Why associations should act to prevent the escalation of member disputes

The incorporated associations legislation in Queensland imposes a system of governance that basically requires one vote one member with a management committee elected annually. A quite pure form of direct democracy, what could go wrong?  The majority is always right.

That is the theory. In practice, incorporated associations with their statutorily imposed democracy may not be the promised nirvana that democracy is ideologically promised to be.

The prevailing judicial view is that associations and clubs should look after their own domestic affairs with minimal judicial intervention. The intervention often takes the form of providing the orders that allow for a general meeting of members to be properly convened to elect a governing body.

The usual governance arrangement for many other non-profit organisations and charities is different again with some having no members – such as the charitable trust with just a couple of trustees who appoint replacements themselves or a faith-based organisation with leadership that may be appointed at will by an external, but related, body or a federated peak body consisting of organisational member appointed representatives.

This is different to listed public share companies where a shareholder can typically cast a vote for every share they hold. If they don’t like the management of the company they can sell their shares and invest elsewhere.

Again, memberships can’t usually be sold in non-profit organisations and some members don’t want to or can’t just simply transfer their membership to another organisation.

Two recent cases illustrate the world of pain and grief for associations and their members that can be the product of an unresolved grievance of a member who feels that their only recourse is litigation.

In Sporting Shooters Association ^[1], Mr McGuire became a member of the Coffs Harbour Branch of Sporting Shooters Association of Australia (New South Wales) (SSAA) in 1992, and in 2007 was granted life membership. In 2010, Mr McGuire, with others, were elected to SSAA’s management committee, but complaints about the election process led to another election with a new management committee.

Before leaving office, Mr McGuire had $24,624.16 of the association’s funds transferred into a solicitor’s trust account while there was a dispute about the integrity of the branch.

The SSAA sued Mr McGuire for the return of the funds. Mr McGuire sued for defamation, costs of earthmoving works he allegedly had done on association property and disputed the claims of SSAA.  This eventually amounted to Court costs of $264,000 against Mr McGuire.  Some of the costs were calculated on an ‘indemnity’ basis (indemnity costs are broader in scope than standard costs and are generally awarded when a party is found to have conducted their case improperly or to have wasted the Court’s and the other party’s time).

The Court noted that:

“I also recognise that there have been difficulties in serving the McGuires in the past, that they have been blessed with four lots of solicitors and that their unreasonableness has been the foundation for each of the indemnity costs orders referred to above.^[2]“

The SSA then issued a bankruptcy notice on Mr McGuire’s estate for the costs, which he contested but was unsuccessful.

One has to ask whether such distractions for the SSAA and the personal and financial cost to Mr McGuire could have been avoided?

In a case closer to home, in Thompson v Cavalier King Charles Spaniel Rescue^[3], Mr Thompson fought legal battles spanning over 9 years, with 341 filed documents, 2 aborted trials, numerous interlocutory applications, many directions hearings, 3 unsuccessful appeals to the Court of Appeal, and one application to the High Court of Australia. ^[4] Unfortunately, 2 of the committee members during the litigation died.

Mr Thompson, who was self-represented, had his membership terminated by the management committee and sought the continuance of his life membership of the association and compensation for loss of income derived from boarding dogs in relation to the association.

Costs awarded against Mr Thompson in the preliminary litigation were over 100 times the claimed annual loss.

There was evidence that the case was about more than financial loss with the following exchange:

His Honour: …  say… that decision is set aside, what’s that going to achieve from your point of view? It’s a society that have fairly clearly indicated they don’t want you…

Plaintiff:             Maybe that’s why I want to be in their face.[5]

The context of these comments is that the association had 7 members of the association (the minimum number required to establish an incorporated association) who were also the management committee. Although not disclosed as to why this was the case, it is often chosen because it is believed to reduce administration costs and maintain control by the founders of the organisation.  Under its rules (which were the model rules under the Act), there was an appeal to the association in a general meeting for a member whose membership had been terminated by the management committee.

The Court clearly was unimpressed with the time taken to bring the matter before the Court and then move to a conclusion of the proceedings, commenting (at 13):

“The delay is a disgrace to the parties, particularly having regard to the subject matter… and …is of Dickensian “Bleak House” character“.

The Court used its discretion under s 73 of the Associations Incorporation Act 1981 (Qld) (Act) to permanently stay the proceedings of the case due to a range of factors such as the prospects of success, size of the association, and unreasonableness in prosecution of the claim.

