the restricted charitable gift as third-party … restricted charitable gift as...

THE RESTRICTED CHARITABLE GIFT AS THIRD-PARTY-BENEFICIARY CONTRACT

William P. Sullivan*

Author’s Synopsis: Although American law has traditionally barred the donor of a restricted charitable gift from enforcing the terms of his or her gift, most American jurisdictions now permit donors to enforce gift restrictions under at least some circumstances. The nature and extent of the right of enforcement, however, remain uncertain. This Article argues that the uncertainty surrounding enforcement is best resolved by treating restricted charitable gifts as third-party-beneficiary con-tracts. The Article presents a contractarian analysis of restricted charitable gifts, subjects alternative analyses to conceptual and prac-tical critique, and suggests several modifications to the American Law Institute’s forthcoming Restatement of the Law of Charitable Nonprofit Organizations to facilitate appropriate contractual interpretation of restricted-charitable-gift instruments.

I. INTRODUCTION ........................................................................... 80 II. THE RESTRICTED CHARITABLE GIFT AS CONTRACT .......... 85 A. The Third-Party-Beneficiary Contract Model ........................ 85 1. Compatibility with Contract Law ..................................... 87 2. Compatibility with the Law of Donative Transfers .......... 90 3. Compatibility with the Law of Charity ............................. 91 B. Consequence for Enforcement ................................................ 93 1. Ineffectiveness of Existing Law ........................................ 93 2. The Contractarian Solution ............................................. 96 3. Remedies .......................................................................... 96 C. Answering Objections to the Contractarian Analysis ............. 97 1. Standard of Intent ............................................................ 97 2. Consideration ................................................................... 99 3. Donative Transfers on Death ......................................... 102 4. Charitable Contribution Deduction ............................... 104 a. Quid pro quo Test ................................................... 105 b. Complete Transfer .................................................. 106 5. Cy pres ........................................................................... 107

* Legal History Fellow, Yale Law School; Ph.D. candidate, Departments of Classics and History, University of Chicago. For comments on earlier drafts I am grateful to Evelyn Brody, Christian Burset, José Cabranes, Thomas Gallanis, Richard Helmholz, John Langbein, and Noelle Lyle.

80 52 REAL PROPERTY, TRUST AND ESTATE LAW JOURNAL

III. DEFAULT CLASSIFICATION OF RESTRICTED CHARITABLE GIFTS ........................................................................................ 108

A. Third-Party-Beneficiary Contract as Default ........................ 108 B. Personal Obligation .............................................................. 109 C. Fee Simple Defeasible .......................................................... 110 D. Restraint on Alienation ......................................................... 112 E. Servitude ............................................................................... 112 F. Charitable Trust .................................................................... 113 IV. INTERPRETING RESTRICTED CHARITABLE GIFTS IN THE

RESTATEMENT OF THE LAW OF CHARITABLE NONPROFIT ORGANIZATIONS ...................................................................... 114

A. Contract as Default ............................................................... 114 B. Acceptance and Capacity ...................................................... 115 C. Standard of Intent ................................................................. 115 D. Enforcement ......................................................................... 116 V. CONCLUSION ............................................................................. 119

I. INTRODUCTION The restricted charitable gift is currently the object of a seemingly

arcane doctrinal controversy: can a gift be treated as a contract? A restricted charitable gift is a transaction in which a donor transfers

wealth to a charity,1 subject to a restriction specifying what the charity may or may not do with the property.2 The restriction imposes an enforceable duty on the donee.3 A typical example: an alumnus gives money to his alma mater with an instruction that the money be used for

1 For purposes of this Article, I take “charity” to mean any entity that is organized to further a charitable purpose and that satisfies the related requirements for being treated as a “public charity” under section 501(c)(3) of the Internal Revenue Code. See I.R.C. § 501(c)(3) (setting forth federal tax law’s requirements for treatment as a public charity); see also MARION R. FREMONT-SMITH, GOVERNING NONPROFIT ORGANIZATIONS 3-4 (2004) (reviewing the legal definition of “charity”). All statutory citations in this Article refer to the current statute unless otherwise indicated. Any references to “I.R.C.” refer to the Internal Revenue Code, Title 26, United States Code.

2 Compare PRINCIPLES OF THE LAW OF CHARITABLE NONPROFIT ORGS. § 400 (AM. LAW INST., Tentative Draft No. 2, 2009), which distinguishes between charitable trusts and restricted charitable gifts. For purposes of discussion in this Article, I depart from the Principles by treating gifts made in trust and gifts not made in trust as both falling under the heading of “restricted charitable gift.”

3 See, e.g., Lefkowitz v. Lebensfeld, 417 N.Y.S.2d 715, 720 (App. Div. 1979) (discussing the enforceability of a restriction placed on the use of a charitable gift).

SPRING 2017 Restricted Charitable Gift 81

the upkeep of the school gym or to fund scholarships for students from Nebraska.

In principle, a restricted charitable gift may take any of several doctrinal forms depending on the circumstances. Often the gift is in trust, with the trustee directed to administer the trust corpus in accordance with one or more restrictive terms. Another device is a gift of property in fee simple defeasible in which the restriction is embodied in the words of the condition subsequent. For example: a donor conveys land to a school district for a schoolhouse on condition that the land revert to the donor if the district ceases to use the property for a school.4 If the gift is real property, the land may also be transferred in fee simple absolute but subject to a servitude governing the use of the property.5

One potential doctrinal form for the restricted charitable gift—contract—has met with hostility in the academic literature. Several court decisions,6 as well as some donors,7 have treated restricted charitable gifts as enforceable contracts. The premise of these cases is that the terms of a restricted charitable gift may constitute a contract that the donor, as promisee, is entitled to enforce against the charity. Scholars, however, have criticized the contractarian analysis of restricted charitable gifts by arguing that restricted charitable gifts violate the con-sideration requirement of contract law and by raising other conceptual

4 See Thompson v. Godfrey, 379 P.2d 269 (Kan. 1963). 5 See RESTATEMENT (THIRD) OF PROP.: SERVITUDES § 2.1 cmt. d (AM. LAW INST.

2000) (noting that a servitude may be created by donative transfer). 6 See, e.g., L.B. Research & Educ. Found. v. UCLA Found., 29 Cal. Rptr. 3d 710

(Cal. Ct. App. 2005) (holding that a restricted charitable gift to establish an endowed medical-school professorship constituted a contract and that the donor therefore had standing to bring an enforcement suit); Glenn v. Univ. of S. Cal., No. B151776, 2002 WL 31022068 (Cal. Ct. App. Sept. 10, 2002) (holding that a gift agreement to endow a professorship constituted a contract and that the donor had a cause of action); Family Fed’n for World Peace & Unification Int’l v. Moon, No. 2011 CA 003721B, 2012 WL 3070965 (D.C. Super. Ct. June 19, 2012) (granting plaintiffs standing to bring a breach-of-contract claim for breach of the terms of a restricted charitable gift to fund a church foundation); Stock v. Augsburg Coll., No. C1-01-1673, 2002 WL 555944 (Minn. Ct. App. Apr. 16, 2002) (holding that the plaintiff donor’s claim was barred by the statute of limitations but stating that the donor could otherwise have brought a breach-of-contract claim against the donee college for failure to name a building wing after the donor); Reed Found., Inc. v. Franklin D. Roosevelt Four Freedoms Park, LLC, 964 N.Y.S.2d 152 (App. Div. 2013) (accepting the plaintiff’s breach-of-contract claim for breach of a condition of a restricted charitable gift to help fund a park and ordering specific enforcement).

7 See Evelyn Brody, From the Dead Hand to the Living Dead: The Conundrum of Charitable-Donor Standing, 41 GA. L. REV. 1183, 1188 (2007).


and practical objections.8 The received scholarly wisdom is embodied in tentative drafts for the American Law Institute’s Restatement of the Law of Charitable Nonprofit Organizations project,9 which rejects a con-tractarian analysis of restricted charitable gifts in favor of an analysis implicitly grounded in the law of property.10

The Contractarian Argument. My argument is that contract provides both an acceptable structure of choice for individual gift instruments and the best available default classification for restricted charitable gifts. At bottom, the restricted charitable gift is a deal—a third-party-beneficiary

8 See RICHARD HYLAND, GIFTS: A STUDY IN COMPARATIVE LAW 575, 579–80 (2009)

(objecting to a contractarian analysis of the gift on the grounds that a gift lacks considera-tion and thus cannot be a contract under Anglo-American law; that a gift “involves no promises and creates no obligations” and thus fails to accord with the common-law notion of contract as being an exchange of “unperformed obligations”; and that treatment of a gift as a contract conflicts with the ordinary understanding of what the English word “gift” means); Brody, supra note 7, at 1192, 1258–59 (objecting to a contractarian analysis on the grounds that “allow[ing] competent parties to agree to any terms they negotiate” is an inappropriately “laissez-faire” approach to non-profit law; that permitting gifts to be made in contract form “ratchets up the level of lawyering and negotiating for too many major restricted charitable gifts”; that many restricted charitable gifts are testamentary devises and thus not the product of normal contract bargaining; implicitly, that application of contract doctrine may prevent the use of cy pres; that “although a restricted [charitable] gift constitutes an agreement between the donor and the charity, it is not merely a contract in the private law sense—rather, an unascertainable group consti-tutes the true beneficiaries”; and that application of contract law may “over-privileg[e] ‘donor intent’” when in fact the term donor intent serves “as shorthand for a web of actors and actions” and when the long timeframe of charitable gifts “argues for increased scrutiny . . . of claims about what the donor intended”); Ronald Chester, Grantor Standing to Enforce Charitable Transfers Under Section 405(c) of the Uniform Trust Code and Related Law: How Important Is It and How Extensive Should It Be?, 37 REAL PROP. PROB. & TR. J. 611, 630–35 (2003) (refusing to apply a contractarian analysis to gifts, impliedly out of fear that any donor could sue to enforce the terms of a gift, but nonetheless arguing that an express gift agreement with an explicit reservation of standing is an enforceable contract because of the nature of the exchange between donor and charity, in which “[t]he grantor receives the right to control the use of the gift; in exchange, the charity is able to use the gift within the agreed-upon parameters”).

9 The Restatement project was upgraded from a Principles of the Law project in 2014. I cite pre-2014 drafts under the name Principles of the Law of Charitable Nonprofit Organizations but refer to the combined project under the name of the Restatement.

10 I infer a property-based analysis from PRINCIPLES OF THE LAW OF CHARITABLE NONPROFIT ORGS. ch. 4, topic 3, intro. note, reporter’s note 4 (AM. LAW INST., Tentative Draft No. 2, 2009) (rejecting a contractarian analysis of restricted charitable gifts); see also id. § 400 cmt. a (distinguishing between restricted charitable gifts and trusts). But see id. ch. 4, intro. note, at 4 (implying disapproval of application of property-law doctrine to restricted charitable gifts).


contract in which the donor transfers property to the charity in considera-tion of the charity’s promise to respect the donor’s restriction on the use of that property. Although I concede that alternative analyses remain suitable under particular circumstances, the best description of restricted charitable gifts lies in contract.

Gift Enforcement. The doctrinal analysis of restricted charitable gifts is about more than just labeling. The American Law Institute’s reluc-tance to endorse a contractarian analysis of restricted charitable gifts in the Restatement of the Law of Charitable Nonprofit Organizations project has important practical implications for the law governing en-forcement of gifts. Until recently, American law denied the donor the right to enforce a restricted charitable gift,11 reserving that right to the state attorney general or to some other official responsible for charity oversight.12 But responding to the criticism that this rule sometimes prevented effective enforcement of the terms of charitable gifts,13 most American jurisdictions have wholly or partly abandoned the prohibition and now grant the donor a right of enforcement in some or all cases.14

11 See, e.g., Carl. J. Herzog Found., Inc. v. Univ. of Bridgeport, 699 A.2d 995, 997

(Conn. 1997) (“At common law, a donor who has made a completed charitable contribution, whether as an absolute gift or in trust, had no standing to bring an action to enforce the terms of his or her gift or trust . . . .” (footnote omitted)); PRINCIPLES OF THE LAW OF CHARITABLE NONPROFIT ORGS. § 670(b) cmt. c (AM. LAW INST., Tentative Draft No. 3, 2011) (“Traditionally, the settlor of a charitable trust did not, by such status alone, have standing to sue to enforce the trust. . . . Courts generally extended this trust approach to deny standing to donors of restricted [charitable] gifts to corporate charities, leaving enforcement of the charity’s performance of a charitable gift to the attorney general . . . .” (citation omitted)).

