Unenforceability of By-laws Against Non-Members
In its 1999 decision in Berry v. Indian Park Assn., the Ontario Court of Appeal held that the by-laws of an Ontario not-for-profit corporation did not bind non-members.
1. Facts
Sugarbush was a rural residential community in Ontario near the Horseshoe Valley Ski Resort. It was developed in three phases.
The first two phases occurred in the mid-1970s and consisted of a total of 157 un-serviced, recreational lots upon which cottages were built and occupied on a seasonal basis. The owners of the first two phases were all members of the Indian Park Association, a non-share capital corporation incorporated under the Ontario Corporations Act (OCA), which maintained a recreation centre and other common areas in the community for the benefit of all residents. The association's by-laws required every resident of Sugarbush to be a member of the association and set out several covenants restricting how owners could use their land.
The third phase was built by a different developer in 1988 and consisted of 178 modern, serviced residential subdivision lots upon which 82 permanent home were built.
In 1991, the developer entered into an agreement with the association according to which the developer agreed, on behalf of itself and its successors and assigns, to abide by the association's by-laws. Purchasers of lots in Phase III became members of the association and also agreed in their agreements of purchase and sale to comply with the association's by-laws.
Disputes arose between the Phase III residents and the association, which was controlled by the residents of Phases I and II. The association provided garbage collection, sewage disposal, water supply and distribution, snow removal and common parking lots. The Phase III residents contributed to the costs of these services, which they did not need and which only subsidized the Phase I and II residents. Eventually, many of the Phase III residents stopped paying their maintenance fees.
2. Rulings
The Ontario Court of Appeal ruled that the restrictive covenants set out in the by-laws (including over additional structures on the lots, pools and fences, storage limitations and single-family use requirements) were not part of a valid building scheme, in part because the restrictive covenants were not registered under the Land Titles Act.
The court also ruled that the association's by-laws were not binding on the Phase III residents.
First, the association exceeded its powers in passing by-laws that purported to restrict the use to which Phase III owners could put their property and that required all Phase III owners to become members of the association. Nothing in the OCA conferred on the association the power to regulate land use. Nor did the objects set out in the letters patent of the association give it the power to restrict the private use of land.
Second, while the developer of Phase III entered into an agreement with the association and the agreements of purchase and sale for Phase III required the owners of the Phase III lots to abide by the association's by-laws, there was no contract between the association and the owners of the Phase III lots. Therefore, there was no privity of contract between the association and the Phase III owners that would entitle the association to enforce the restrictive covenants against the owners. The owners were at liberty, at any time, to unilaterally terminate their memberships in the association.
3. Key Observations
Berry v. Indian Park Assn. highlights the inherent limitations of by-laws. By-laws are a species of private contract that regulate the activities and affairs of a corporation. However, by-laws do not run with land and cannot be made binding on non-members. Also, by-laws cannot be inconsistent with the corporation's letters patent (or articles in the case of a corporation incorporated or continued under the Canada Not-for-profit Corporations Act).
While it was not necessary on the facts of this case for the court to discuss other limitations, by-laws can only bind members in their capacity as members of the association or as directors and officers of the association. By-laws cannot bind members in another capacity, such as in their capacity as owners and occupants of real property. One reason for this limitation is that by-laws can be amended - usually by unilateral act of a majority of the directors. In any case, by-laws of an OCA corporation can generally be amended at any time by simple majority vote of the members. A majority of members cannot use this statutory power, that relates to the activities and affairs of the corporation, to extend the contractual obligations outside this limited context to members in any and all possible contexts.