Diana charity freezes all its funds after losing £4m lawsuit with souvenir firm

The charity set up in memory of Diana, Princess of Wales, was in crisis yesterday after being forced to freeze all its funds because of a costly legal battle it launched against an American souvenir firm.

The Diana, Princess of Wales, Memorial Fund said 500 jobs at the fund and its 120 beneficiaries were now at risk. The fund needs about £10m to honour its commitments to existing and new grants and has been seeking assistance from other charities to continue operating.

Some of the organisations likely to suffer are those that represent causes closely associated with the concerns of the princess, such as landmines and helping those suffering from HIV and Aids.

The crisis stems from the unsuccessful £4m legal battle with the Franklin Mint - which produces giftware featuring the image of the princess - and the Mint's counter-suit launched last November for $25m (about £15m), claiming it was a "malicious prosecution".

In a robust statement issued last night the Franklin Mint said it was "disappointed" the fund had "chosen to suspend its charitable giving". The firm said: "We were also disappointed when they chose to sue us," the firm said. "We were relieved when the court ruled so strongly against them, finding that many of their claims were 'absurd', 'just short of frivolous', 'groundless' and 'unreasonable'.

"We have sued the trustees of the Fund and their lawyers for malicious prosecution because we believe that they have acted in bad faith and that they should be held accountable for their actions. But it is most definitely not a matter of money."

The Charity Commission issued a warning to all charities to take "great care" in starting legal actions. Describing the decision by the fund to freeze all its grants as a "massive blow", the charities regulator said it showed the possible "serious consequences" of courtroom battles.

Referring to the legal action, Dr Andrew Purkis, the fund's director, said: "At the time, the trustees were doing what they thought was right for the memory of the Princess and followed legal advice very carefully. It's only with hindsight that it is clear it was a mistake."

The fund admitted the freeze would be "an unexpected and painful blow" for its beneficiaries. It was trying to find a way to make sure the freeze on new grant-giving was only temporary by asking other grant-giving bodies to continue the funding, which would be reimbursed in the future. Dr Purkis said: "If this doesn't work, it means that unfortunately and terribly wastefully, a lot of wonderful projects may have to close while the fund remains in a frozen state. We are simply not prepared to see this inspiring work destroyed."

Lucy Gampell, director of Action for Prisoners' Families, which receives £100,000 from the fund each year, said the impact would be "catastrophic". Its staff had been put on reduced hours and a number of services had been cut.

Richard Lloyd, Landmine Action's director, said the Diana fund was its single biggest private source of income, adding: "This is obviously very sad news for us."

Derek Bodell, chief executive of the National Aids Trust, said: "It is very worrying because clearly the Diana fund has become a major supporter of charitable causes and, particularly, unpopular ones which don't find it easy to get funding from the usual trusts and foundations."

In 1999, the fund was criticised for putting aside money for its dispute with Franklin. It lost the case in June 2000, leaving it with a £4m bill, when Florence-Marie Cooper, a US district judge, ruled: "The estate's entry into the marketplace for Princess Diana memorabilia at this late date cannot change the fact that Princess Diana did nothing to prevent others from using her image while she was alive."

In November last year, Franklin launched its counter-suit for $25m damages, claiming the action was "merely an effort to damage the Franklin Mint's sales efforts, embarrass it and sully its reputation".

FABULOUS HEIRLOOMS OR TACKY TRINKETS?

"A spectacular gift any princess would love" is the Franklin Mint's description of its most expensive item, a $595 Princess Diana Tiara Ring, in its 37-item catalogue. Collectors can choose the Princess Diana porcelain doll in blue chiffon gown, at $195; the Princess Diana Designer Dinnerware Collection, at $295; a solid silver memorial coin, at $55; or a range of hand-painted plates, at about $29.95 each. It sells by mail order or the internet and through special stores. It says it "strives to touch the hearts of collectors with heirloom works of art to enjoy and pass down to future generations".