Why It Matters That The Supreme Court Decision Reinforced The Existence Of Hidden Contracts In Charity/Nonprofit Governance – Corporate/Commercial Law

Bizar Male

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.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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