12 For the policy justification for this rule, see Smithers v. St. Luke’s-Roosevelt Hospital Center, 723 N.Y.S.2d 426, 439 (App. Div. 2001) (“In holding that standing is generally restricted to the Attorney General, our courts have pointed out that a limited standing rule is necessary to protect charitable institutions from ‘vexatious litigation’ by parties who do not have a tangible stake in the outcome of the litigation.” (citation omitted)).

13 See FREMONT-SMITH, supra note 1, at 336 (summarizing criticisms of the rule). 14 Under current law, the donor of a restricted charitable gift that is treated as falling

under the heading of property has a right of enforcement under New York and North Carolina law and in some cases under Iowa statute. See IOWA CODE § 540A.106(5) (granting a right of enforcement to a donor under certain circumstances); N.C. GEN. STAT. § 36C-4-405.1(b); Smithers, 723 N.Y.S.2d at 426. The donor of a restricted charitable gift that is deemed to have been made in trust has a right of enforcement in all but one of the thirty-one jurisdictions that have adopted the Uniform Trust Code as of early 2016. UNIF. TRUST CODE § 405(c) (amended 2010), 7C U.L.A. 486 (2006) (granting a right of enforcement to “[t]he settlor of a charitable trust, among others”); UNIF. TRUST


The result of this shift from non-enforceability to enforceability has been to create confusion about what exactly this right of enforcement is and how far it should extend. Is it transferable to a third party? Can it survive the death of the donor? If so, for how long? In the absence of a coherent conceptual account of the juridical nature of the restricted charitable gift, courts are left to improvise by granting or denying donor enforcement according to their view of the facts in individual cases. Such uncertainty in existing law hinders donors and charities from making reliable arrangements for gift enforcement ex ante.

Although relatively few violations of gift restrictions become public knowledge, the amounts at stake in those cases that do become public are often of considerable economic significance. Litigation in the 2000s over the Robertson family’s restricted charitable gift to Princeton University, for example, challenged the control of more than $900 million.15 The university eventually paid $100 million to settle the case in 2008.16 Gift litigation between the Georgia O’Keeffe Foundation and Fisk University involved O’Keeffe canvases worth more than $60 million.17 In the leading New York case, a gift to a hospital worth $10 million was in controversy.18

CODE Table of Jurisdictions Wherein Act Has Been Adopted (amended 2010), 7C U.L.A. 198 (Supp. 2016) (listing jurisdictions that have adopted the Uniform Trust Code as of early 2016). But see MD. CODE ANN., EST. & TRUSTS §§ 14.5-101 to -1006 (omitting the settlor enforcement provision from the Maryland version of the Uniform Trust Code). Non-uniform versions of the settlor enforcement provision are the following: MASS. GEN. LAWS ANN. ch. 203E, § 405(c); MICH. COMP. LAWS § 700.7405(3); MONT. CODE ANN. § 72-38-405(3); N.H. REV. STAT. ANN. § 564-B:4-405(c); N.C. GEN. STAT. § 36C-4-405.1(a); N.D. CENT. CODE ANN. § 59-12-05(3); OR. REV. STAT. § 130.170(3); 20 PA. STAT. AND CONS. STAT. ANN. § 7735(c); S.C. CODE ANN. § 62-7-405(c); VT. STAT. ANN. tit. 14A, § 405(c); W. VA. CODE ANN. § 44D-4-405(c); WIS. STAT. ANN. § 701.0405(3). Non-uniform statutes in Delaware and Iowa and judicial precedent in New York also provide for settlor enforcement. See DEL. CODE ANN. tit. 12, § 3303(b); IOWA CODE ANN. § 633A.5106; Smithers, 723 N.Y.S.2d at 426 (holding that a donor or settlor and the donor or settlor’s personal representative have a right to enforce the terms of a gift or trust); McQuillan v. Holy Land Art Co., No. 0116134/2006, 2008 WL 627585 (N.Y. Sup. Ct. Feb. 22, 2008) (limiting the holding of Smithers to confer a right of enforcement only on the donor and the donor’s personal representative, not on heirs or descendants).

15 See Tamar Levin, Princeton Settles Money Battle over Gift, N.Y. TIMES, Dec. 11, 2008, at A29.

16 See id. 17 See Georgia O’Keeffe Found. v. Fisk Univ., 312 S.W.3d 1, 4 (Tenn. Ct. App.

2009). 18 See Smithers, 723 N.Y.S.2d at 426.


Recognizing the contractarian basis of restricted charitable gifts would help to resolve the confusion surrounding enforcement in such disputes. Contract law is rooted in the principle of private autonomy.19 Contract gives effect, within broad limits, to the consensual arrange-ments of private parties. This Article suggests that, in keeping with contract law’s core principle of private autonomy, courts should look primarily to the intent of the parties in determining whether a litigant has the right to enforce a restricted charitable gift.

I develop this argument in the pages that follow. Part II sets forth and defends a contractarian analysis of restricted charitable gifts. Part III makes the case for treating restricted charitable gifts as third-party-beneficiary contracts and subjects alternative analyses to conceptual and practical critique. Part IV concludes by suggesting several modifications to the Restatement of the Law of Charitable Nonprofit Organizations to facilitate appropriate contractual interpretation of restricted-charitable-gift instruments.

II. THE RESTRICTED CHARITABLE GIFT AS CONTRACT A. The Third-Party-Beneficiary Contract Model

In the doctrinal literature and case law, the restricted charitable gift, like other types of gift, is usually treated as a matter of property law.20 The two common classifications for restricted charitable gifts are property and trust; trust law is generally regarded as a branch of property law.21 In many jurisdictions, the default classification varies depending on the organizational form of the charity that accepts the gift. In those

19 See Lon L. Fuller, Consideration and Form, 41 COLUM. L. REV. 799, 806 (1941).

Regarding the significance of the principle of private autonomy for almost all contemporary theories of contract, see most recently Robin Kar, Contract as Empowerment, 83 U. CHI. L. REV. 759, 806–09 (2016).

20 Donative transfers—the area of law that includes gifts—fall under the law of property. See, e.g., RAY ANDREWS BROWN & WALTER B. RAUSHENBUSH, THE LAW OF PERSONAL PROPERTY § 1.4 (3d ed. 1975) (noting that property law encompasses donative transfers of personalty). Donative transfers are covered for the most part in the Restatements of Property. See generally RESTATEMENT (THIRD) OF PROP.: WILLS & OTHER DONATIVE TRANSFERS (AM. LAW INST. 2003); RESTATEMENT (SECOND) OF PROP.: DONATIVE TRANSFERS (AM. LAW INST. 1959). For a definition of gift, see RESTATEMENT (THIRD) OF PROP.: WILLS & OTHER DONATIVE TRANSFERS § 6.1(a) (defining a gift as a transaction in which “the donor . . . transfer[s] an ownership interest to the donee without consideration and with donative intent”).

21 See, e.g., RESTATEMENT (THIRD) OF TRUSTS ch. 1, intro. note (AM. LAW INST. 2003) (calling trust law “closely allied to the subject of Property”).


jurisdictions, a restricted charitable gift to a charity organized as a trust is under most circumstances a gift in trust,22 whereas a restricted charitable gift to a charity organized as a corporation is treated as property unless it is made expressly in trust,23 meaning that the charity holds the gift in fee simple absolute but subject to a duty—exactly what type of duty is uncertain—to adhere to the donor’s restriction.24 In other jurisdictions, older authority implies that every restricted charitable gift will be treated as a gift in trust, meaning that the charity holds the gift in trust for the specific, restricted charitable purpose that the donor indicates.25

In a contractarian analysis, by contrast, the restricted charitable gift is seen as a deal—a third-party-beneficiary contract—between donor and donee. In this deal, the donor transfers property in fee simple absolute to the donee. In return, the donee charity agrees to use the property as restricted. The donor transfers the gift property to the donee charity in consideration of the donee’s promise to use the gift property for the benefit of the charity’s beneficiaries or for its charitable purposes.26

22 Unless the trust itself controls a subsidiary corporation, there is no entity in a

charitable trust that can hold both legal and equitable title to trust property. See id. at 9–14.

23 See Lyme High Sch. Ass’n v. Alling, 154 A. 439, 441–42 (Conn. 1931); Persan v. Life Concepts, Inc., 738 So. 2d 1008, 1011–12 (Fla. Dist. Ct. App. 1999); Grear v. Sifford, 7. N.E.2d 371, 375 (Ill. App. Ct. 1937); Bradley v. Hill, 42 P.2d 580, 581 (Kan. 1935); Conner v. Trinity Reformed Church, 99 A. 547, 548 (Md. 1916); Watkins v. Bigelow, 100 N.W. 1104, 1109 (Minn. 1904); Hardt v. Vitae Found., Inc., 302 S.W.3d 133, 139–40 (Mo. Ct. App. 2009); St. Joseph’s Hosp. v. Bennett, 22 N.E.2d 305, 307 (N.Y. 1939); In re Found. for Anglican Christian Tradition, 103 A.3d 425, 429–30 (Pa. Commw. Ct. 2014); In re Havsgaard’s Estate, 238 N.W. 130, 131 (S.D. 1931); Dodge v. Trs. of Randolph-Macon Woman’s Coll., 661 S.E.2d 805, 807–08 (Va. 2008).

24 For a possible doctrinal account of the non-trust restricted charitable gift in Anglo-American law, see WILLIAM HENDERSON, JONATHAN FOWLES & JULIAN SMITH, TUDOR ON CHARITIES 319 (10th ed. 2015) (stating, in reference to English law, that a donee may be subject to a “personal liability enforceable by the equitable jurisdiction in personam” to satisfy the terms of a non-trust gift). For a discussion on enforcement of this duty, see Lefkowitz v. Lebensfeld, 417 N.Y.S.2d 715, 720 (App. Div. 1979) (“[A]lthough gifts to a charitable [corporation] do not create a trust in the technical sense, where a purpose is stated a trust will be implied, and the disposition enforced by the Attorney-General, pursuant to his duty to effectuate the donor’s wishes.”).

25 See J.W. Oler, Annotation, Nature of Estate Created by, and Enforceability of, Provision in Devise or Bequest to Charitable, Religious, or Educational Corporation as to Particular Purpose of the Corporation for Which It Shall Be Used, 130 A.L.R. 1101, 1121–24 (1941).

26 The descriptive account presented here must be distinguished from one in which the donative transfer and an agreement imposing a restriction on the use of the transferred


1. Compatibility with Contract Law

The contract-based model of restricted charitable gifts falls appropri-ately within the scope of the central principle of contract law: the principle of private autonomy. In obedience to this principle, contract law gives effect within very broad limits to the intent of the parties, allowing the parties to create highly customized rights and duties that adapt the default rules of contract to the circumstances of the deal.27 By contrast, property law is characterized by a fixed number of forms—the fee simple absolute, the term of years, and so forth—and by its reliance on mandatory rules.28 Thomas Merrill and Henry Smith have argued29 that this conceptual division between contract and property is explained by the need to reduce the information costs that the creation of new property rights imposes on third parties. According to Merrill and Smith, when parties create a customized regime of duties and rights by contract, their choices affect only the parties themselves and any potential suc-cessor in interest, who must expend resources to determine the exact juridical nature of the rights and duties that he or she is acquiring.30 But when parties attempt to create a new, customized type of property right, they force unrelated market participants to expend additional resources to determine whether the property rights they are acquiring belong to the new customized property type or to one of the existing types.31 In Merrill and Smith’s hypothetical example, parties who attempt to create an idio-syncratic property interest that grants title to a watch to one person on Mondays and to another person on all other days of the week impose information costs on other market participants, who must devote resources to making sure that other watches available in the market are

property are understood as two separate transactions. For this “gift-plus-contract” account, see Chester, supra note 8, at 632–35. Such an account is unconvincing because the agreement, consisting merely of the donee’s bare promise to abide by a specified restriction on its use of the prior gift, lacks consideration and is therefore unenforceable. Under established law, the past-consideration rule applies only to cases in which the promisor has been unjustly enriched at the promisee’s expense. It is thus without bearing on restricted charitable gifts. See RESTATEMENT (SECOND) OF CONTRACTS § 86 cmt. b (AM. LAW INST. 1981) (discussing the scope of the past-consideration rule).

27 See Thomas W. Merrill & Henry E. Smith, Optimal Standardization in the Law of Property: The Numerus Clausus Principle, 100 YALE L.J. 1, 3 (2000).

