Why it matters that the Supreme Court decision reinforced the existence of hidden contracts in charity/nonprofit governance

6 juillet 2021 | David Tang

( Disponible en anglais seulement )

Covenants, which lawyers call contracts, lie at the heart of many of the world’s religions. If we reflect on the Kendrick brothers’ film, Courageous, contemporary North American culture is similarly attracted to the use of resolutions or covenants between not only God and the individual but between co-religionists.

What, then, has the Supreme Court of Canada recently said about the role of contracts in voluntary organizations, particularly religious ones?

Background and Facts

As we summarized previously, the Supreme Court had already considered in 2018 the possibility that if the relationship between a congregation member and a religious organization could be properly characterized as contractual, the courts would adjudicate disputes between them, even if the question involved religious matters.

The May 21, 2021, Ethiopian Orthodox Tewahedo Church of Canada St. Mary Cathedral v. Aga (2021 SCC 22) (“Aga”) decision rendered by the Supreme Court considered the assertion made by five former members of the congregation of the Ethiopian Orthodox Tewahedo Church of Canada, St. Mary Cathedral (the “Church”) that there was a contract between them and the Church. They complained that the contract was breached due to the manner in which they were expelled from the congregation. Right at the heart of the dispute was theology, because they were expelled for investigating and making recommendations in support of an allegedly heretical movement within the Church and subsequently challenging the Archbishop’s ruling that the movement was indeed heretical.

Perhaps the most compelling aspect of this assertion was the fact that the applicants’ initial applications for membership in the congregation included a pledge to make monthly financial contributions to the Church, which they were able to show they had performed. These payments were said to be “consideration” (the concept of one party giving the other party something of value in exchange for contractual promises), one of the key ingredients in a contractual relationship.

The motions judge found there was no contract, but on appeal, as summarized previously, the Ontario Court of Appeal held that contractual relationships had been established based upon the Church’s constitution and the by-laws taken together with the honored pledges of financial contribution. The Court of Appeal held that these documents formed the legal basis for the Church’s obligation to follow certain procedural requirements. This was appealed by the Church to the Supreme Court of Canada.

Findings and Principles

The Supreme Court of Canada confirmed that it is possible for voluntary organizations, including religious organizations, to be in contractual relationships with the members of their congregations. Where that is the case, those members can ask the courts to adjudicate those contractual rights, even if the questions have a “religious aspect.”

The focus of the Court’s analysis was whether the facts demonstrate an objective intention to enter into contractual or legal relations.  The Court found there was no such evidence in this case. While every case will be different, the decision does provide the following principles about how such an analysis should be carried out:

  • General principles of contract law apply.
  • “[M]embership in a voluntary association is not automatically contractual. Rather, a contract exists only if the conditions of contract formation, including intention to create legal relations, are met.”
  • Objective standard (not subjective):
    • How does a party’s conduct appear to a reasonable person in the position of the other party?
    • Have the parties indicated to the outside world/an objective reasonable bystander their intention to contract and the terms of such contract?
  • Intention to form a contractual relationship might be harder to establish in a religious context
  • Where property or employment is at stake, it is more likely there is an intention to create contractual rights.
  • No automatic conclusion that where there is membership in an organization with a constitution and by-laws that a “web of contracts” is created.

Application to Religious Organizations

Religious organizations, in particular, often have large congregational “memberships”, comprised of individuals who may or may not be legal members of the incorporated organization under the corporate statutes.  Despite this, it is clear that they may be able to assert contractual rights.

This is clearly the case because the applicants in Aga, while members of the congregation, were not members of the corporation under the corporate statutes. This decision therefore affects even those religious organizations that deliberately avoided replicating their congregational membership concepts in their corporate governance. Many religious organizations are structured with only a select group of the congregation as the legal members of the corporation, so as to ensure theological orthodoxy and avoid tyranny of the majority. Those arrangements continue to ensure that only that select group will elect the directors, but are not enough to avoid the impact of this decision.  For example, churches whose elders/bishops/deacons are the only corporate members will still be subject to the principles raised on this appeal.

Next Steps

Voluntary organizations, even religious ones, which wish to avoid having their previously internal decisions challenged in court on this basis should now consider whether their documentation and practices support an objective intention to create contractual rights. This will typically start with an examination of their documentation, which would certainly include its constitution/articles/letters patent and by-laws, but may also require assessment of other documents such as signed statements of faith, covenants and policies. With some organizations, consideration of specific practices may also be required.  It is important to acknowledge that the subjective intentions of the church or even the individuals may not be determinative of whether or not there is a contract.

If there are elements of the documentation or practices that suggest the existence of contractual relationships, the documentation should be revised or augmented. In some cases, an explicit statement that no contractual relationship exists may be useful, but these should not be considered determinative in all cases.  Where all or even the majority of the facts, practices and circumstances point to there being a contract, statements of that nature are not likely to prevail.

While future members of the organization can be persuaded to sign documentation with explicit denials of any contractual relationship, it is often difficult to persuade existing members to do the same. So while there is value in getting the documentation right at the outset, existing organizations will likely need to implement a series of changes in practices and some documentary revisions to reduce the risk. As always, the benefits of implementing changes to reduce this risk need to be balanced with the desire to not overly disrupt the character and effectiveness of the organization and its mission.

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