Next Legal Steps for NSW Charities When Mediation Fails in an NFP Dispute

Introduction

An internal dispute can disrupt the operations of any not-for-profit organisation or charity in NSW. Handling NFP member disputes effectively and legally is essential for an incorporated association to maintain focus on its objectives and meet its obligations.

The Associations Incorporation Act 2009 (NSW) requires every incorporated association to have a process to resolve disputes, which often begins with mediation. This article outlines the next legal steps for a not-for-profit organisation when mediation fails to resolve a dispute, covering options from arbitration to potential litigation.

Interactive Tool: Find Out Your Next Legal Step in an NFP Dispute

Understanding a Dispute Within a NSW Charity

Identifying the Parties in a NFP Dispute

An internal dispute within a NSW charity is a conflict between people who are bound by the rules of the incorporated association. Therefore, understanding who is involved is the first step to finding a path to resolve the dispute.

These conflicts commonly arise in a few different situations, including disputes between:

• Two or more members of the not-for-profit organisation;
• One or more members and the association as a whole;
• A member or group of members and the committee of management; or
• Members within the committee of management itself.

Reviewing Dispute Resolution Procedures

The Associations Incorporation Act 2009 (NSW) requires that the constitution of every incorporated association outlines a process for resolving internal NFP disputes. This procedure is the formal mechanism your organisation must follow to manage grievances between members or between a member and the association.

Ultimately, it is important to follow the procedures in your constitution closely to ensure fairness. However, if your charity’s constitution does not include a specific dispute resolution procedure, the process outlined in the model constitution will automatically apply to your organisation. This ensures every NFP has a structured way to resolve disputes.

Steps to Resolve a Dispute Before Litigation

Utilising Mediation for Charities & NFPs

For an incorporated association in NSW using the model constitution, any internal dispute must first be referred to a NSW Community Justice Centre (CJC) for mediation. This process is a voluntary and confidential way to resolve a dispute. An unbiased and independent mediator facilitates the meeting, helping the parties involved to communicate and find common ground.

The mediator’s role is to control the process, not the outcome. Specifically, they will not:

• make decisions for the parties;
• determine who is right or wrong; or
• provide any legal advice.

Ultimately, the primary goal is to support the parties in reaching a negotiated agreement. Furthermore, the mediation services provided by NSW Community Justice Centres are free and impartial.

Moving to Arbitration When Mediation Fails

If mediation does not resolve the dispute within three months of being referred to a Community Justice Centre, the model constitution requires the matter to be referred to arbitration. This is the next mandatory step in the dispute resolution process for any not-for-profit organisation following this procedure. It is important to note that arbitration has its own particular legal requirements that must be followed.

Alternative Options to Resolve an Internal Dispute

Holding a Special General Meeting

When formal dispute resolution procedures reach a deadlock, an incorporated association can convene a special general meeting of all its members to try and resolve the problems. Ultimately, this allows the entire membership to address and vote on ongoing concerns.

Your organisation’s constitution will outline the specific process for calling such a meeting. For example, if your charity uses the model constitution, a meeting can be convened in the following ways:

• The committee of management has the authority to call a special general meeting whenever it deems it necessary.
• The committee is also required to convene a meeting if a written request is received from at least 5% of the total membership.

Requesting NSW Fair Trading to Investigate

NSW Fair Trading has the power to investigate an incorporated association if there is evidence of a breach of the Associations Incorporation Act 2009 (NSW). As a result, the regulator can issue fines or prosecute an organisation or individual for offences under the Act.

Examples of breaches that NSW Fair Trading can investigate include:

• Failing to hold annual general meetings within the required timeframe.
• Not keeping proper and complete financial records.
• A committee member dishonestly using their position or information obtained in their role.

However, it is important to understand that NSW Fair Trading cannot intervene in internal disputes that are governed by the organisation’s constitution and do not involve a breach of the Act. Therefore, the regulator will not act on matters concerning the internal administration of a charity or conflicts between members that do not break the law.

Taking Legal Action in the NSW Supreme Court

When an NFP Can Be Taken to Court

Pursuing commercial litigation should be the final step for a not-for-profit organisation after all other attempts to resolve a dispute have been exhausted. Courts in NSW are often hesitant to intervene in the internal management of community organisations. Litigation is a stressful, time-consuming, and expensive process that should only be considered as a last resort.

Legal proceedings may become necessary for complex issues that cannot be settled through the organisation’s alternative methods, including:

• internal dispute resolution procedures;
• mediation; or
• arbitration.

In addition, an action may be brought before the Local Court for an offence under the AI Act, such as the dishonest use of information by a committee member. However, this can typically only occur after the dispute resolution process in the charity’s constitution has been completed.

Applying for Winding Up Orders

In serious circumstances, an incorporated association, a member, or a creditor can apply to the NSW Supreme Court for insolvency and winding up orders. This is a significant legal action that effectively dissolves the not-for-profit organisation.

The Supreme Court may order an association to be wound up if it meets any of the following conditions:

• It has conducted its affairs to provide financial gain to its members.
• It has engaged in activities that are inconsistent with its stated objects or purpose.
• It has acted in the interests of the committee or its members, rather than in accordance with its objects.
• It has behaved in a manner that is unfair or unjust to the members of the association.
• The court believes it is just and equitable for the organisation to be wound up.

Furthermore, an incorporated association can also be wound up voluntarily if its members pass a special resolution to do so, a process that involves navigating the legal and dispute risks of winding up an NFP.

Responding When a Member Takes Your Charity to Court

Receiving a Statement of Claim or Summons

An incorporated association in NSW will typically find out that a member has started legal action when it receives a formal court document. These documents, which officially commence the legal proceedings, are usually a Statement of Claim or a Summons.

There are specific timeframes for these documents to be delivered to your not-for-profit organisation. Generally, they must be served within six months after being filed with the court. Furthermore, it is important to act quickly, as strict time limits apply for responding to the claim.

Seeking Personal Legal Advice & Notifying Insurers

If your charity receives a court document regarding an internal dispute, there are several immediate steps the organisation must take to protect its interests. As a priority, the committee of management should be informed about the situation right away.

Key actions to take include:

• Seek legal advice: You should obtain personal legal advice immediately to understand the most appropriate course of action for your organisation and what defences may be available.
• Notify your insurer: Check your insurance policies to see if they cover legal action arising from an internal dispute. You must notify your insurer as soon as possible to understand your coverage for legal costs.

Conclusion

When an internal dispute in a NSW charity cannot be resolved through mediation, the organisation must follow its constitutional procedures, which may lead to arbitration or even litigation as a last resort. Understanding these formal steps, alongside alternative options like special general meetings, is vital for any not-for-profit organisation facing conflict.

If your not-for-profit organisation is facing an unresolved internal dispute, it is important to seek professional guidance. Contact our experienced not-for-profit lawyers at LawBridge today for specialised legal advice to help protect your charity’s interests and ensure you comply with your legal obligations.

Frequently Asked Questions