28 See id. at 3. 29 See id. at 8. 30 See id. at 27. 31 See id.


not subject to similar ownership regimes.32 By prohibiting such customi-zation of property interests, standardized property forms lessen the informational burden on parties unrelated to a property transaction by freeing them from having to learn the details of a unique legal arrange-ment.33

In this schema, restricted charitable gifts fit much more readily within the domain of contract. The transfer of a restricted charitable gift is a transfer of property.34 But the restricted charitable gift’s charac-teristic customizing feature—the restriction—imposes information costs only on the contracting parties. No market in similar property interests is affected by the parties’ choice of terms for a restricted charitable gift.

Restricted charitable gifts also fit within the specific legal framework for third-party-beneficiary contracts. In a third-party-beneficiary con-tract, promisor and promisee confer a benefit on a third party not privy to the agreement. Such a contract may or may not grant the beneficiary a right of enforcement. The Restatement (Second) of Contracts recognizes a third-party beneficiary’s enforceable right to performance in cases in which performance satisfies a debt to the beneficiary or the promisee intends “to give the beneficiary the benefit” of performance.35 If court recognition of a right of enforcement is not “appropriate to effectuate the intention[] of the parties,” the beneficiary will not be permitted to enforce the gift.36

This analytical structure suits the typical restricted charitable gift. Ordinarily, the donor and donee intend to use the gift property for one or more charitable purposes that benefit the general public, but they do not intend for specific members of the public to have the right to enforce the terms of the gift.37 As elsewhere in contract law, the core principle behind the third-party-beneficiary contract is the principle of private autonomy. If the contracting parties intend to benefit an indefinite group

32 See id. 33 See id. at 37. 34 See supra note 23. 35 RESTATEMENT (SECOND) OF CONTRACTS § 302(1)(b) (AM. LAW INST. 1981). 36 Id. § 302(1). 37 In cases in which a donor has made a restricted charitable gift intended to benefit

a discrete, easily ascertainable group of beneficiaries, courts sometimes recognize a beneficiary’s right of enforcement under the so-called “special interest” doctrine. See, e.g., Hooker v. Edes Home, 579 A.2d 608, 612–13 (D.C. 1990). Such a beneficiary can be understood in contractarian terms as an “intended beneficiary” within the meaning of Restatement (Second) of Contracts section 302(1)(b).


of beneficiaries who will not have a right of enforcement—as in the archetypical restricted charitable gift—the principle of private autonomy will protect the contracting parties’ wishes.38

If the restricted charitable gift is suited to the contract form, one might wonder why the third-party-beneficiary contract is not already the usual means of describing this type of gift. The most probable explana-tion is historical: the third-party-beneficiary contract was not widely recognized in Anglo-American law until well into the twentieth cen-tury.39 In the common law of the nineteenth century, a party who was not privy to a contract generally had no right to enforce it.40 In the United States, the right of a third-party beneficiary to enforce a contract was first recognized by the Court of Appeals of New York in 1859.41 Widespread recognition by American jurisdictions followed in the first decades of the twentieth century, largely through the efforts of contracts scholar Arthur Corbin.42 In England, recognition required the intervention of Parliament, which authorized the third-party-beneficiary contract by statute only in 1999.43 Into the twentieth century, a more natural form for the restricted charitable gift was provided by the fee simple defeasible.44 A donor who wished to be able to enforce a gift could draft a restriction as a special limitation, which would cause the donee’s interest to expire automat-ically on violation of the restriction,45 or as a condition subsequent,

38 See L. COMM’N, REP. NO. 242, PRIVITY OF CONTRACT 39-52 (1996) (Eng.) (discussing the policy justifications for enforcement of third-party-beneficiary contracts).

39 See generally Anthony Jon Waters, The Property in the Promise: A Study of the Third Party Beneficiary Rule, 98 HARV. L. REV. 1109 (1985).

40 The classic case is Tweddle v. Atkinson (1861) 121 Eng. Rep. 762; 1 B&S 393 (QB), http://www.bailii.org/ew/cases/EWHC/QB/1861/J57.htm (“[I]t is now established that no stranger to the consideration can take advantage of a contract, although made for his benefit.”). For a historical account of the gradual development, culminating in the nineteenth century, of a strict privity requirement in English contract law, see generally VERNON V. PALMER, THE PATHS TO PRIVITY (1992).

41 See Lawrence v. Fox, 20 N.Y. 268 (1859); see also Waters, supra note 39, at 1116–48 (detailing the history of Lawrence).

42 See Waters, supra note 39, at 1148–72 (recounting Corbin’s efforts and influence).

43 See Contracts (Rights of Third Parties) Act 1999, c. 31 § 1 (Eng., N. Ir. & Wales); see also Neil Andrews, Strangers to Justice No Longer: The Reversal of the Privity Rule Under the Contracts (Rights of Third Parties) Act 1999, 60 CAMBRIDGE L.J. 353, 353–54 (2001).

44 On this form see RESTATEMENT OF PROP. § 16 (AM. LAW INST. 1936). 45 See id. § 23 (defining the special limitation); see also id. § 23 cmt. d (giving the

example of a restricted charitable gift of land made subject to a special limitation); In re


which would empower the donor or his or her successor in interest to terminate the donee’s interest at will if the donee violated the restric-tion.46 These mechanisms, which vested the donor with a possibility of reverter or power of termination,47 were made much less attractive in American law by the adoption of Treasury regulations in 1958 that denied a charitable contribution deduction to a donor of a defeasible property interest unless defeasance “appeared to have been highly im-probable on the date of the gift.”48 The underlying deal structure of restricted charitable gifts has remained unchanged, but changes in con-tract law and in federal tax law make the third-party-beneficiary contract more suitable and the fee simple defeasible less suitable for restricted charitable gifts now than at the beginning of the twentieth century.

2. Compatibility with the Law of Donative Transfers

The contractarian analysis is equally consistent with the fundamental policy of American donative-transfer law: freedom of disposition.49 The donor’s reasonable choice of doctrinal form for the disposition, here, a bilateral contractual arrangement rather than a unilateral transfer, is simply one further means of exercising this broad freedom.50 In the civil law, jurists going back at least as far as Savigny have recognized that different donative transfers may be described in terms of different doctrinal categories, depending on the circumstances. The notion of gift, Savigny observed, “is a general characteristic that the most varied legal acts may assume”; there need not be only one doctrinal conceptualization

Terry’s Estate, 112 N.E. 931, 932–33 (N.Y. 1916) (detailing an example of a restricted charitable gift of personal property made subject to a special limitation).

46 See RESTATEMENT OF PROP. § 24 (defining the condition subsequent); Green v. Old People’s Home of Chi., 109 N.E. 701 (Ill. 1915) (detailing an example of a restricted charitable gift made subject to a condition subsequent).

47 See RESTATEMENT OF PROP. § 23 cmt. d, illus. 4 (discussing the possibility of reverter); id. § 24 cmt. b (discussing the power of termination).

48 T.D. 6285, 1958-1 C.B. 127, 132. The current regulation is drafted in stricter terms, requiring that the likelihood of defeasance be “so remote as to be negligible.” Treas. Reg. § 1.170A-1(e) (as amended in 2008).

49 See RESTATEMENT (THIRD) OF PROP.: WILLS & OTHER DONATIVE TRANSFERS intro. (AM. LAW INST. 1999) (“The organizing principle of the American law of donative transfers is freedom of disposition.”).

50 Cf. id., div. VIII (AM. LAW INST. 2011) (listing the major limitations on the principle).


for gifts.51 Acknowledging that the contract form is consistent with the governing principle of donative transfers extends Savigny’s insight to Anglo-American law.

3. Compatibility with the Law of Charity

Public Benefit. Restricted charitable gifts differ from other contracts in that they are subject to charity law, in particular the public benefit requirement of gifts for charitable purposes.52 To qualify as charitable, donative transfers must “accomplish objects that are beneficial to the community.”53

A contractarian analysis of restricted charitable gifts, grounded in the principle of private autonomy, is by no means incompatible with the public benefit requirement. Within wide limits, Anglo-American law generally leaves to private parties the task of determining what the proper objects of charitable activity are. The capacious enumeration of permissible charitable purposes in the English Statute of Charitable Uses of 160154—considered declarative of the common law55—is deliberately broad and open-ended.56

The freedom of the donor to define the proper object of his or her charity is not totally unbounded. The Anglo-American law of charitable trusts authorizes courts to disallow trusts that attempt to further purposes that are wholly without benefit to the public, as measured by an objective

51 See 4 FRIEDRICH CARL VON SAVIGNY, SYSTEM DES HEUTIGEN RÖMISCHEN RECHTS

3 (Berlin, Veit und Comp. 1841) (“[D]ie Schenkung [ist] . . . ein allgemeiner Charakter . . . welchen die allerverschiedensten Rechtsgeschäfte annehmen können . . . .”).

52 The requirement of a public benefit is safeguarded primarily by the non-inurement rule of federal tax law and by the concept of charitable purpose. See I.R.C. § 170(c)(2)(C) (allowing a taxpayer to take a charitable contribution deduction only if the contribution is made to an entity whose earnings do not “inure[] to the benefit of any private shareholder or individual”); RESTATEMENT (THIRD) OF TRUSTS § 28 (AM. LAW INST. 2003) (restating the standard definition of charitable purpose).

53 RESTATEMENT (THIRD) OF TRUSTS § 28 cmt. a. Charitable purpose and “public benefit” are sometimes viewed as distinct requirements in the law of charity, particularly in Commonwealth jurisdictions. See MATTHEW HARDING, CHARITY LAW AND THE LIBERAL STATE 7 (2014). I treat them as a single attribute here.

54 See 43 Eliz. I, c. 4 (1601). 55 See Vidal v. Mayor of Phila. (Vidal v. Girard’s Ex’rs), 43 U.S. (2 How.) 127, 150

(1844), abrogating Trs. of the Phila. Baptist Ass’n v. Hart’s Ex’rs, 17 U.S. (4 Wheat.) 1 (1819).

56 See GARETH JONES, HISTORY OF THE LAW OF CHARITY, 1532-1827, at 121–27 (1969).


standard.57 Federal tax law also sharply restrains charitable organiza-tions’ intervention in political activity.58 Yet within these limits, the policy of Anglo-American charity law deliberately leaves the determina-tion of what constitutes a public benefit largely within the domain of private autonomy.

Longevity. A further peculiarity of gifts to charity is their longevity. Most contracts do not exist forever, whereas a restricted charitable gift is at least in theory perpetually binding on the donee charity if the gift property is not expendable. Even if the terms of a restricted charitable gift bind only the donor and donee, the longevity of the gift means that the terms will, in practice, implicate persons who were not involved in the formulation of the gift restriction.

This attribute of many charitable gifts does not inherently bar a contractarian analysis, however. Perpetual duration imposes an added cost on the donee because successive generations of staff must expend time and effort to familiarize themselves with the donee’s rights and duties under the gift instrument, even if informational costs are internal-ized to the donor and donee. Yet in this respect the restricted charitable gift resembles other contracts with very long or perpetual terms, such as the long-term bond or shares of corporate stock. Moreover, the law of restricted charitable gifts already has a corrective to the risk posed by perpetual duration: cy pres. The doctrine permits a court to modify “wasteful,” “unlawful, impossible, or impracticable” terms of a gift.59 If the cost of continuing to enforce a restricted-charitable-gift restriction

57 See, e.g., Westminster Bank Ltd. v. Pinion (In re Pinion) [1965] Ch 85 (CA) at

107 (Eng.) (holding that the testator’s devise to trustees of a “mass of junk” to create a house museum had no benefit to the public and therefore did not constitute a valid charitable trust).

58 For an overview of the law, see STAFF OF J. COMM. ON TAXATION, JCX-29-05, HISTORICAL DEVELOPMENT AND PRESENT LAW OF THE FEDERAL TAX EXEMPTION FOR CHARITIES AND OTHER TAX-EXEMPT ORGANIZATIONS 56-60 (2005).

59 RESTATEMENT (THIRD) OF TRUSTS § 67 (AM. LAW INST. 2003). Although original-ly a doctrine of trust law, cy pres also now applies to gifts not made in trust. See also PRINCIPLES OF THE LAW OF CHARITABLE NONPROFIT ORGS. § 460 (AM. LAW INST., Tentative Draft No. 2, 2009). For charitable purpose as a prerequisite for cy pres, see In re Estate of du Pont, 663 A.2d 470, 478 (Del. Ch. 1994) (affirming that general charitable intent on the part of the settlor is a prerequisite for application of the cy pres doctrine to a trust).


over time far outweighs the gift’s benefit to the public, the courts are empowered to modify the terms of the gift.60

A contractarian analysis of restricted charitable gifts thus fits com-fortably with the governing principles of three areas of law: with the private autonomy of contract law, with the freedom of disposition of the law of donative transfers, and with the bounded private autonomy of Anglo-American charity law.

