Follow up on other blogs I’ve written about Ontario not for profit corporations, I thought it would be worth discussing what happens if there is an internal dispute concerning an Ontario Not-For-Profit Corporation. Take the following example.  The By-Laws (power-giving documents)  say something or fail to say something about a specific procedure – for example, procedural requirements that must be followed for holding a member meeting or having members vote for a board of directors.  At the end of the day, someone (e.g. a director, officer, or member) cries foul for procedural irregularity and are contemplating court action.  The question comes up: how have Ontario courts responded previously when faced with these types of matters?

Basically, Ontario Courts dealing with disputes about procedural irregularities involving not-for-profit corporations have observed that:

• Courts will be loathe to interfere in the internal working of not-for-profit corporations absent some demonstrated evidence that any procedural irregularities went to the heart of the electoral process or lead to a result which does not reflect the wishes of the majority.
• Courts will not intervene with determinations made by a non-share capital corporation in accordance with its by-laws provided the corporation does not demonstrate bad faith or act contrary to the rules of natural justice.
• The relationship between a not-for-profit corporation and its members is contractual: only in certain circumstances, or where there are contractual rights created by the not-for-profit corporation’s by-laws, will the member be able to enforce their rights under the law.
• It is only for a not-for-profit corporation (and not a court) to determine its corporate governance documents. Courts should not get generally get involved in the internal governance matters of a not-for-profit corporation.

What follows is a brief summary of the past cases where Ontario courts have made decisions concerning internal governance disputes of not-for-profit corporations.  You are cautioned again not to rely on these cases (as they may no longer be good law and may not apply to your particular situation) and to seek professional help by making a post on Dynamic Lawyers (or contact me directly - michael@carabashlaw.com).

In Lee v. Lee’s Benevolent Assn. of Ontario, [2004] O.J. No. 6232, members of an Ontario not-for-profit corporation alleged irregularities in the conduct of an election of directors and sought to invalidate that election. Specifically, the applicants primarily claimed that some ballots were cast in advance of the election date. There was nothing in the corporation’s by-laws permitting the advance voting. While Nordheimer J. admitted that this caused an irregularity in the election, he did not accept this irregularity as invalidating the election. Indeed, he held that, notwithstanding this technical failure, there was no evidence or suggestion that the votes so cast did not reflect the wishes of the voters. He went on to state:

12 Non-profit organizations such as the Association should not be required to adhere rigorously to all of the technical requirements of corporate procedure for their meetings as long as the basic process is fair. Nor should the court be too quick to grant relief in such circumstances that may only serve to encourage a disgruntled member of such an organization to seek such relief. Absent some demonstrated evidence that any irregularities went to the heart of the electoral process or lead to a result which does not reflect the wishes of the majority, the court should be loathe to interfere in the internal workings of such groups.

The last sentence of this passage has been adopted by subsequent Ontario courts.

In Warriors of the Cross Asian Church v. Masih, (2007) 87 O.R. (3d) 169, members of an Ontario not-for-profit corporation alleged irregularities in the conduct of an election of directors and sought to invalidate that election. Specifically, the applicants claimed that no written notice of the meeting had been provided and no ballots had been used at the meeting to take the vote. Lederer J. found that the election of the board members did not comply with the Corporations Act and was therefore not valid. Citing the ruling in Lee v. Lee’s Benevolent Assn. of Ontario, Lederer J. held that the error in the instant case “goes to the very heart of an election” and ultimately ordered that the not-for-profit corporation be would up for its failure to adhere to the requirements of the Corporations Act.

In Rakowski v. Malagerio, [2007] O.J. No. 369, the member of an Ontario not-for-profit corporation (the Humber Students’ Federation) brought an application to challenge the validity of a policy which prevented directors from being members of non-sanctioned student associations or advocacy groups. Perell J. dismissed the application, finding that the not-for-profit corporation’s policy was reasonable, non-discriminatory and not contrary to public policy and the public interest, and that the policy had been enacted in good faith. Although the Humber Students’ Federation is a corporate entity, Perell J. commented that it was similar to an association or club and offered the following observations about why the court’s jurisdiction in the affairs of associations and clubs is problematic:

29 Traditionally, courts have expressed reluctance and sometimes a refusal to interfere with the internal affairs of associations and clubs. There are a variety of reasons for this attitude. One reason is that the nature of the relationship of the members of an association is intentionally designed by the members of the association to be informal and non-legal. Just as some promises are intended to be contractual and some are not, persons may decide to associate in informal ways that are not meant to call for judicial supervision. The courts tend to respect these choices. Another reason is that the legal classification of these associations does not fit neatly into the recognized categories of legal entities. Yet another reason is that there may be little the court could do if it assumed jurisdiction and the only solutions or remedies might rest with the members of the club or association.

30 The case law, however, reveals that courts do get involved in the affairs of associations and clubs. Sometimes, the court will decide a matter involving an association because the jurisdictional issue was simply not raised by the parties, who wished an answer from the court or did not appreciate that perhaps the matter of the dispute was non-juridical. Sometimes, the court will become involved if a principle of natural justice is breached. Here, one classic class of examples is the situation where a member of a club or association is expelled from the club or association or is temporarily or permanently disqualified from participating in its activities or is disciplined for breach of the club or association rules and the process of expulsion, disqualification, or discipline is fundamentally unfair. The courts will exercise a limited jurisdiction to ensure that an association or club does not violate the principles of natural justice. Sometimes, the court will become involved because the nature of the unincorporated association has evolved to be a legal entity that may be regulated by the courts at least for some purposes. This evolution appears to have occurred for trade unions; see: Berry v. Pulley, [2002] 2 S.C.R. 493 and registered political parties; see: Ahenakew v. MacKay (2004), 71 O.R. (3d) 130 (C.A.). Sometimes, the courts will become involved because, upon analysis, the court finds that the relationship between the members that constitute the association or club is contractual in nature and that the law of contract affords a basis for the court’s common law jurisdiction. Sometimes, there are special statutory provisions that empower the court with jurisdiction, and sometimes the members of the association or club circumvent the problem by relying on rules of civil procedure or legislation that authorizes the court to interpret documents or statutes and to make declarations.

In Alaimo v. Di Maio, 2008 CarswellOnt 3729 (Ont. S.C.J.), members of an Ontario not-for-profit corporation alleged irregularities in the conduct of an election of directors and sought to invalidate that election. Boswell J. dismissed that claim in light of the test set down by Nordheimer J. in Lee v. Lee’s Benevolent Assn. of Ontario and followed by Lederer J. in Warriors of the Cross Asian Church v. Masih. Boswell J. reviewed the evidence and held:

128 From a procedural point of view, therefore, there were no irregularities identified by the Applicants in their evidence that appear to me to be of a significant nature, and certainly none that could be described as going to the heart of the election.