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How to Build a Disaffiliation Mechanism to Protect a Charity's Brand

In a previous post, we stated that the Supreme Court of British Columbia's 2015 ruling in Habitat for Humanity Canada v. Hearts and Hands for Homes Society 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 when handling the disaffiliation process should the local organization become a threat to the larger brand. In a decision released in May 2016, the British Columbia Court of Appeal unanimously affirmed the lower court ruling.

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 of homes and providing non-interest bearing loans to assist residents to purchase their homes.

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.

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. The six-step disaffiliation process set out in the standard affiliation agreement was as follows:

1. Identification of an issue or deficiency. Here, HPG had unresolved conflicts of interest, lacked financial transparency and failed to meet 34 of Habitat's 56 standards of excellence.

2. Preliminary discussions with affiliate member. If the Vice-President of Affiliate Services (VP) is satisfied that the information obtained in Stage 1 warrants an investigation, the VP shall investigate the issue, including having preliminary discussions with the affiliate.

3. Written notice and a request for information or remedy.

4. Mediation. Here, the mediation committee consists of one nominee of Habitat Canada and one nominee of the affiliate who, in turn, designate a third member.

5. Probation. A majority of the board of Habitat Canada can place the affiliate on probation if unsatisfied with the plan of action outlined through the mediation process.

6. Disaffiliation. A super-majority of two-thirds of the directors of Habitat Canada can disaffiliate a member who is in serious violation of the affiliation agreement or by-laws if its continued existence as an affiliate is expected to jeopardize Habitat's name or reputation.

 

2. Ruling

In detailed reasons, the Court of Appeal found that:

● throughout the disaffiliation process, HPG was given many opportunities to bring itself into good standing; and

● the disaffiliation process itself is premised on finding a way to assist affiliates to return to good standing - which is not a process of penalizing the affiliate, but one aimed at rehabilitation.

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. The Court of Appeal agreed with the lower court that Habitat Canada had met or exceeded any duty it had to its affiliate.

3. Key Observations

The outcome in this case 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 but to disaffiliate the local body and redeploy the assets under its own administration.

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