B. Consequence for Enforcement

1. Ineffectiveness of Existing Law

I have so far discussed only conceptual arguments in favor of a contractarian analysis of restricted charitable gifts. But the chief issue at stake in this conceptual debate is its practical consequence for gift enforcement.

Current law on the enforcement of restricted charitable gifts is notoriously uncertain. In property-based analyses of restricted charitable gifts, the donor is deemed to transfer his or her entire property interest to charity.61 Without any remaining stake in the gift property, the donor has ordinarily been barred from enforcing the gift restriction once the donation is complete. Until recently the law of donative transfers reserved the right to enforce a gift restriction to the state attorney general or to some other state official charged with charity supervision.62

60 See the formulation of the cy pres doctrine in LEWIS M. SIMES, PUBLIC POLICY

AND THE DEAD HAND 139 (1955) (“[T]he law should declare that a purpose may be found inexpedient solely because the amount to be expended is out of all proportion to its value to society.”). I do not mean to imply that either the perpetual character of many gift restrictions or the doctrine of cy pres as currently applied by the courts is beyond criticism or debate. But insofar as scholars’ reluctance to accept a contractarian analysis of restricted charitable gifts arises in fact from unease about gift longevity or cy pres, their efforts should be directed toward the direct reform of those elements of the law of donative transfers.

61 Transfer of the donor’s entire interest in the property is a prerequisite for the charitable contribution deduction under federal income tax laws. See I.R.S. Tech. Adv. Mem. 200610017 (Mar. 10, 2006) (holding that the charitable contribution deduction under Internal Revenue Code section 170 is available only to a donor who either retains no interest in or dominion over the gift property or retains only a future interest whose value is de minimis and whose “possibility of reverter is so remote as to be negligible”).

62 See Carl J. Herzog Found., Inc. v. Univ. of Bridgeport, 699 A.2d 995, 997 (Conn. 1997); PRINCIPLES OF THE LAW OF CHARITABLE NONPROFIT ORGS. § 670(b) cmt. c (AM. LAW INST., Tentative Draft No. 3, 2011).


Attorney general enforcement, however, is widely viewed as ineffective.63 The charity-supervision units in the offices of state attorneys general are often understaffed.64 One recent study of state charity regulation found that regulatory staff levels in most jurisdictions have remained constant since 2008, even as the number of new charitable organizations has increased rapidly in response to the simplification of the process for obtaining federal tax-exempt status.65 Even when ade-quately staffed and funded, attorneys general may be subject to political pressures that dampen their enthusiasm for enforcing gift restrictions against powerful and respected local charities.66

A case in point of the risk posed by lax or ineffective attorney general enforcement is Smithers v. St. Luke’s-Roosevelt Hospital Center, a leading New York case.67 The defendant hospital accepted a restricted charitable gift of $10 million to found a freestanding alcoholism treatment facility, but subsequently violated the gift restriction by under-taking to sell the building that housed the facility and to move the center into a hospital ward.68 The donor’s widow brought suit to enforce the gift after the New York Attorney General had made only tepid efforts to in-duce the defendant hospital to abide by the gift restriction.69

It is the shortcomings of attorney general enforcement that have induced some courts and scholars to favor allowing donors to enforce re-stricted charitable gifts in some circumstances. Proposals for reform vary widely, but almost all attempt to solve the enforcement problem by permitting donor enforcement in some circumstances while still limiting

63 See FREMONT-SMITH, supra note 1, at 336; see also Office of the Ohio Att’y Gen.,

The Status of State Regulation of Charitable Trusts, Foundations, and Solicitations, in 5 COMM’N ON PRIVATE PHILANTHROPY & PUBLIC NEEDS, RESEARCH PAPERS 2705 (1977) (discussing earlier reform proposals).

64 See Henry B. Hansmann, Reforming Nonprofit Corporation Law, 129 U. PA. L. REV. 497, 601 (1981).

65 See Alex Daniels, Nonprofits Proliferate but Not the Regulators, Says Report, CHRON. PHILANTHROPY (Oct. 5, 2015), https://www.philanthropy.com/article/Nonprofits-Proliferate-but-Not/233641.

66 See, e.g., Jonathan Klick & Robert H. Sitkoff, Agency Costs, Charitable Trusts, and Corporate Control: Evidence from Hershey’s Kiss-Off, 108 COLUM. L. REV. 749, 755–56, 781–82 (2008) (recounting the intervention of the Pennsylvania Attorney General, then running for governor, to prevent the Milton Hershey School Trust from diversifying its assets by selling Hershey stock).

67 See 723 N.Y.S.2d 426 (App. Div. 2001). 68 See id. at 427, 429. 69 See id. at 429–30.


the discretion of donor and charity to draft custom-made enforcement provisions.70 Too much donor enforcement, it is feared, would lead to wasteful litigation against charities.71 A line of New York cases has addressed the problem by holding that the right of enforcement survives the donor’s death and may be exercised by the personal representative of the donor’s estate but no one else.72 One scholar agrees but favors granting an enforcement right only if the right is expressly reserved in the gift instrument.73 Another would allow the donor to make an express reservation in the gift instrument of a right of enforcement that may then be assigned or devised; this right would expire, however, fifty years after the death of the donor.74 The tentative drafts for the Restatement of the Law of Charitable Nonprofit Organizations project adopt the view that the donor plus any person “granted authority in the . . . gift instrument” may enforce the gift.75 The Uniform Trust Code, which applies to re-stricted charitable gifts deemed to be held in trust, grants a right of enforcement to the donor-settlor “among others,” without defining who those “others” are.76 One scholar argues for reading “others” to include no more than one person to whom a donor-settlor may assign the right of enforcement.77 Except for the settlor enforcement provision in the Uniform Trust Code, which has been adopted by most state legislatures, none of these reforms has won broad acceptance.

70 See id. at 435. 71 See id. at 439. 72 See Rettek v. Ellis Hosp., 362 Fed. App’x 210 (2d Cir. 2010) (“The dispositive

distinction between this case and Smithers . . . is that Rettek is not the legal representative of the donors’ estates. Accordingly, she lacks standing to pursue this action . . . .”); Bd. of Educ. v. Att’y Gen., 811 N.Y.S.2d 685 (App. Div. 2006) (holding that the plaintiff did not have standing by virtue of being the grandson of the donor); Smithers, 723 N.Y.S.2d at 426; McQuillan v. Holy Land Art Co., No. 0116134/2006, 2008 WL 627585 (N.Y. Sup. Ct. Feb. 22, 2008) (limiting the holding of Smithers to confer a right of enforcement only on the donor and the donor’s personal representative and denying standing to the donor’s granddaughter).

73 See Chester, supra note 8, at 633. 74 See Reid Kress Weisbord, Reservations About Donor Standing: Should the Law

Allow Charitable Donors to Reserve the Right to Enforce a Gift Restriction?, 42 REAL PROP. PROB. & TR. J. 245 (2007).

75 PRINCIPLES OF THE LAW OF CHARITABLE NONPROFIT ORGS. § 670(b)(1)-(2) (AM. LAW INST., Tentative Draft No. 3, 2011).

76 UNIF. TRUST CODE § 405(c) (amended 2010), 7C U.L.A. 486 (2006). 77 See Joshua C. Tate, Should Charitable Trust Enforcement Rights Be Assignable?,

85 CHI.-KENT L. REV. 1045 (2010).


2. The Contractarian Solution

A contractarian analysis provides a clear principle with which to settle the question of who may enforce a restricted charitable gift: let donor and donee decide for themselves. Contract law sets default rules allowing enforcement by a contract promisee as well as assignment and descent of rights to third parties.78 The parties to a contract are largely free to vary these defaults as they see fit.79

An objection to permitting the donor and charity to set their own enforcement terms is that donor enforcement will sometimes encourage costly, harassing litigation by donors and their families against charities.80 It is far from clear, however, that such harassment is likely. A search of the law reports found no reported enforcement cases in the twenty-four years that Wisconsin had a statutory provision permitting private enforcement of charitable trusts or in the ten years after New Jersey courts liberalized standing requirements for donors to enforce restricted charitable gifts.81

Restriction of donors’ and charities’ autonomy to choose their own terms, including the terms of enforcement, poses its own risk in that potential donors who feel that their gift restrictions are difficult to enforce may be less generous with their gifts.82 Granting the parties autonomy to negotiate enforcement terms leaves it to the individual charity to weigh the risk of enforcement litigation against the benefit provided by a particular restricted charitable gift.

3. Remedies

The contractarian approach to enforcement of restricted charitable gifts developed so far will be viable only if it preserves the existing remedies available in cases in which a charity violates a restriction. The reported decisions on restricted-charitable-gift enforcement reveal the

78 See id. at 1056. 79 See id. at 1058. 80 See Smithers v. St. Luke’s-Roosevelt Hosp. Ctr., 723 N.Y.S.2d 426, 435–36

(App. Div. 2001). 81 See Hansmann, supra note 64, at 609–10. 82 For this fear in the case law, see Howard v. Administrators of the Tulane

Educational Fund, 970 So. 2d 21, 36 (La. Ct. App. 2007) (Tobias, J., dissenting).


decree of specific performance and the injunction to be courts’ con-sistently preferred remedies.83

This remedy regime is compatible with a contractarian account. In contract law, specific performance or injunction is ordinarily the appro-priate remedy in a promisee’s suit for breach of a third-party-beneficiary contract because the promisee is not the beneficiary. In such a suit, the promisee incurs no loss in the event of breach for which damages would provide an adequate remedy.84 This is precisely the situation of the donor of a restricted charitable gift. The donor may request specific perfor-mance or an injunction, but is not entitled to damages.85

A decree of specific performance could be a problematic remedy if it forced a charity to perform a gift restriction that had become impractic-able, wasteful, or damaging to the charity.86 But the availability of cy pres to modify the restriction in such circumstances should allay concern about the application of specific performance. A court remains free to refuse to decree specific performance and instead to apply cy pres to a gift instrument in appropriate cases. In cases of impracticability of per-formance, the contract doctrine of impracticability, which permits a court to supply missing terms of an agreement when justice requires, may also provide independent authority for court modification of the gift instru-ment’s terms.87

C. Answering Objections to the Contractarian Analysis

1. Standard of Intent

A contractarian analysis of restricted charitable gifts must confront several objections raised in the academic literature.

83 See, e.g., Reed Found., Inc. v. Franklin D. Roosevelt Four Freedoms Park, LLC,

964 N.Y.S.2d 152 (App. Div. 2013) (specific performance); Tenn. Div. of the United Daughters of the Confederacy v. Vanderbilt Univ., 174 S.W.3d 98 (Tenn. Ct. App. 2005) (injunction).

84 See, e.g., 25 RICHARD A. LORD & SAMUEL WILLISTON, A TREATISE ON THE LAW OF CONTRACTS § 67:112 (4th ed. 2005).

85 This rule does not prevent a donor, as promisee of a third-party-beneficiary con-tract, from claiming purely nominal damages, including court costs. See RESTATEMENT (SECOND) OF CONTRACTS § 346 cmt. c (AM. LAW INST. 1981).

86 See Brody, supra note 7, at 1192 (“What if the parties [to a restricted charitable gift instrument drafted as a contract] contract to grant standing to the donor to enforce the restriction and not just to sue for forfeiture?”).

87 See RESTATEMENT (SECOND) OF CONTRACTS ch. 11 (discussing impracticability and frustration along with available remedies).


One objection is the argument that different standards of intent apply to gifts and contracts.88 In principle, the law of donative transfers looks solely to the intent of the donor in interpreting a gift instrument, whereas the law of contracts looks to the manifested intent of both parties.89

This discrepancy in standards of intent is nonetheless consistent with a contractarian analysis of restricted charitable gifts.90 The parties who draft a restricted-charitable-gift instrument intend to give effect to the donor’s desire to make a donative transfer. Their intent is thus that a court construe their agreement—like any other donative transfer—in a manner that privileges the donor’s intent. The parties to a restricted-charitable-gift instrument treat the usual rule of contract construction as a default rule that they override.

No authority yet addresses the question of whether the contract standard of intent is a default rule of contract law that parties may override or a mandatory rule that they may not override.91 There is, however, precedent for the choice of equally knowledgeable parties to override other rules of construction. The standard “Bermuda Form” insurance contract expressly overrides the rule contra proferentem, which construes ambiguous contract language against the party that drafted it.92 Treating the contract standard of intent as a default rule in this situation is also consistent with the policy that underlies mandatory

88 Cf. John H. Langbein, The Contractarian Basis of the Law of Trusts, 105 YALE

L.J. 625, 652 (1995) (“A key distinction between contract and gift is the standard of intention that governs the transaction.”).