Lessons

Litigation is a pastime reserved only for billionaires and while it may be genuinely necessary from time to time in relation to incorporated associations, prevention maybe better than a litigious cure.

Good governance is essential to maintaining healthy relationships in an incorporated association. While robust views might be expressed from time to time, an equally robust process is necessary for such concerns to be aired and dealt with in what the ordinary person would regard as a fair manner.

The situation in Queensland has probably not been aided by disputes between members, and the association only being able to be heard in the Queensland Supreme Court, rather than in other jurisdictions opening up lower Courts and tribunals to quickly and inexpensively deal with such matters. Queensland has chosen the philosophy that the barrier of litigation in the Supreme Court keeps trivial and vexatious litigation to a minimum.

It appears to have had the effect of stifling litigation in relation to incorporated associations, but it has had some side effects.

In some cases, management committees have chosen to act harshly in member expulsions and disciplinary matters in the knowledge that members often can’t afford to contest the matter in the Supreme Court. Appeal processes maybe regarded as shams given that the appeal arbiters are often not perceived to be independent of the issues or the association management.  This leads, in many instances, to a festering culture of disrespect within associations that hampers their communal life and reputation.

The Queensland government has proposed a legislative amendment to provide some guidance to solving these issues. It passed the Associations Incorporation and Other Legislation Amendment Act 2020.  The Act was assented to on 22 June 2020, but some provisions (such as those discussed below) have not become operational as the Government needs to consult about the regulations of the Act, including a new set of model rules.

The provisions, when in force, will provide better governance standards for associations by providing guidance on how management committee members and officers of incorporated associations should meet their governance obligations. It achieves this by imposing obligations on officers to:

• exercise their powers and discharge their duties with care and diligence, in good faith in the best interests of the association, and for a proper purpose;
• not improperly use their position to gain, directly or indirectly, a pecuniary benefit or material advantage for themselves or another person; and
• not improperly use information obtained from their position to gain, directly or indirectly, a pecuniary benefit or material advantage for themselves or another person;

and imposes obligations on members of the management committee to:

• disclose material personal interests;
• disclose remuneration or benefits paid/given to management committee members and senior staff members, and their relatives; and
• prevent insolvent trading of the association.

Further, the measures introduce a requirement for the rules of an association to provide a grievance procedure and require parties to a dispute to attempt to resolve the matter internally before seeking adjudication through the Court system. It was considered that both associations and their members will benefit from a formalised internal dispute resolution process prior to initiation of Court action.

The grievance procedure must include:

• a mediation process for the parties;
• a mediator who decides the outcome of the dispute and they must be unbiased;
• a member may appoint someone to act on their behalf in the mediation; and
• each party must be given an opportunity to be heard.

If the rules of an incorporated association do not set out a grievance procedure that is consistent with the requirements outlined in the new section, then the rules of the association are taken to include the provisions of the model rules providing for the grievance procedure. An incorporated association will not be able to exclude the operation of the section.

The new model rules with grievance mediation clauses are yet to be disclosed and probably will only occur after consultation about its form with stakeholders.

Depending on the nature of the model grievance clause, many associations will want to craft a bespoke grievance clause that better suits their governance and organisational culture. This will involve the association passing an amendment to their constitution at a general meeting with special notice to override the mandatory imposition of the model rule clause into their constitution.

It is yet to be seen how many mediators will want to be involved with mediating such disputes given the risk of potential liability and becoming embroiled in ongoing litigation about their role.

[1] Sporting Shooters Association of Australia (New South Wales) Coffs Harbour Branch Inc v McGuire [2022] FedCFamC2G 286

[2] Sporting Shooters Association of Australia (New South Wales) Coffs Harbour Branch Inc v McGuire [2022] FedCFamC2G 286 [at 40] quoting the reasons for judgment of Magistrate Heilpern.

[3] Thompson v Cavalier King Charles Spaniel Rescue (Qld) Inc [2022] QSC 82

[4] Thompson v Cavalier King Charles Spaniel Rescue (Qld) Inc [2020] QCA 2; Thompson v Cavalier King Charles Spaniel Rescue (Qld) Inc [2019] QCA 110; Thompson v Cavalier King Charles Spaniel Rescue (Qld) Inc & Ors [2015] QCA 10; and Thompson v Cavalier King Charles Spaniel Rescue (Qld) Inc & Ors [2020] HCASL 91.

[5] Thompson v Cavalier King Charles Spaniel Rescue (Qld) Inc [2022] QSC 82 [at 72].

Article by:

Myles McGregor-Lowndes
Consultant
Email Myles