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Contractual Nature of the Constating Documents of NFP Corporations

Senez v. Montreal Real Estate Board is a 1980 decision of the Supreme Court of Canada on the nature and effect of the by-laws of not-for-profit corporations. It continues to be an important decision today.

1. Facts

The plaintiff , Mr. Senez, was a real estate broker and an associate member of the Montreal Real Estate Board, a corporation without share capital incorporated under the laws of Québec. He was purportedly expelled as a member, although the expulsion contravened the Board's expulsion by-law and was therefore invalid. More than three years after the purported expulsion, Mr. Senez brought an action in damages against the Board.

The threshold issue before the courts was whether the action was prescribed (or statute-barred) under the Civil Code of Lower Canada (since superseded by the Civil Code of Québec). The Supreme Court of Canada found that the action was not statute barred to the extent that it was in contract (which at the time had a 30-year prescription or limitation period). Therefore, the plaintiff's claim for certain damages as a result of his expulsion from the Board (including to his professional reputation) could be claimed.

The enduring importance of the case is in what the court said about the nature and effect of the by-law (and by extension) the other constating documents of an NFP corporation.

2. Rulings

The important rulings of the court may be summarized as follows:

● The by-laws of an NFP corporation are contractual in nature. Therefore, a breach by the corporation of its own by-laws equates to a breach of its contractual obligations to its members.

● When an individual joins an NFP corporation as a member, he accepts its constitution and by-laws then in force and undertakes an obligation to observe them.

● In accepting the constitution, a member also undertakes, in advance, to comply with the by-laws that are subsequently adopted even if he disagrees with such changes.

● A member may, generally, resign.

● If the member remains, he accepts the new by-laws.

● Reciprocally, the obligations of a corporation to observe its own by-laws are similarly contractual in nature.

Importantly, in reaching this decision, the court canvassed case law from other jurisdictions (including Alberta and British Columbia) involving NFP corporations incorporated under the laws of those sister provinces.

3. Key Observations

The analysis in Senez is equally applicable to the articles and by-laws of NFP corporations incorporated or continued under the Canada Not-for-profit Corporations Act. There is nothing in the Act that negates the effect of Senez.

Indeed, the Act includes some additional factors pointing to the contractual nature of the articles and by-laws of an NFP corporation. For example, directors and officers are required to comply with the articles and by-laws of the corporation. The articles must set out any voting rights or restrictions on the members (providing a default voting rule if the articles are silent). The by-laws can provide for the transfer of memberships. Either the articles or by-laws can provide for the power to expel or discipline a member (which was the issue that gave rise to the breach of contract action in Senez). Articles or by-laws can set out conditions for being a member, the manner of giving notice to members entitled to vote at a meeting of members and the methods of voting at meetings by absentee members. Finally, subject to the articles and by-laws, the directors may require members to make an annual contribution or pay annual dues (which would give rise to a claim in debt by the corporation against the unpaid member).

The provisions of the Act strongly reinforce the contractual nature of the relationship created between a corporation and its members articulated by the Supreme Court in Senez. Also, as underscored in Senez, the inherent nature of this contract (created by the articles and by-laws) is that it can be amended against the will of a minority member. A minority member has the choice to resign as a member. However, if she continues as a member after the effective date of the amendment, she is nevertheless bound by the articles and by-laws as amended from time to time.

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