89 Compare RESTATEMENT (THIRD) OF PROP.: WILLS & OTHER DONATIVE TRANSFERS § 10.1 (AM. LAW INST. 2003) (“The controlling consideration in determining the meaning of a donative document is the donor’s intention. The donor’s intention is given effect to the maximum extent allowed by law.”), with RESTATEMENT (SECOND) OF CONTRACTS § 201 cmt. c (“[T]he primary search is for a common meaning of the parties . . . .”).

90 See Langbein, supra note 88. 91 Some academic commentary suggests that all contract rules of construction are

mandatory. See, e.g., Tom Baker & Kyle D. Logue, Mandatory Rules and Default Rules in Insurance Contracts, in RESEARCH HANDBOOK ON THE ECONOMICS OF INSURANCE LAW 377, 389 (Daniel Schwarcz & Peter Siegelman eds., 2015) (“The basic rules of interpretation developed in the common law of contract are generally considered mandatory . . . .”).

92 See RICHARD JACOBS, LORELIE S. MASTERS & PAUL STANLEY, LIABILITY INSURANCE IN INTERNATIONAL ARBITRATION: THE BERMUDA FORM 44, 52–53 (2d ed. 2011) (noting that the Bermuda Form contains a New York choice-of-law clause but overrides the contra proferentem rule of construction usually applied under New York law). But see Baker & Logue, supra note 91, at 390 (finding no American court decision treating contra proferentem as a default rule).


rules. Mandatory rules are usually justified on the grounds that they protect contracting parties from harming themselves and from imposing externalities on third parties.93 Neither self-harm nor imposition of negative externalities on third parties is at issue here.

The discrepancy in standards of intent can also be resolved in the opposite way. In appropriate cases, a court may find that the donor manifested an intent that the contract standard of intent govern the inter-pretation of his or her restricted-charitable-gift instrument. In such cases, the intent of the donor, which is the controlling guide of the law of donative transfers, directs that the instrument be interpreted as a contract, thus making the intent of both parties relevant.94

2. Consideration

Another objection is that the restricted charitable gift fails to satisfy the consideration requirement of contract. A valid contract must usually be supported by sufficient consideration,95 whereas a transfer by gift re-quires precisely the opposite—no consideration. The Restatement (Third) of Property: Wills and Other Donative Transfers identifies the absence of consideration as “the essence of a gift.”96

This seeming conflict between gift law and contract law is only apparent, however. The consideration requirement of contract law and the no-consideration attribute of donative-transfer law each serve distinct functions. A restricted charitable gift may therefore simultaneously satis-fy both norms.

In contract law, consideration serves both substantive and formal functions.97 The substantive function of consideration is to ensure that

93 See, e.g., Ian Ayres & Robert Gertner, Filling Gaps in Incomplete Contracts: An

Economic Theory of Default Rules, 99 YALE L.J. 87, 88–89 (1989) (restating the policy justifying mandatory rules in contract law).

94 See RESTATEMENT (THIRD) OF PROP.: WILLS & OTHER DONATIVE TRANSFERS § 10.1 (AM. LAW INST. 2003).

95 See RESTATEMENT OF CONTRACTS § 19(c) (AM. LAW INST. 1932) (requiring sufficient consideration for the formation of a valid informal contract).

96 RESTATEMENT (THIRD) OF PROP.: WILLS & OTHER DONATIVE TRANSFERS § 6.1 cmt. b. Accord Provena Covenant Med. Ctr. v. Dep’t of Revenue, 925 N.E.2d 1131, 1151 (Ill. 2010) (“It is a fundamental principle of law . . . that a gift is ‘a voluntary, gratuitous transfer of property by one to another,’ and . . . ‘[i]t is essential to a gift that it should be without consideration.’” (quoting Martin v. Martin, 67 N.E. 1, 3 (Ill. 1903))).

97 See generally Fuller, supra note 19 (discussing the substantive and formal functions of consideration). To cite only Fuller’s work on consideration oversimplifies


courts enforce only those promises of sufficiently high social and eco-nomic importance to justify the costs of intervention.98 In practice, the category of promise that courts do not consider sufficiently important to justify intervention consists of “gratuitous promises,” which take place outside of a commercial setting and involve no reliance or unjust enrich-ment and no return promise.99 The substantive function of consideration is thus to separate gratuitous promises from those involving reliance, unjust enrichment, market exchange, or a counter-promise. The require-ment of the exchange of consideration for the obligor’s promise also serves formal functions: it provides evidence of the existence of a valid contract (the evidentiary function); it helps, like other formalities, to deter parties from rash action (the cautionary function); and it facilitates easy judicial recognition of what is and is not an enforceable agreement (the channeling function).100

A completed restricted charitable gift fulfills both the substantive and the formal functions of consideration. In a restricted-charitable-gift trans-action, the donor’s transfer of property constitutes consideration for the charity’s promise to abide by the restrictions set forth in the gift instru-ment. The transaction also satisfies the formal purposes of consideration. Evidence of the terms of a restricted charitable gift is typically expressed in a written instrument conveying and acknowledging the gift.101 In

the complex debate surrounding the functions of consideration. An oversimplified account nonetheless suffices for the limited purposes of this Article.

98 See JOHN P. DAWSON, GIFTS AND PROMISES 199–221 (1980) (arguing that enforcement of bargains is the sole legitimate substantive function of consideration but discussing other purposes for which the doctrine has been used); Fuller, supra note 19, at 813; Charles J. Goetz & Robert E. Scott, Enforcing Promises: An Examination of the Basis of Contract, 89 YALE L.J. 1261, 1265 (1980) (“Bargained-for promises support value-enhancing exchanges. Such promises are thus seen as fully enforceable . . . in order to protect and encourage value-maximizing resource allocation.”).

99 See generally 4 LORD & WILLISTON, supra note 84, § 8:1 (2008) (summarizing the current state of the law on enforcement of gratuitous promises); see also Andrew Kull, Reconsidering Gratuitous Promises, 21 J. LEGAL STUD. 39, 39 (1992) (claiming, on the basis of a review of recent case law, that application of the consideration doctrine to defeat enforcement of an agreement is “limited to the narrow range of promises that are simultaneously gratuitous, noncommercial, and unrelied on”).

100 See Fuller, supra note 19, at 800–03. 101 For the assumption that a conditional gift will be memorialized in written form,

see, for example, PRINCIPLES OF THE LAW OF CHARITABLE NONPROFIT ORGS. § 410 (AM. LAW INST., Tentative Draft No. 2, 2009) (“Permitted Terms in a Trust or Gift Instrument”); see also Treas. Reg. § 1.170A-13(f)(1) (as amended in 1996) (requiring a written acknowledgment from the donee for any charitable contribution for which the


addition, the act of transferring the gift property to the donee provides the psychological “wrench of delivery” on the donor that fulfills the cautionary purpose.102

While serving the functions of consideration in contract law, the re-stricted charitable gift simultaneously complies with the no-consideration principle of donative-transfer law. The two norms serve different pur-poses. The purpose of the consideration requirement of contract law is to distinguish between those promises that are important enough to justify court intervention and those that are not.103 The purpose of the no-consideration norm, by contrast, is to exclude from the definition of don-ative transfer any transaction in which the transferor accrues a material advantage.104

This underlying purpose of the no-consideration norm is visible both in the federal tax law’s definition of a gift and in the common law. In the Internal Revenue Code, a gift is any property “transferred for less than an adequate and full consideration in money or money’s worth” to the extent that “the value of the property exceeded the value of the con-sideration.”105 Consideration is “money or money’s worth.”106 Similarly, in the case law, a purported commercial transaction may be reinterpreted as a donative transfer if a court finds that it was made for inadequate compensation.107 In a restricted charitable gift, the donee’s promise to abide by the gift restrictions constitutes consideration for the donor’s transfer of property. Yet such consideration does not violate the no-

donor takes a charitable contribution deduction under section 170 of the Internal Revenue Code).

102 The phrase comes from Philip Mechem, The Requirement of Delivery in Gifts of Chattels and of Choses in Action Evidenced by Commercial Instruments, 21 ILL. L. REV. 341, 348 (1926) (emphasis omitted).

103 See DAWSON, supra note 98. 104 The exact boundary between deductible gift and non-deductible sale is very dif-

ficult to define. For discussion of this difficulty, see John D. Colombo, The Marketing of Philanthropy and the Charitable Contributions Deduction: Integrating Theories for the Deduction and Tax Exemption, 36 WAKE FOREST L. REV. 657 (2001). I mean only to show here that recognition of a restricted charitable gift as having consideration does not disturb the existing distinction between gift and purchase.

105 I.R.C. § 2512(b). 106 Id. 107 See, e.g., In re 3COM Corp., No. C.A. 16721, 1999 WL 1009210, at *4 (Del.

Ch. Oct. 25, 1999) (observing that corporate fiduciaries waste a corporation’s assets if they make a property transfer “so completely bereft of consideration that ‘[s]uch transfer is in effect a gift’” (quoting Lewis v. Vogel Stein, 699 A.2d 327, 336 (Del. Ch. 1997))).


consideration norm because it does not make the transfer a sale “in money or money’s worth.”108

Beyond ensuring the viability of a contract analysis, the restricted charitable gift’s conformity with both the consideration and the no-consideration norm conveniently preserves the existing distinction be-tween a completed restricted charitable gift and a promise to make a future gift. Whether and under what circumstances the promise of a fu-ture gift, made without consideration, constitutes an enforceable contract is a heavily debated question in the law of donative transfers.109 A com-mon approach is to enforce a promise to make a charitable gift if the charity has reasonably relied on the would-be donor’s promise.110 Treating a completed restricted charitable gift as a contract leaves this debate undisturbed. Because a restricted charitable gift satisfies the con-sideration requirement but gift promises typically do not, courts may safely apply a contractarian analysis to the former without also being obliged to enforce the latter.

3. Donative Transfers on Death

Acceptance. In contract law, the offeree’s power to accept an offer terminates on the death or incapacity of the offeror.111 This rule of acceptance is difficult to apply to a restricted charitable gift made by means of a transfer on death. If a restricted charitable gift made in the form of a testamentary devise or non-probate instrument is concep-tualized as a contract, the donee charity will not have an opportunity to receive the offer, and either accept or decline, until after the donor has died. In such cases, the usual contract rule of acceptance terminates the offer before the donee has had the opportunity to accept the gift.

The contract acceptance rule is better understood, however, as a default norm that contracting parties may override in appropriate circum-stances. The usual contract rule of acceptance gives effect to most offerors’ likely intent. If I offer to buy your car and then die before you have accepted my offer, I am unlikely to want a rule that forces my estate to buy a car I can no longer drive. The donor of a testamentary gift, however, intends for his or her offer to remain open after death. In such

108 I.R.C. § 2512(b). 109 For discussion and references to the older literature, see Kull, supra note 99. 110 See, e.g., Allegheny Coll. v. Nat’l Chautauqua Cty. Bank of Jamestown, 159

N.E. 173, 174–75 (N.Y. 1927). 111 See RESTATEMENT (SECOND) OF CONTRACTS § 48 & cmt. a (AM. LAW INST.

1981).


cases, the donor opts implicitly for the usual rule of acceptance of donative-transfer law, which holds open the offer of a gift made in a will or non-probate instrument for a reasonable time or until the time period fixed by an applicable disclaimer statute has elapsed.112

Capacity. The ordinary standard of capacity for making a contract or a gift inter vivos requires that each contracting party be able to understand the nature of the transfer.113 The standard of capacity for disposition of property by will is lower, requiring only that the testator be “capable of knowing [. . .] the nature and extent of his or her property” and the “natural objects of his or her bounty.”114 This discrepancy in capacity standards means that the donor of a restricted charitable gift made by will may meet the capacity standard for wills, making the gift a valid bequest, but fail to meet the higher capacity standard for contracts. In such a situation, the devise appears to fail as a valid contract offer because the testator lacked the requisite capacity.

There is no need to apply the higher capacity standard in the case of a restricted charitable gift made on death. The two capacity standards for contracts and for wills rest on different principles. The capacity standard for contract serves protective policies: to protect the incompetent party from being taken advantage of by rapacious members of the public, and to protect any dependents of the incompetent.115 The lower capacity standard for wills, by contrast, is motivated mainly by the policy of protecting the incompetent decedent’s family and dependents from poor-ly reasoned decisions about the disposition of his or her property after death.116 A decedent needs no protection.

