Dispute resolution clauses in founding documents

We quite often see standard ‘quick fix’ or arbitration dispute resolution clauses included in founding documents such as trust deeds, MOIs and constitutions.

These dispute resolution clauses originate from contracts, and as a way to try to have people who have signed an agreement resolve matters faster and cheaper, before resorting to tedious and expensive legal process. Whether they are ‘independent expert’ or ‘quick arbitration’ clauses, the idea is that parties with competing views and interests agree to submit to the ruling of the external third party when a dispute arises.

In non-profit organisations which are set up for public benefit, the members (if there are any) and the board participate in the meetings and governance of the organisation in service of the public benefit objects of the organisation. This differs markedly from contractual arrangements or from commercial entities or associations for common purpose, where the members, shareholders or contracting parties are (correctly) servicing their own personal interest, or the interest of a sector which they represent. In these commercial and self-serving contexts, a dispute resolution clause may be useful to broker an agreement between warring parties.

However, the context of those who serve on the board of a public benefit organisation is completely different, as each board member serves the organisation (and its ultimate beneficiaries) and lays aside questions of any personal benefit in service of other. This is the essence of the fiduciary duty – looking after something which is not yours, and therefore board members should not have competing interests to be served, as they should all be (ultimately) pulling in the same direction.

Of course, having the same goal in mind does not mean that all will agree on the best way to achieve that goal, and the allocation of scarce resources where the need is great requires tough decisions to be made. However, where boards cannot reach consensus on the next step to be taken/approved, they can take a vote on it and then the majority decision prevails. If the voting is inconclusive (and if there is no casting vote power in the Chair) then the matter to be decided can either be left so, and not pursued OR there can be some further information-gathering, discussion and some independent research, and the board can convene again with clear heads for a re-vote. This process seems to us to be how the board should be carrying out their duties and vastly preferable to calling in an external ‘expert’ to make a ruling.

In any event:

  1. We are not certain that a ruling on a decision which should have been taken by a board would be enforceable against the board members, who must all still exercise their discretion and carry out their duties;

  2. We also think it doubtful that the duty to make the big strategic and oversight decisions which rests with the board is something which can be delegated to another party, since that expert or arbitrator does not have the same relationship of trust which the board does towards the organisation.

In one of the silly examples we sometimes use to demonstrate the essential nature of the fiduciary duty – If your neighbour asks you to feed and take care of their dog while they are away, you can certainly delegate to your child or husband the administration of the duty and ask them to feed the dog on your behalf, but it is still you who is responsible to your neighbour and who must, in the case of any accident or emergency, make the call on whether the dog needs taking to the vet.

In the same way, we feel that a board which is jointly tasked with governing and guiding an organisation should not be able to avoid their essential duty and delegate an important decision to a paid, external arbitrator.


 

Nicole Copley | NGO Law

Nicole has consulted to the NGO sector since 1993. She is an admitted attorney (non-practising), has her Masters in the tax exemption laws and is a Master Tax Practitioner. Nicole developed her drafting skills while working as a business lawyer, and she has a pragmatic problem-solving approach to all the work she does. Her depth and breadth of experience over many years and her work with government and a wide range of clients, give her useful perspective and insight. Nicole also lectures and trains on various topics of importance to the NGO sector. She is author of ‘NGO Matters: A practical legal guide to starting up’, and publisher of the series of NGO Matters handbooks.

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