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How to Unilaterally Disaffiliate a Local Member Organization

Habitat for Humanity Canada v. Hearts and Hands for Home Society (released July 2015) provides a textbook illustration of how an umbrella charitable organization can protect its brand not only at the time that it accepts local organizations as affiliates but also how it should handle the disaffiliation process when the local organization become a threat to the larger brand.

1. Facts

Habitat for Humanity International (Habitat International) was established in 1976 with the object of soliciting volunteer time and funds to provide low-cost housing as a means of addressing poverty.  It has a network of local affiliate organizations all over the world, each of which is dedicated to the building, renovating and repairing homes and providing non-interest bearing loans to assist residents to purchase their homes.  By 2006, Habitat International's brand had been valued at $3.1 billion.

Habitat for Humanity Canada (Habitat Canada) is the Canadian national affiliate of Habitat International and has more than 60 local affiliates across Canada, each of which is a separate corporation and registered charity.

In 2001, Habitat for Humanity Prince George Society (HPG) was incorporated in B.C. and, in 2006, HPG entered into an affiliation agreement with Habitat Canada.  Under the affiliation agreement:

  • HPG recognized that Habitat International was the owner of all Habitat trade-marks, which were licensed to HPG and other local affiliates under non-exclusive sublicenses allowing their use in connection with their charitable mission;
  • in exchange, HPG obtained the right to represent itself as an affiliate of Habitat Canada, was entitled to use the Habitat trade-marks and copyrighted materials, could establish ReStores (a second-hand goods shop operated by affiliates as one means of raising funds) and obtain advice, assistance, resource materials and administrative services from Habitat Canada (including with respect to obtaining registered charitable status); and
  • HPG agreed to a review process and potential six-step disaffiliation process that was ultimately designed to protect the Habitat brand image and reputation.

HPG's constating documents set out objects that were aligned with the purposes of Habitat Canada and provided that, upon dissolution, the net residual assets of HPG must be distributed to Habitat Canada.

Habitat Canada first detected that HPG was not in compliance with Habitat's standards in 2009.  A report in 2010 found that HPG lacked a strategic plan, an operating plan and a budget and also expressed concerns with HPG's family selection process. But these deficiencies were not rectified.  In 2012, a further report identified a multitude of problems with HPG's governance and operations, including conflicts of interest at the board level, HR issues, problems with the management of the ReStore, a lack of financial transparency and accountability and a failure to meet most of Habitat's standards of excellence.

While it was at the same time trying to induce HPG to get on track, Habitat Canada began the process of disaffiliation, which would result in HPG having to discontinue use of the Habitat trade-marks and brand connection and turn over to Habitat Canada all of the net assets of HPG.  At the end of the disaffiliation process, HPG would be converted back into an empty corporate shell.

In addition, in 2013, Habitat Canada retained an independent party to assess the health of HPG's governance and operations.  That assessment concluded that HPG was in crises from which the current board and management did not have the skills to extricate it.  HPG was placed on three-month probation.  About five months later, Habitat Canada's board voted by the required two-thirds majority to disaffiliate HPG and terminated the affiliate agreement and sublicense.  After that, HPG changed its corporate name and continued to operate.

2. Ruling

Justice Sharma of the Supreme Court of British Columbia found that Habitat Canada not only meet a duty of good faith in enforcing its contracts with HPG but "it surpassed it with its patient approach to the issues raised with HPG" and went "above and beyond any contractual duty of good faith".

The clause in the affiliation agreement requiring that all net assets of the affiliate be transferred to Habitat Canada was upheld as binding and enforceable against HPG.  One reason supporting this result was that HPG and Habitat Canada had the same charitable purposes and shared a common charitable mission.  Nor was the asset transfer an invalid penalty clause or forfeiture of the assets of HPG.  The judge found that HPG received significant assets using the goodwill and name of Habitat.

The court found that there was the essential uniqueness to the assets held by HPG to justify an order of specific performance.  The assets of HPG were inexorably linked to the mission and brand of Habitat Canada.  HPG had no status or reputation completely independent of Habitat Canada.  Damages would be an inadequate remedy because of the valid concerns to protect the integrity of the Habitat name and brand and the interest-free status of the partner family mortgages.

Accordingly, the judge ordered specific performance of the asset transfer provision in the affiliation agreement.  Among other things, this ensured that the interest-free status of the partner family mortgages remained unaffected.

HPG's counterclaims against Habitat Canada alleging breach of contract and other causes of action were all dismissed summarily.

3. Key Observations

This case is remarkable for several reasons. Obtaining an order for specific performance on a summary judgment motion is not an easy achievement in litigation. Here, however, it reflects the care that went into documenting the affiliate relationship at the outset and the painstaking efforts the umbrella organization took to work with the local affiliate before ultimately concluding that it had no choice left but to disaffiliate the local body and redeploy the assets under its own administration.

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