112 Cf. RESTATEMENT (THIRD) OF PROP.: WILLS & OTHER DONATIVE TRANSFERS

§ 6.1 cmt. i (AM. LAW INST. 2003) (“Acceptance . . . is presumed, subject to the donee’s right to refuse or disclaim under an applicable disclaimer statute or, in the absence of an applicable disclaimer statute, within a reasonable time after learning of the gift.”).

113 See e.g., Bailey v. Bailey, 677 S.E.2d 56, 59 (Va. Ct. App. 2009) (“A contracting party is competent if, at the time he executes the agreement, he had sufficient ‘mental capacity to understand the nature of the transaction and agree to its provisions.’” (quoting Jones v. Peacock, 591 S.E.2d 83, 86 n.1 (Va. 2004))).

114 RESTATEMENT (THIRD) OF PROP.: WILLS & OTHER DONATIVE TRANSFERS § 8.1(b); see also Milton D. Green, Public Policies Underlying the Law of Mental Incompetency, 38 MICH. L. REV. 1189, 1204 (1940) (discussing authority “for the proposition that it takes less mental capacity to execute a valid will than it does to execute a valid contract”). Cf. Skelton v. Davis, 133 So. 2d 432, 436 (Fla. Dist. Ct. App. 1961) (“[A] lunatic may draw a valid will.”).

115 See Green, supra note 114, at 1213–14. 116 See id. at 1216.


A restricted charitable gift effective on death, even if made in the form of a contract, is a disposition for which only the family-protection policy is relevant. Applying the lower capacity standard for wills to a restricted charitable gift made in the form of a testamentary devise or other transfer on death is consistent with the general approach of the Restatement (Third) of Property: Wills and Other Donative Transfers, which applies the substantive rules governing wills to any will substi-tute.117 It is also analogous to the solution that the Restatement (Third) of Trusts applies to revocable trusts. Recognizing that the revocable trust’s main use is in estate planning, the Restatement makes the capacity stan-dard for revocable trusts the same as that of wills.118 What counts for the proper application of the capacity standards is not the form of the legal act but the circumstances under which the act takes place. Applying the lower capacity standard to testamentary restricted charitable gifts accords with the principles governing capacity in contract law.119

4. Charitable Contribution Deduction

Any contract-based account of restricted charitable gifts must be compatible with the federal tax law governing deductibility of charitable contributions. The Internal Revenue Code provides for a charitable con-tribution deduction from gross income;120 separate provisions governing the estate and gift taxes allow for deductions from a gross estate and from the total included amount of a gift.121 An analysis of restricted char-itable gifts that would lead to the denial of donors’ claims of charitable

117 See RESTATEMENT (THIRD) OF PROP.: WILLS & OTHER DONATIVE TRANSFERS § 7.2 (“[A] will substitute . . . is, to the extent appropriate, subject to substantive restric-tions on testation and to rules of construction and other rules applicable to testamentary dispositions.”); see also Ivie v. Smith, No. SD 32222, 2013 WL 6097926, at *8 (Mo. Ct. App. Nov. 20, 2013) (acknowledging that the capacity standard for wills applies to a gift that takes effect on the death of the donor).

118 See RESTATEMENT (THIRD) OF TRUSTS § 11 (AM. LAW INST. 2003). The Restate-ment’s approach was later adopted in UNIF. TRUST CODE § 601 & cmt. (amended 2010), 7C U.L.A. 545 (2006).

119 It has also been objected that a transfer on death cannot be interpreted as a contract because it provides the donee with no opportunity to bargain over the terms. See Brody, supra note 7, at 1192. This objection fails because the law of donative transfers still requires the donor to agree to the terms of the gift by manifesting acceptance. The donee cannot be forced to accept a gift subject to restrictions that it does not accept. See RESTATEMENT (THIRD) OF PROP.: WILLS & OTHER DONATIVE TRANSFERS § 6.1(b) (“Acceptance by the donee is required for a gift to become complete.”).

120 See I.R.C. § 170. 121 See I.R.C. §§ 2055, 2522.


contribution deductions is untenable. A brief survey of the rules governing charitable contribution deductions suggests, however, that this risk for a contractarian account of restricted charitable gifts is very low.

a. Quid pro quo Test. A restricted charitable gift must qualify as a “contribution or gift” within the meaning of section 170(c) of the Internal Revenue Code.122 Under the so-called “quid pro quo” test, a transfer constitutes a gift for tax purposes only insofar as the value of the trans-ferred property exceeds the value of any consideration that the donor receives in return and insofar as the donor intends to make a gift of that excess amount.123 The intent element of this test is satisfied if the donor intentionally transfers property worth more than the fair-market value of any consideration received to a tax-exempt organization, whether or not the donor’s motive is charitable.124

It is unlikely that a restricted charitable gift would run afoul of this test simply by virtue of being drafted as a contract. Courts and the Internal Revenue Service have found consideration within the meaning of the quid pro quo test only in situations in which the donor receives some readily quantifiable economic benefit in return for the transfer of gift property. For example, a taxpayer who made a payment requested by a retirement home in return for his choice of a particular type of apart-ment within the home was held to have received valuable consideration that disqualified the payment for the charitable contribution deduction, since the payment was in effect the fee for having the option to move into an apartment of that type.125 A deduction was also disallowed to a taxpayer who had donated two conservation easements over farmland to the county government, but had done so in expectation of receiving zoning exemptions that permitted him to subdivide the property and construct additional buildings on it, increasing its overall sale value.126 The Tax Court found that the economic value of the subdivision permit exceeded the value of the easements.127 In another case, taxpayers were denied a deduction for payments that they had made to a religious school and that they had argued were in part deductible donations for which

122 I.R.C. § 170(c). 123 See United States v. Am. Bar Endowment, 477 U.S. 105, 117–18 (1986); Treas.

Reg. § 1.170A-1(h)(1) (as amended in 2008); Rev. Rul. 67-246, 1967-2 C.B. 104. 124 See Treas. Reg. § 1.170A-1(h)(1)(i). 125 See Rev. Rul. 72-506, 1972-2 C.B. 106. 126 See Pollard v. Comm’r, 105 T.C.M. (CCH) 1249 (2013). 127 See id.


they had received only an “intangible religious benefit.”128 The court disallowed the deduction, finding that the payments in were in fact a quid pro quo: tuition fees for their children’s education at the school.129

In these and similar cases, courts and the Internal Revenue Service have required any consideration to have a quantifiable dollar value.130 In contrast, it is unlikely, barring unusual circumstances, that a donee’s promise to abide by a gift restriction and a donor’s retained right to enforce a gift restriction would have any quantifiable economic value to the donor that would cause the gift to violate the quid pro quo test.

b. Complete Transfer. To qualify for a charitable contribution deduction, the taxpayer must make a complete transfer of the gift property, giving up all “dominion and control” over the property and delivering it irrevocably to the charitable donee.131 Under most circumstances, the transfer must also consist of an undivided interest in the underlying gift property. The donor cannot transfer some rights in the property while retaining one or more “substantial” rights; a deduction will be disallowed unless any retained interest is “insubstantial.”132 Examples of insubstantial interests include retained mineral rights of “de minimis” value,133 hunting rights reserved during the donor’s lifetime,134 and a reserved easement of ingress and egress over donated land.135

This requirement is unlikely to affect a contractarian treatment of restricted charitable gifts. Any right of enforcement of a gift restriction that a donor acquires under a restricted-charitable-gift instrument is not a retained interest in the gift property, but a right that, if exercised, merely furthers the charitable purpose of the gift. The Internal Revenue Service applied similar reasoning in a 1992 private letter ruling, allowing a deduction to a donor who had entered into an enforceable “Loan and Gift Agreement” with the donee museum that required her approval for “changes in gallery or installation design” in a permanent art exhibit for

128 Sklar v. Comm’r, 549 F.3d 1252, 1255 (9th Cir. 2008). 129 See id. at 1264. 130 The value need not be quantifiable at the time of the donative transfer. See

Singer Co. v. United States, 449 F.2d 413, 414 (Ct. Cl. 1971). 131 Edson v. Lucas, 40 F.2d 398, 404 (8th Cir. 1930). 132 See I.R.C. § 170(f)(3); Treas. Reg. § 1.170A-7(b)(1)(i) (as amended in 1994). 133 See Stark v. Comm’r, 86 T.C. 243, 253 (1986). 134 See Rev. Rul. 75-66, 1975-1 C.B. 85. 135 See Priv. Ltr. Rul. 9729024 (Apr. 18, 1997).


which she had donated artworks.136 The Service reasoned that such con-tinued control on the donor’s part was permissible because it consisted of “largely fiduciary powers to be exercised in furtherance of the charitable purposes” of the donee museum.137

5. Cy pres

One further objection to the contract-based analysis is that treating restricted charitable gifts as contracts may interfere with a court’s power to apply cy pres.138 If cy pres is understood as a doctrine belonging to trust law, it may not be possible to apply cy pres to gifts that are con-strued as contracts.

This fear is unfounded. Although cy pres originated in trust law,139 contemporary statutory provisions and judicial precedents authorize courts to apply cy pres to any donative transfer for a charitable purpose irrespective of the form in which the transfer is made. The Uniform Prudent Management of Institutional Funds Act, now in force in every American jurisdiction except Pennsylvania, authorizes a court to apply cy pres to any “gift instrument” that governs property transferred to a charitable institution’s endowment.140 For gifts of other types of property for which specific statutory authorization is lacking, courts still have the

136 Priv. Ltr. Rul. 9303007 (Oct. 20, 1992). 137 Id. 138 See PRINCIPLES OF THE LAW OF CHARITABLE NONPROFIT ORGS. ch. 4, topic 3,

intro. note, reporter’s note 4 (AM. LAW INST., Tentative Draft No. 2, 2009) (implying that application of contract doctrine to a charitable gift may prevent the use of cy pres).

139 See JONES, supra note 64, at 73–75. 140 See UNIF. PRUDENT MGMT. OF INSTITUTIONAL FUNDS ACT § 6 (2006), 7A pt. 3

U.L.A. 40-41 (Supp. 2016). For statutory citations for the jurisdictions that have adopted the Uniform Prudent Management of Institutional Funds Act; see id., Table of Jurisdictions Wherein Act Has Been Adopted, 7A pt. 3 U.L.A. 5-6 (Supp. 2016). Section 6 also provides statutory authority for the related doctrine of equitable deviation, which permits a court to modify terms respecting the administration of a gift fund. Georgia’s version of the Uniform Prudent Management of Institutional Funds Act omits section 6. See GA. CODE ANN. §§ 44-15-1 to -8. However, the doctrine of cy pres in Georgia case law is already broad enough to encompass gifts made in contract form. E.g., Baker v. Merrill Lynch Tr. Co., 650 S.E.2d 296, 299 (Ga. Ct. App. 2007) (describing cy pres as applying to “an otherwise valid charitable grant or trust”). Although Pennsylvania has not adopted the Uniform Prudent Management of Institutional Funds Act, Pennsylvania has adopted the Uniform Trust Code, which recognizes the courts’ power to apply cy pres to all types of donative transfer for charitable purposes. See 20 PA. CONS. STAT. § 7740.3 cmt. (“The doctrine of cy pres is applied not only to trusts, but also to other types of charitable dispositions, including those to charitable corporations.”).


option of applying cy pres by analogy to trust law.141 Merely recon-ceptualizing restricted charitable gifts as contracts should have no bearing on the courts’ exercise of the cy pres power.

III. DEFAULT CLASSIFICATION OF RESTRICTED CHARITABLE GIFTS

A. Third-Party-Beneficiary Contract as Default

I have so far argued that the restricted charitable gift has its basis in the law of contract and that a restricted charitable gift may be structured as a third-party-beneficiary contract in full consistency with existing contract law.142 There remains, however, the problem of determining the proper default classification of restricted charitable gifts. A given donor and donee may well choose to arrange their exchange in the form of a third-party-beneficiary contract. But what should be done when a gift instrument fails to specify the kind of legal act that the parties intended to undertake?

The most suitable default classification for restricted charitable gifts is, I argue, the third-party-beneficiary contract. The principal advantage is clarity. Placing restricted charitable gifts within the law of contract makes plain that such gifts are, in essence, donor-donee deals. Categori-zation within contract also highlights the primacy of the principle of private autonomy, subject only to the usual regulatory framework of charity law. Although it has been unusual to apply contract law to restricted charitable gifts made in the form of transfers on death, I have tried to show that no reason of policy prevents courts from doing so.

