, as was preferred by those testifying. For outside observers, it may have raised the question: what is the difference? Under the common law, we could find no established distinction between a contribution agreement and a contract. As far as we can tell, this particular agreement contains an offer, an acceptance and consideration flowing both ways, which makes it a regular contract under the common law.
It appears, however, that a contribution agreement has a special meaning in government contracting. Under a contribution agreement, the administrator of the government program submits expense reports in exchange for funds. However, a portion of the money is paid before it is expensed in order to help fund the program. Since a contribution agreement involves an act of public service, it does not undergo the same bidding process as a regular government service agreement, which is designed to benefit only the government. This allows the initial start up of programs to be significantly faster.
In the case of this agreement, given the COVID-19 pandemic, this may have been what made it an attractive option to ensure funds reached students expeditiously. However, this expedited process does not necessarily mean that corners were cut. Contribution agreements undergo extensive audits and reviews throughout the term of the agreement to ensure the expenses submitted are appropriately eligible to be reimbursed. According to the Assistant Deputy Minister of Employment and Social Development, Stephanie Hébert, there are checks and balances to ensure legitimacy. One of these checks and balances, in the case of this agreement, was the creation of a payment schedule that clearly identified the program activities that WE Foundation and its affiliates were to undertake to support the design and delivery of the program.
Is the use of WE Foundation as the party to the agreement a reasonable approach?
As a second item, FINA examined the use of WE Foundation as the contracting party to the agreement. As some of the more critical members of FINA pointed out, WE Foundation is a corporation with no employees, no assets, and an original purpose of being a real estate holding company that has since been amended. This raised some overall organizational questions about how the “WE Group”, meaning the entities that are affiliated with WE Foundation, came to be. Questioning by FINA revealed a partial list of the entities in the WE Group that included:
- WE Charity U.S.
- WE Charity Canada
- WE Charity U.K.
- ME to WE Foundation
- WE Well-being Foundation
- WE Well-being Foundation America
- We365 LP
- We365 Holdings
- We365 GP Inc.
- Imagine 1 Day International Organization
- ME to WE Social Enterprise.
To an outside observer, such a use of elaborate corporate structuring may appear suspect. In fact, the standard not-for-profit model is to use a holding company (or foundation) to accumulate donations and an operating company to deliver services. However, more elaborate entities are not necessarily a sign of wrong-doing. Some may exist for jurisdictional issues, which may be the reason for WE Charity U.S. or WE Charity U.K, for instance. Others might exist if their activities could result in the accumulation of profit, which may be the reason for We365 LP, We365 GP Inc. and We365 Holdings, three entities that based on naming conventions may be organized into an investment fund of sorts (it is unclear whether these are also related to the We365 app).
The decision to execute the contribution agreement with WE Foundation, however, was questioned because WE Foundation appeared to neither be an operating company that was already delivering services, nor a holding company that had already accumulated donations. WE Foundation, based on the testimony we reviewed appeared to have nothing to it, from an assets or obligations perspective, prior to the execution of the agreement. This created a situation where, in the event of a claim against the WE Foundation by the government if the agreement were breached, there would be limited recourse available to the government, especially if any portion of the funds advanced by the government had already been expended.
During the review, FINA heard testimony that to address this risk, WE Foundation was required to purchase insurance in connection with the delivery of services under the agreement. We do not know the details of insurance portions of the agreement, based on the information provided. However, since WE Foundation had no assets prior to the execution of the agreement, it is unclear from where such funds were sourced. Certainly, the standard formulation is for a corporation to use existing funds to purchase insurance.
Overall, while it was reasonable for WE Group to want to use the WE Foundation to deliver the services under the agreement, the more commonly used approach in this scenario would have been to have the government contract with a regular operating WE Group entity and to negotiate appropriate limitations of liability and insurance terms for such an agreement to balance WE Group’s risk allocation.
Were the safeguards against personal gain contained in the agreement standard for commercial agreements?
The final point of contention at FINA that had a legal aspect to it was whether the Kielburgers could benefit personally from the agreement under the drafting of it. Certainly, given the media coverage of the agreement in certain corners, one could get the impression that the agreement was there to line the pockets of the Kielburgers.
While we do not have access to the full agreement, the details we do have paint a much more complex picture. The Kielburgers correctly noted in their testimony that there was no way for them to make a profit on the agreement. The agreement itself does not permit it and the Kielburgers are not paid through WE Foundation. However, the members of FINA considered this only a partial explanation, with one member going so far as to label the discussion of “profit” as a red herring in light of other terms in the agreement. While the Kielburgers were testifying truthfully, their comments, the assertion ran, was not the full picture.
At issue was the reimbursement of expenses pursuant to the agreement, which could have permitted salaries for individuals at other entities in the WE Group, such as the Kielburgers, to be compensated for their work on the delivery of the services under the agreement. That is not altogether surprising, however. WE Group employs people on a full-time basis to do work toward their initiatives, including the Kielburgers. If the Kielburgers are personally overseeing the delivery of the services under the agreement as additional work to their regular services provided to the WE Group, it would not be surprising if they were compensated in some way. While we may wish all social entrepreneurs would provide their services out of the goodness of their hearts, paying people for labour, even for charitable labour, is not necessarily scandalous.
The challenge here is that the terms of the agreement, per our understanding based on the disclosed materials, allowed WE Foundation to assess and demand compensation for expenses in its sole discretion. This would mean that there was no contractual check on the expensing process on the government’s end.
If it is the case that WE Foundation had sole discretion, to many that might sound like a failure of negotiation on the part of the government, but the realities of commercial drafting are a little more complex. If, for instance, the government had sole discretion to strike any claimed expenses from WE Foundation, that formulation would be similarly unfair to WE Foundation. The obvious solution would be to give neither party sole discretion, but forcing parties to work reasonably to agree on expenses can be more of a headache than it is worth. It can involve creating committees, having a staged dispute resolution process and potentially going to mediation, arbitration or court to resolve the issue. None of these options would have been very popular at the time of negotiation given the urgency in delivering the services.
That said, getting sole discretion over the expenses of the agreement would be a clear negotiating win for WE Foundation and should be viewed as such. More importantly, it creates a great deal of ambiguity about how the agreement functions as a contribution agreement in substance, even if it is one in form. If expenses submitted paid pursuant to the agreement are done at the sole discretion of WE Foundation, how does the audit process initially described in the first portion of this article have any teeth? Without a contractual enforcement mechanism, an audit finding that some expenses were inappropriate would be akin to closing the barn door after the horses were already out.
As we stated at the beginning, the purpose of our analysis here is not to evaluate the ethical or political ramifications of the form or substance of the agreement, but rather to take a look at some of the legal intricacies that were involved in its negotiation. Without a complete contract to review, our analysis is qualified by what we have actually been able to access through public records, but it does raise some questions about how the agreement was negotiated. That said, negotiating agreements is a challenging task at the best of times. The setting under which the agreement was negotiated would not, to anyone’s mind, be likely to be considered ideal negotiating settings. While it is unfortunate that some of these drafting and structure issues could not be addressed more fully, it is perhaps the nature of rushing to unveil a program in the midst of a crisis that made the final version of the agreement a necessary outcome.
- Evidence of the Standing Committee on Finance – Evidence No. 41↩
- Evidence of the Standing Committee on Finance – Evidence No. 45↩
- Evidence of the Standing Committee on Finance – Evidence No. 49↩