Avoiding Costly Litigation Through Mindful Drafting

Background: Benefits of Incorporation

Once incorporated, not-for-profits are governed by Part III of the Ontario Corporations Act. As a result, not-for-profit corporations are able to hold property and commence legal action. In addition, individual members are not held personally liable for debts of the corporation.

Incorporated not-for-profit corporations also have the ability to adopt by-laws that modify, to an extent, the existing default framework of the Corporations Act. Carefully crafted by-laws allow the not-for-profit corporation to organize meetings, determine governance structures, and address issues of particular concern in a manner that best fits with its goals and values. For example, a not-for-profit can establish timing for elections, identify the manner in which new members will be confirmed, provide conditions for membership and termination of membership, create different classes of members with different voting rights, and, most importantly for the purposes of this article, determine conflict or dispute resolution procedures among members.

The Polish Alliance Case and Member Disputes

During the initial stages of establishing the existence of the not-for-profit corporation and its governing structure (including the adoption of by-laws), the possibility of future litigation among members may not be a significant consideration. However, the recent case of Polish Alliance of Canada, Branch 43 v. Polish Alliance of Canada ¹ reminds us that even in corporations in which shareholder profit is not a concern, untimely and potentially costly disputes can and do arise. The Polish Alliance case involved, in part, an application to the Superior court by a member of the Polish Alliance who wanted certain resolutions passed at a general meeting to be declared invalid. The Applicant objected to the Alliance's failure to provide proper notice to its members before approving a mortgage of the Alliance's property. Fortunately, in its Constitution, the Alliance had provided internal grievance procedures for unhappy members (such as filing a complaint to the Alliance's Head Grievance Committee). The Applicant did not follow these procedures before commencing litigation and, consequently, the Court refused to rule on the validity of the contested resolution.

This case illustrates the importance of anticipating that conflicts can arise in the not-for-profit context and the importance of implementing internal dispute resolution procedures that best fit the needs of the individual corporation.

Abiding by the By-Laws and Technical Breaches

Ontario case law has consistently shown that, once in force, not-for-profit corporations are bound by their own internal procedures. Therefore, founding members should not only determine how future disputes are to be handled, but should also ensure that any procedures decided upon are also appropriate to the organization's size and resources (establishing a Head Grievance Committee, while useful for a large not-for-profit corporation like the Polish Alliance, may not be the ideal mechanism for a smaller, local organization).

The Ontario courts have also stated that not-for-profit corporations should not be held to the same standard as their for-profit counterparts. In fact, in the recent case of Deol v. Grewal ², the court went so far as to say that "non-profits should not be required to adhere religiously to all of the technical requirements of corporate procedure...as long as the process is fair". To provide a concrete example, in Lee v. Lee's Benevolent Assn. of Ontario ³, allowing votes to be cast in advance of an election, despite contravening the by-laws of the organization, was held to be technical breach, and yet the Court refused to invalidate the election results.

However, recent examples of breaches that were deemed procedurally unfair include: unilaterally terminating fees and memberships without proper notice or without giving the affected member a chance to respond ⁴, disqualifying a presidential candidate from running for election based on past conduct where there was no authority to do so ⁵, and failing to provide advance notice to directors of important business to be discussed at a directors meeting ⁶.

Procedural Fairness and Reluctance to Interfere

Finally, it is important to note that the courts will not mandate that a certain outcome be achieved, but will require that fair procedure be followed.

In 2002, the Ontario Superior Court of Justice refused to involve itself in a membership dispute since the club in question had followed its own by-laws in refusing membership privileges. Chapnik J., in his ruling, emphasized that "people have a right to associate or not associate with whom they choose" ⁷. Two other membership disputes in 2006 were also dismissed because the decisions made were procedurally fair and in accordance with each corporation's by-laws ⁸. On the other hand, failing to come up with any criteria to qualify for membership or any consistent process for admission warranted a more invasive ruling in a 2007 case: the winding-up of the entire entity ⁹.

As recent case law illustrates, not-for-profit corporations have considerable leeway in determining their own internal dispute resolution mechanisms so long as the procedure itself is fair and the corporation follows its own policies when conflicts arise. To avoid time-consuming and costly litigation in the future, it may be worthwhile to consult a legal advisor familiar with the needs of not-for-profit organizations in order to establish the manner in which disputes should be settled.

References

¹[2009] O.J. No. 2882 (Ontario Superior Court of Justice).

² [2008] O.J. No. 3355 (Ontario Superior Court of Justice).

³ [2004] O.J. No. 6232 (Ontario Superior Court of Justice).

⁴Assn. of Part-Time Undergraduate Students of the University of Toronto v. University of Toronto Mississauga Student's Union, [2008] O.J. No. 3344 (Ontario Superior Court of Justice); Thorne v. Lambeth Lawn Bowling Club, [2009] O.J. No. 564 (Ontario Superior Court of Justice- Small Claims Court).

⁵ Bala v. Scarborough Muslim Assn., [2008] O.J. No. 4839 (Ontario Superior Court of Justice).

⁶ Deol v. Grewal, [2008] O.J. No. 3355 (Ontario Superior Court of Justice).

⁷ Conacher v. Rosedale Golf Assn. Ltd., [2002] O.J. No. 575 (Ontario Superior Court of Justice).

⁸ McGee v. Beaver Valley Ski Club, [2006] O.J. No. 1691 (Ontario Superior Court of Justice); Sahaydakiviski v. YMCA of Greater Toronto, [2006] O.J. No. 1368 (Ontario Superior Court of Justice).

⁹ Warriors of the Cross Asian Church v. Masih, [2007] O.J. No. 3794 (Ontario Superior Court of Justice).

Susanne Greisbach is an Articling Student with BrazeauSeller.LLP. Susanne can be reached at 613-237-4000 ext. 245 or sgreisbach@brazeauseller.com. For further information about this article, please contact Nicole Allen at 613-237-4000 ext. 227 or nallen@brazeauseller.com.

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