The third-party-beneficiary contract is by no means the only doc-trinal form that can be employed to describe restricted charitable gifts in contractarian terms. Each of the alternatives, however, suffers from con-ceptual or practical drawbacks that make them less desirable defaults than the third-party-beneficiary contract.

141 See, e.g., In re Estate of Lamb, 97 Cal. Rptr. 46, 49 (Dist. Ct. App. 1971)

(“Although the doctrine of [c]y pres ordinarily applies when there is a formal trust which in some respect is doubtfully identified, the doctrine is applicable where, as in the case before us, no trust is mentioned in the will.”).

142 See RESTATEMENT (SECOND) OF CONTRACTS ch. 14, intro. note (AM. LAW INST. 1981).


B. Personal Obligation

The usual property-based description treats a restricted charitable gift as a transfer to a donee charity of property in fee simple absolute, subject to the donor’s restriction on the use of the property; the exact juridical nature of this restriction is not described in the American cases. A possible variation on this theme, modeled on English equity practice for non-charitable donative transfers, would describe the restricted charitable gift as a transfer of property in fee simple absolute that subjects the donee to a personal duty, enforceable in equity, to abide by the restric-tion.143 In one leading English case, the Chancery Division held that the testator’s bequest of corporate stock to the legatee in fee simple absolute, “subject [t]o the payment by him” of annuities to certain third parties, constituted a “personal obligation” that bound the legatee when he ac-cepted the bequest.144 Such a duty differs from an equitable charge in that it is a personal duty of the recipient of the property rather than a security interest in the property itself.145 The personal obligation is enforceable against the recipient of the property despite the fact that he or she holds the property in fee simple absolute, not in trust, and with no gift-over provision.146

This interpretation of restricted charitable gifts is not incompatible with the contractarian analysis set forth above. The basic structure of a restricted charitable gift can be described as a transfer of property in fee simple absolute that the transferor makes in consideration of the trans-feree’s promise to abide by a restriction on the use of the property; this restriction is embodied in a personal obligation that is enforceable in equity. Indeed, the words used to formulate the restriction at issue in one English case, in which the testatrix devised real property to her husband “in consideration of” the husband’s payment of a two-pound-per-week life annuity to her sister,147 is suggestive of a fundamentally contractual logic.148

143 See generally T.C. Thomas, Conditions in Favour of Third Parties, 11

CAMBRIDGE L.J. 240, 251–57 (1952). 144 Lester v. Lester (In re Lester) [1942] Ch 324 at 324 (Eng.). 145 See id. at 326. 146 See Northumberland v. Egremont (1768) 27 Eng. Rep. 427; Amb. 657 (Ch)

(enforcing the duty imposed on the devisee). 147 Hodge v. Griffiths (In re Hodge) [1940] Ch 260 at 261 (Eng.). 148 But see HENDERSON, FOWLES & SMITH, supra note 24, at 319 n.338 (“This

obligation does not rest on implied contract . . . .”).


The main disadvantages of the personal obligation model are its lack of candor and the absence of clear authority authorizing enforcement by the transferor. To describe restricted charitable gifts in terms of personal obligation obscures the gifts’ underlying deal structure, inviting con-fusion about what exactly the obligation is and who exactly is entitled to enforce it. The question of enforcement is especially troublesome be-cause the device appears in the English case reports only when a testator wishes to impose a duty on a devisee that may be enforced by a third-party beneficiary.149 There is no reported case in which a living transferor enforces a gift against the transferee. The want of an established doc-trinal basis for donor enforcement makes the fee simple absolute subject to a personal obligation a less desirable default classification for restricted charitable gifts.

C. Fee Simple Defeasible

An alternative is to treat a restricted charitable gift as a transfer in fee simple defeasible.150 In this interpretation, the donor’s gift restriction is a limitation or condition subsequent to which the donee’s fee simple is subject, and the donor is understood as transferring property to the donee for so long as the donee abides by the donor’s restriction.151 On violation of the restriction, the property reverts to the living donor, otherwise to the donor’s heirs.152 The donor’s retention of a future interest—a reversion—in the gift property also explains why the donor has a right to enforce the gift.153

149 See, e.g., Lester, [1942] Ch at 324 (devisee under obligation to pay annuities to

third parties); Hodge, [1940] Ch at 260; Rees v. Engelback (1871) 12 L.R.Eq. 224 (Ch) (beneficiary of testamentary trust under obligation to pay annuities); Welby v. Rockcliffe (1830) 39 Eng. Rep. 219; 1 Russ. & M. 571 (Ch) (devisee under obligation to pay annuity); Messenger v. Andrews (1828) 38 Eng. Rep. 885; 4 Russ. 478 (Ch) (devisee under obligation to pay decedent’s debts and to make other payments); Northumberland, 27 Eng. Rep. at 427 (devisee under obligation to release claims on decedent’s estate).

150 I follow here the Restatement (Third) of Property: Wills and Other Donative Transfers in abandoning the obsolete distinction among the fee simple determinable, the fee simple subject to a condition subsequent, and the fee simple subject to an executory limitation in favor of the single term “fee simple defeasible.” RESTATEMENT (THIRD) OF PROP.: WILLS & OTHER DONATIVE TRANSFERS § 24.3 (AM. LAW INST. 2011).

151 See id. 152 See id. illus. 1. 153 I again follow the terminology of the Restatement, which abandons the

distinction among the reversion, the possibility of reverter, and the right of entry for breach of condition in favor of the single term “reversion.” See id. § 25.2 & cmt. d.


As a practical matter, however, this style of describing restricted charitable gifts is unworkable in most cases because it would deny donors a federal income tax deduction. The Internal Revenue Code disallows a charitable contribution deduction from gross income for almost any gift in which the taxpayer retains a reversionary interest.154

The fee-simple-defeasible analysis is suitable for at least one special case: a restricted charitable gift whose donor is unwilling or unable to claim a charitable contribution deduction. An example is a restricted charitable gift whose donor is itself a non-profit organization and thus not subject to income taxation. In such a case, the donor could retain a future interest in the gift property without negative tax consequences.155

For cases in which a deduction is desired, a possible variation on the defeasible fee that avoids the tax difficulty would treat the donor’s retained interest as an enforcement interest only, not a reversion. The donee would thus hold a fee simple that would be indefeasible, but subject to the donor’s restrictions. This variation would probably not bar a charitable contribution deduction because the donor would retain no material interest in the gift property, only an interest in the enforcement of the gift’s intended charitable purpose.156

Yet even the retained-enforcement-interest theory must still confront a conceptual problem: why does the donee remain bound by the gift restriction even after the donor’s enforcement right expires? Such a problem arises, for example, in the case of a restricted charitable gift inter vivos whose donor makes no provision for enforcement by heirs or

154 To qualify for the charitable contribution deduction of section 170 of the Internal

Revenue Code, a donor ordinarily cannot retain any interest in the gift property. See I.R.C. § 170(f)(3). But the deduction is still available if the donor retains a reversionary interest whose possibility of reverter is “so remote as to be negligible.” Treas. Reg. § 1.170A-7(a)(3) (as amended in 1994).

155 There is a second special case: a restricted charitable gift whose donative instru-ment provides for a gift over to another charity in the event that the restriction is violated and transfers the donor’s right of enforcement to the remainderman charity. In this scenario, the donor is assured a charitable contribution deduction because the donor retains no interest in the property, and both the initial transferee and the remainderman are charitable organizations, thereby satisfying the requirements of federal tax law for a charitable contribution deduction. The transfer of the donor’s right of enforcement accounts for the fact that under the fee-simple-defeasible analysis, the donor ought not to have a right to enforce the gift, since the donor retains no interest in the gift property. This interpretation is thus conceptually sound only if the donor is construed as having transferred the right of enforcement to the remainderman charity.

156 See supra text accompanying notes 136–37 (discussing Internal Revenue Service authority permitting this type of arrangement).


assignees, but whose restriction remains in force after his or her death. A contractarian analysis of restricted charitable gifts avoids this conceptual difficulty altogether.

D. Restraint on Alienation

Another institution of property law, the promissory restraint on alienation, could be used to describe restricted charitable gifts in certain special cases. A promissory restraint in a conveyance of a property interest subjects the conveyee to contractual liability to the conveyor if the conveyee alienates the property interest in violation of the restraint.157 The concept of the promissory restraint could be used to describe a restricted charitable gift in which the donor transferred property to a charity subject to an agreement that the charity would never dispose of the property, or would dispose of it only under certain specified circum-stances. It is uncertain, however, whether courts in all American jurisdictions would recognize such a restraint.158 In any case, the concept of promissory restraint can be used only to describe a restricted chari-table gift whose restriction can be characterized as a restraint on alienation rather than some other constraint on the charity’s conduct.

E. Servitude

Certain restrictions in restricted charitable gifts could be described as servitudes. In the formulation of the Restatement (Third) of Property: Servitudes, a servitude is “a legal device,”159 ordinarily created by a contract or conveyance,160 “that creates a right or an obligation that runs with land or an interest in land.”161 A donor of land, for example, might

157 See RESTATEMENT OF PROP. §§ 404(1)(b), (3) (AM. LAW INST. 1944) (defining the

promissory restraint). The principles governing restraints against alienation apply equally to both real and personal property. See, e.g., Sanders v. Hicks, 317 So. 2d 61, 64 (Miss. 1975), overruled on other grounds by First Nat’l Bank of Vicksburg v. Caruthers, 443 So. 2d 861 (Miss. 1983).

158 See generally J.C. Vance, Annotation, Validity and Effect of Provision or Condition Against Alienation in Gift for Charitable Trust or to Charitable Corporation, 100 A.L.R.2d 1208 (1965) (discussing authorities for and against validity of restraints on alienations in property conveyed to charities). The effect of such a restraint would in any case be very limited, since property held for charitable purposes is “practically inalienable anyway.” 3 JOHN A. BORRON, JR., LEWIS M. SIMES & ALLAN F. SMITH, THE LAW OF FUTURE INTERESTS § 1170 (3d ed. 2004).

159 RESTATEMENT (THIRD) OF PROP.: SERVITUDES § 1.1(1)(a) (AM. LAW INST. 2000). 160 See id. § 2.1(1)(a). 161 Id. § 1.1(1).


impose a servitude that granted a right of way to an adjoining property owned by an unrelated third party, or to members of the general public.

Several considerations make the servitude an uneasy fit for most restricted charitable gifts, however. One difficulty is the awkwardness of applying servitude law to personalty. Servitudes are generally understood to burden or benefit real property only.162 Although in principle the servitude concept can also be applied to personal property,163 the defining characteristic of the servitude—that it “runs with” the land or other property to which it applies—seems unnecessary in a context in which the covenantor is unlikely ever to transfer the property to a third party and in which the property in question frequently takes the form of money or fungible securities rather than land or unique chattels.164 Moreover, because few courts and scholars have even attempted to extend the law of servitudes to personal property, the doctrine in this area is underdeveloped, especially as compared to the law and policy of third-party-beneficiary contracts.165

A further difficulty concerns enforcement. The rule that bars a non-beneficiary covenantee from enforcing a servitude166 is directly at odds with the trend in the law of donative transfers toward granting the donor of a restricted charitable gift a right of enforcement against the donee.

F. Charitable Trust

Under a trust analysis, the donor is a settlor who transfers gift property to a charity in trust for the charitable purposes specified in the gift instrument. As trustee, the charity is under a duty to abide by any gift restriction as a term of the trust.167 This is the approach taken by the Restatement (Third) of Trusts, which treats any charitable gift made “for a specific purpose” as a trust.168

162 See id. 163 See Zechariah Chafee, Jr., Equitable Servitudes on Chattels, 41 HARV. L. REV.

945 (1928); Glen O. Robinson, Personal Property Servitudes, 71 U. CHI. L. REV. 1449 (2004).

164 Cf. RESTATEMENT (THIRD) OF PROP.: SERVITUDES § 2.2 cmt. i (contrasting this characteristic of servitudes with the simple contract).

165 See id. § 1.1 cmt. b (noting the paucity of case law). 166 See id. § 8.1 cmt. b, reporter’s note. 167 See, e.g., RESTATEMENT (THIRD) OF TRUSTS § 76(1) (AM. LAW INST. 2007)

(setting forth the duty of the trustee to administer the trust in accordance with its terms). 168 Id. § 28 cmt. a.


