Ontario – not-for-profit’s arbitration agreement in by-laws not subject to heightened court scrutiny – #122

In The Campaign for the Inclusion of People who are Deaf and Hard of Hearing v. Canadian Hearing Society, 2018 ONSC 5445, Mr. Justice Herman J. Wilton-Siegel dismissed arguments that a not-for-profit corporation’s status required the courts to be more vigilant in validating their arbitration provisions and held former members of the not-for-profit corporation to the terms of the arbitration provisions in the by-laws applicable before their loss of membership. Wilton-Siegel J. also held that it was well established that parties by private agreement could submit their oppression claims to arbitration.

The dispute involved the Canadian Hearing Society (“CHS”), the Campaign for the Inclusion of People who are Deaf and Hard of Hearing (the “Campaign”) and two former members of CHS (the “Individual Applicants”).

A national charity founded in 1940 and continued under the Canada Not-for-Profit Corporations Act, SC 2009, c 23 (the “Not-for-Profit Act”), CHS provides services, products, programs and information to members of the Deaf and Hard of Hearing community. The Campaign was incorporated September 5, 2017 also under the Not-for-Profit Act but, as Wilton-Siegel J. noted, it “appears that its sole purpose, at least to date, is to bring this application”.

The litigation filed by the Campaign stemmed from changes CHS had made to its by-laws. Those changes were prompted by a financial challenge CHS experienced in 2014 leading CHS to review its operations and corporate governance. That review lead CHS to make extensive changes to its membership by way of a new policy and by-laws. Those changes are summed up at paragraphs 6-11 of the reasons and their effects outlined at paragraphs 12-15. Those changes included no longer admitting or renewing certain categories of memberships, such as current and former employees and their families, eliminating references to lifetime memberships and updating the procedures for processing membership applications.

The CHS board began a series of steps which included formally adopting its new membership policy and introducing changes to its by-laws. The latter by-law (“2016 By-Law”) was approved by a special resolution of the members at the CHS’ annual general meeting held in September 2016.

Objecting to the changes, the Campaign as sole applicant filed a November 20, 2017 Notice of Application and, further to amendments in February 2018, later added the two (2) Individual Applicants. Purporting to represent three (3) classes of individuals (identified at paragraph 17), the Campaign asserted oppression under section 253 of the Not-for-Profit Act. Its grounds and its motivation for filing the application are summed up at paragraphs 19 and 20 respectively.

CHS applied for a court order dismissing the litigation filed by the Campaign. It argued that: (a) the Campaign had no standing as a “complainant” within the meaning of section 253 of the Not-for-Profit Act; and, (b) the litigation by Individual Applicants should be stayed under section 7 of the Arbitration Act, 1991, SO 1991, c 17 because CHS’ by-laws required membership disputes to be arbitrated.

Wilton-Siegel J. heard the application, addressing CHS’ motion against the Campaign and against the Individual Applicants separately.

With regard to the Campaign, Wilton-Siegel J.’s analysis, covering paragraphs 24-45, lead him to grant CHS’ motion to dismiss the Campaign’s application. He agreed with CHS and determined that the Campaign was not a “complainant” within the meaning of the Not-for-Profit Act. Those paragraphs set out, among other things, the limits of a not-for-profit corporation’s directors’ responsibility to members, distinguishing them from those due to shareholders in a for-profit corporation, and also the absence of members’ consultative function or authority over the not-for-profit’s policies.

With regard to the Individual Applicants’ claims against the CHS, Wilton-Siegel J. concluded that the CHS by-laws required that their oppression claims be arbitrated and issued a stay of the litigation pending that arbitration.

The 2013 version of CHS’ by-laws contained a detailed statement of an undertaking to arbitrate (reproduced in full at paragraph 47) in accordance with the Arbitration Act and bound the Individual Applicants as members or former members. It extended to all disputes or controversies among members, directors, officers, committee members, or volunteers of the CHS arising out of or related to its articles or by-laws, or out of any aspect of the operations of the CHS. The 2016 By-Law was substantially similar.

Individual Applicants raised five (5) separate arguments to resist the application of the arbitration provisions in the by-laws. Wilton-Siegel J. considered and dismissed each in turn. The Individual Applicants claimed that:

1. they were no longer members and CHS’ by-laws did not apply to “disenfranchised members”. The case law submitted by Individual Applicants, Brown v. Quinn, 2007 NBBR 259, drew the discussion over to whether an arbitration agreement adopted by a not-for-profit corporation should be read narrowly. Wilton-Siegel J. dismissed that specific argument. First, he held that the case cited did not apply. Second, he held that there was no basis to claim that a not-for-profit corporation’s by-laws should read narrowly. The reasons contain no discussion as to whether a former member, objecting to the loss of membership, would be bound by an arbitration agreement contained in the rules governing his membership.

2. the wording of the arbitration provisions actually preserved members’ access to the courts. Wilton-Siegel J. held that the wording, “read as an entirety”, confirmed that a member’s rights are not limited or restricted in any way by having to arbitrate any disputes rather than made arbitration optional at a member’s discretion.

3. Parliament had provided a statutory remedy for oppression and “must have intended that any oppression claims would be adjudicated by a court rather than arbitrated”. Wilton-Siegel J. held that there was “no necessary connection between the existence of a statutory remedy and the proper tribunal for the resolution of any claims asserted in respect of that remedy”. He pointed to Blind Spot Holdings Ltd. v. Decast Holdings Inc., 2014 ONSC 1760 when observing that the law was “well established” that parties by private agreement can arbitrate their oppression claims.

4. special circumstances exist, as in Deluce Holdings Inc. v. Air Canada, 1992 CanLII 7654, which justify not applying the arbitration provision. Comparing the situation in that case to the one before him, Wilton-Siegel J. disagreed. In the present case, the subject matter of the dispute fell inside the arbitration provisions.

5. the arbitration provision deprives the court of its inherent jurisdiction to direct and control the administration of charities and is invalid. Wilton-Siegel J. disagreed, pointing to limitations on the court’s role in governance of charities. The added element of one party’s status as a not-for-profit conferred no additional court scrutiny to the arbitration provisions.

[65] The Individual Applicants overstate the role of the courts in respect of charities. Courts have an equitable or inherent jurisdiction to intervene if charitable funds are misapplied by trustees of a fund or by directors of a corporation. However, I do not think that such jurisdiction extends to matters of corporate governance such as membership in a corporation. Such matters are governed by the Act, including remedies provided thereunder, and the well-established principles of corporate law. There is no need, and no room, for an additional and overriding inherent jurisdiction of the courts to address disputes regarding corporate governance of a not-for-profit corporation.

Regarding court costs, CHS as the successful party on its motion sought costs on a partial indemnity basis of $114,000.00, of which $104,000.00 represented legal fees. Wilton-Siegel J. recorded the parties’ agreement that “some portion” of CHS’ legal work would “be relevant for the arbitration of the claims of the Individual Applicants”. The parties disagreed on the proportion. Wilton-Siegel J. held that, as a starting point, “no more than 50% will be relevant, being $52,000 in legal fees”. For reasons set out at paragraphs 72-75, Wilton-Siegel J. set the recovery at $46,700.00. He assigned and capped recovery to each of the Individual Applicants at $11,675.00 payable “jointly and severally” with the Campaign’s own share of the $46,700.00