Several practical considerations make the trust interpretation prob-lematic. Treating every restricted charitable gift as a trust would subject some charities to reporting requirements for charitable trusts that would not otherwise be applicable.169 It might also introduce unwanted changes to the fiduciary duties by which the charities would be bound.170 Most important, the donor-settlor would not necessarily have a right to enforce his or her gift. Although the Uniform Trust Code confers a right of en-forcement on the settlor “among others,” not all American jurisdictions permit the settlor of a charitable trust to enforce the trust.171 It is in any case unlikely that the phrase “among others” will be interpreted to allow a settlor to assign the right of enforcement to a third party, as is possible in a contract-based model of the restricted charitable gift.

IV. INTERPRETING RESTRICTED CHARITABLE GIFTS IN THE RESTATEMENT OF THE LAW OF CHARITABLE NONPROFIT

ORGANIZATIONS In Parts II and III, I have attempted to show that contract provides a

natural conceptual fit for restricted charitable gifts, both for individual gift instruments and as a default classification. In closing, I suggest several changes to the gift provisions of the forthcoming Restatement of the Law of Charitable Nonprofit Organizations that would clarify the contractarian basis of restricted charitable gifts.

A. Contract as Default

The Restatement should treat the third-party-beneficiary contract as the default classification for restricted charitable gifts while clarifying that a restricted charitable gift may take any of several doctrinal forms:

169 See, for example, the charitable trust reporting requirements in IND. CODE § 30-

4-5-12(b); MASS. GEN. LAWS ch. 12, § 8F; MINN. STAT. § 501B.38; N.H. REV. STAT. ANN. § 7:28; N.Y. EST. POWERS & TRUSTS LAW § 8-1.4; OHIO REV. CODE ANN. § 109.31; R.I. GEN. LAWS § 18-9-13; and WIS. STAT. § 701.16(4).

170 This objection is raised in Persan v. Life Concepts, Inc., 738 So. 2d 1008, 1010 (Fla. Dist. Ct. App. 1999). In principle, different standards of loyalty apply to corporate and trust fiduciaries. In corporation law, the standard of loyalty is the “best interest” standard, which requires a corporate fiduciary to act in the corporation’s best interest but permits conflicted transactions as long as the fiduciary can demonstrate that no self-dealing took place. E.g., Cede & Co. v. Technicolor, Inc., 634 A.2d 345, 361 (Del. 1993). In trust law, the standard of loyalty is the “sole interest” standard, which in most circumstances prohibits a fiduciary from engaging in a conflicted transaction even when no self-dealing actually takes place. RESTATEMENT (THIRD) OF TRUSTS § 78(1) (2007).

171 UNIF. TRUST CODE § 405(c) (amended 2010), 7C U.L.A. (2006).


third-party-beneficiary contract, fee simple absolute subject to a personal obligation enforceable in equity, fee simple defeasible, fee simple abso-lute subject to a promissory restraint on alienation, fee simple absolute subject to a servitude, or charitable trust. Any of these forms can be an appropriate means, depending on the circumstances, for effecting a re-stricted charitable gift, and a gift instrument drafted to invoke one of these forms should be interpreted as drafted. A gift instrument whose juridical form is unclear, however, should be interpreted by default as a third-party-beneficiary contract.

B. Acceptance and Capacity

Contract-based interpretation of restricted charitable gifts must take account of the fact that some such gifts form part of the donor’s estate plan within wills or will substitutes, whereas others are transferred during the donor’s lifetime. I argued in Part II that for gifts transferred on death, the contract default rules of capacity and acceptance are inap-posite. The contract rule of capacity is set higher than the rule for wills, whereas the contract rule of acceptance terminates an offer and bars the offeree’s acceptance from the moment of the offeror’s death.

The solution for these difficulties is to specify default rules for restricted charitable gifts. One rule should provide that when a restricted charitable gift forms part of a donor’s overall estate plan, the applicable standard of capacity is the will standard, not the contract standard. Another rule should specify that when a restricted charitable gift is made by means of a testamentary devise or non-probate instrument, the donor is presumed to intend for the gift offer to remain open after his or her death. The donor’s death will not bar acceptance by the donee.

C. Standard of Intent

I argued in Part II that the discrepancy between the standards of intent of contract and donative transfers can be resolved in two ways.172 One may assume that the parties to a restricted-charitable-gift transaction treat the contract standard of intent, which looks to the intent of both parties, as a default rule that they override by manifesting their intent to make a gift. The donative-transfer standard of intent, which looks solely to the intent of the donor, should therefore govern interpretation of the gift instrument. Alternatively, one may assume that a donor intends for his or her restricted charitable gift to be interpreted as a contract. In such

172 See supra Part II.C.1.


a case, the donor intends for the contract standard of intent to govern interpretation of the terms of the gift.

The contract standard of intent better reflects the deal underlying the restricted charitable gift. The Restatement should therefore specify that unless contrary intent is manifested, the default standard of intent of contract law should apply to the construction of restricted-charitable-gift instruments. In other words, the intent of both parties should control the construction of a restricted charitable gift.

D. Enforcement

Default Right of Enforcement. A contract-based approach to restricted charitable gifts should specify that, by default, the donor retains a right of enforcement. Such a rule is in keeping with the usual rules of contract. Contract law grants the donor, as promisee of a third-party-beneficiary contract, the right to enforce the donor-donee agree-ment.173 One can assume that, if asked, almost every donor would want the right to enforce his or her gift in case of violation by the donee charity. Making no donor enforcement the default rule would unfairly punish the donor who lacked access to a sufficiently cautious drafting lawyer.174

Assignment. Contract law permits unlimited assignment. A promisee may assign to a third party one or more of his or her rights under a contract unless such an assignment would work a material change in the obligor’s duty to the contract obligee, contravene statute or public policy, or violate an express term of the contract itself.175 Assignment is allowed even in a situation in which the promisee does not stand to gain any economic benefit from the performance of the contract.176

This rule is undesirable for restricted charitable gifts because it fails to capture most parties’ likely intent. For both donors and donees, assign-ment of a right of enforcement is an unfamiliar practice. Many charities would not likely agree to a provision that permits unlimited assignment of the donor’s enforcement right, since such a provision expands the risk

173 See RESTATEMENT (SECOND) OF CONTRACTS § 305 (AM. LAW INST. 1981). 174 Ronald Chester’s proposal, which requires express reservation of an enforcement

right, is thus undesirable because it goes against intuition of what most donors would want. Cf. Chester, supra note 8, at 631.

175 See RESTATEMENT (SECOND) OF CONTRACTS § 317(2). 176 See, e.g., Arthur L. Corbin, Assignment of Contract Rights, 74 U. PA. L. REV.

207, 219–20 (1926) (giving the example of C contracting to have A serve B as valet and then assigning his right of enforcement to a fourth party).


posed by private enforcement suits and raises the possibility of a difficult and expensive inquiry to determine who has a right of enforcement in a given case.

The Restatement should therefore specify that the donor’s right of enforcement is not assignable unless the gift instrument expressly so provides. Setting the default in this way gives effect to the likely intent of most parties and ensures that the donee will have notice of the possibility that third parties may enforce a gift. A charity that does not wish for the donor’s right to be assignable may object and, if necessary, refuse the gift.

Descent. Similar reasoning applies to descent of the donor’s right of enforcement to heirs. Contract law may provide by default for descent to heirs of a promisee’s contract rights in a contract subject to ongoing performance after the promisee’s death, if the promisee does not specif-ically assign those rights to a third party. The promisee’s right to enforce a contract against the promisor is a chose in action—a legal claim that constitutes the personal property of the promisee.177 In principle, a chose in action descends to heirs according to the terms of its owner’s will, or by intestacy like any other personal property.178

A default rule making the donor’s right of enforcement descendible is undesirable in part because it would disrupt the expectations of many donees. Like a default rule permitting assignment, a default rule of de-scendibility increases the probability of future enforcement action against a donee and risks a complicated inquiry to determine whether a party is in fact heir to a right of enforcement.

A default descent rule may also fail to reflect the intent of many donors. A donor may not want the possibility that his or her enforcement right could end up in the hands of a party who does not share his or her interpretation of the terms of the gift.179 In principle, allowing an heir to bring an enforcement suit does not substitute the heir’s intent for that of

177 See, e.g., GP Credit Co. v. Orlando Residence, Ltd., 349 F.3d 976, 980 (7th Cir. 2003) (“One form of intangible property is a ‘chose in action,’ which in its classic sense is a legal claim, that is, something on which an ‘action’ (a lawsuit) might be founded . . . .”).

178 E.g., Flynn v. Chi. Great W. R.R. Co., 141 N.W. 401, 402 (Iowa 1913) (treating a chose in action in a decedent’s estate as a chattel personal). The lack of authority on the descendibility of a promisee’s right to enforce a third-party-beneficiary contract—an agreement in which the promisee does not stand to receive material gain through enforce-ment—makes it uncertain whether contract law would allow a donor’s enforcement right to descend to heirs as a matter of default.

179 For this objection, see Brody, supra note 7, at 1259 (“After a donor is dead, those who purport to speak for the donor might have very different goals.”).


the donor. It simply enables an heir to bring a gift restriction to the attention of a court, which may interpret, enforce, or modify the restric-tion as appropriate. But in practice, an heir who is supposed to vindicate the donor’s intent may bring an enforcement suit in a situation in which the donor would have taken no action or may do nothing in a situation in which the donor would have brought suit.

These risks of expense and divergence of viewpoints between donor and heir find expression in the case law. The potential for expense and difficulty in determining whether a given plaintiff is an heir of the original donor, and thus eligible to bring an enforcement suit, is apparent in Howard v. Administrators of the Tulane Educational Fund.180 Two remote collateral descendants of the donor who founded a women’s college within Tulane University sought standing to prevent Tulane from abolishing the college as a distinct entity within the university.181 The Supreme Court of Louisiana overruled two lower courts to hold that Louisiana’s civil law permitted heirs of the donor to enforce the donor’s condition.182 The court then remanded the case to the trial court to deter-mine whether the two plaintiffs were in fact descendants of the donor eligible to bring suit.183 The plaintiffs’ case was ultimately dismissed without explanation.184 The risk of viewpoint divergence is illustrated by Russell v. Yale University,185 in which the supposed heir to the settlor of a trust who had died in 1918, along with other plaintiffs, sought to prevent the reorganization of Yale Divinity School and the partial demo-lition of its buildings, whose construction the trust had funded some years after the settlor’s death. The Appellate Court of Connecticut dis-missed the suit for lack of standing.186 If the descendant had been granted

180 986 So. 2d 47 (La. 2008). 181 See id. at 50. 182 See id. at 61. 183 See id. 184 See Howard v. Adm’rs of Tulane Educ. Fund, No. 06-4200, 2008 WL 7019016

(La. Civ. Dist. Ct. Sep. 25, 2008). In addition to highlighting the difficulty and expense of determining whether the plaintiffs were in fact heirs eligible to enforce the donor’s gift, Howard also provides evidence of the risk that an heir or assignee may bring an enforce-ment suit that the donor would not have wanted or that advances arguments not in accord with the donor’s own intent. The trial court’s opinion in Howard expressed doubt that the donor had wanted to impose an enforceable condition on her gift to Tulane in the first place. See Howard v. Adm’rs of Tulane Educ. Fund, No. 2006-04200, 2006 WL 6282345 (La. Civ. Dist. Ct. June 29, 2006).

185 737 A.2d 941 (Conn. App. Ct. 1999). 186 See id. at 946.


standing, it would have been difficult, if not impossible, to determine whether the descendant’s aims aligned with the settlor’s original intent.

The Restatement can allay these concerns by specifying that a donor’s right of enforcement expires at his or her death unless the gift instrument provides expressly to the contrary.

V. CONCLUSION Departing from the traditional understanding of gifts in Anglo-

American law, I have argued in this Article that the restricted charitable gift is most naturally understood as a deal—a third-party-beneficiary contract—and that no policy of the law of contract, charity, or donative transfers bars a donor and donee from drafting a restricted-charitable-gift instrument as a contract. Further, I have attempted to show that reana-lyzing most restricted charitable gifts as contracts provides a coherent principle—the principle of private autonomy—with which to interpret the nature of the gift restriction and the donor’s enforcement right while avoiding the conceptual and practical pitfalls of other analyses. For this reason, I have argued that the third-party-beneficiary contract offers the best available default description for restricted charitable gifts. Although I have suggested several presumptions that the Restatement of the Law of Charitable Nonprofit Organizations might include to facilitate the inter-pretation of restricted charitable gifts, I have stressed in this Article that existing law already permits parties to draft restricted-charitable-gift instruments as contracts. The basis of the restricted charitable gift is best understood as lying in contract.

the restricted charitable gift as third-party … restricted charitable gift as...

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