Legal obligations of an incorporated association

Contributed by Wendy Lamotte and Gosnells Community Legal Centre and current to 1 September 2005

Every incorporated association must have a Management Committee. The Association Incorporations Act (“the Act”) defines the committee of the association as those persons who, under the rules of an association, have the power to manage the affairs of an association. The committee is responsible for keeping proper books of accounts and records in accordance with the Act.

The following section details the potential legal liability of individuals who are involved in an incorporated association as a committee or board member.

SOURCES OF LEGAL LIABILITY

For an incorporated association the major compliance document will be the Association Incorporations Act. However it is also necessary to meet any other law/act or code that is relevant to the type of service involved.

One of the questions that is often asked is “will I lose my house if I sit on a management committee?”. The Act provides (Article 12) however that

“An officer, trustee or a member of an incorporated association is NOT by reason of his being such an officer, trustee or member liable in respect of the liabilities of the association.”

This means that once the organisation is incorporated, legal liability remains with the organisation. However, the management committee members do have a responsibility to ensure the legal, ethical running of the association and, liability could carry to the individual committee members if it can be proven that there has been evidence of:

• criminal action;

• fraudulent action; or

• negligent action

by such an individual.

This is why it is incumbent on Committee members to ensure they know what is happening in the organisation even if they have delegated their day to day decision-making to an executive officer.

Constitution or Rules of the organisation

The organisation’s Constitution, along with relevant legislation, sets the boundaries within which it can act. The Constitution is a legal document that is approved by the Department of Consumer and Employee Protection. It specifies the purpose and objectives of an organisation and provides a framework of rules within which the organisation can operate. A decision or process outside these boundaries will be invalid (ultra vires).

Organisations are responsible for ensuring that they operate in accordance with the Constitution and that they are aware of the responsibilities contained within it.

CONTENTS OF A CONSTITUTION

The Act sets the requirements of the Constitution. The Act requires that the Constitution deal with the organisation’s:

• Name

• Objects (aims of the Association)

• Powers

• Procedures on dealing with income and property

• Membership criteria

• Composition and election of Board/Management Committees

• Annual General Meetings and General Meetings – its powers, when it is held, how resolutions or motions are brought, voting procedures, and representation at the meeting

• Control and management of funds

• The term of the organisation’s financial year (that is, January to December or July to June)

• Keeping and recording of minutes

• Custody and use of the Common Seal

• Amendments to the Constitution

• Dissolution of the organisation.

COMMON EXAMPLES OF CONSTITUTIONAL PROBLEMS

The following are common problems which may arise under the organisation’s Constitution:

• Notices of Special General Meetings or Annual General Meetings are not given within the required time limit;

• Provisions of the Constitution have not been changed to take into account changes in legislation;

• The current objects of the organisation do not meet those specified in the Constitution;

• Amended Constitutions have not been registered with DoCEP;

• There is not a quorum for a management committee meeting and yet decisions have been taken in such a meeting;

• Processes for determining membership are unclear.

CONFLICT OF INTEREST

Each committee member has a legal obligation to the organisation to avoid conflict of interest. That is, they must not, directly or indirectly, use their position to gain any personal advantage. The committee member must therefore fully disclose his or her involvement in the decision at hand. If that duty is breached by the committee member, then he/she member may be liable to the organisation for damages caused to the organisation as a result of the breach of the duty.

Conflict of interest may arise where a committee member, or an organisation with which he or she is associated, a close friend, business partner or family member, may potentially receive a direct or indirect financial benefit as a result of the committee’s decision on a particular matter. For example, a conflict of interest may arise where:

• a committee member, whose own organisation is tendering for a particular contract, takes part in a decision on the same contract while sitting as a member of the decision-making committee;

• a committee member is interested in applying for an employee position that is being discussed by the management committee;

• the committee member’s own organisation is pursuing an opportunity that was made known during the meeting of which he or she is a committee member (for example,a committee member runs a catering business and the organisation holds functions that require catering).

Managing conflicts of interest

Conflicts of interest have emerged as a very significant issue for community organisations, and the potential for them to arise has been exacerbated by the contracting and tendering environment.

Committee members can deal with the conflict of interest by:

• declaring their potential conflict of interest at the start of any discussion;

• ensuring that the declaration is recorded in the minutes;

• leaving the room where discussion is taking place and returning only after a decision has been reached;

• ensuring that their return to the meeting is recorded in the minutes; and

• ensuring that organisations have appropriate policy and procedures in place to deal with such situations.

‘DUTY OF CARE’ AND RISK MANAGEMENT RESPONSIBILITIES

To whom are the members of the Management Committee accountable?

In the private sector, Boards are accountable to the owners of the company. In the not-for-profit sector, volunteer committees have difficulty determining who their ‘owners’ really are and then finding a way to hear them. In fact, community organisations have many ‘owners’ and they are accountable to all of them. They include:

• Members • Funding bodies

• Donors • Volunteers

• Staff • Government

• The community • Clients

• Sponsors

• Individual committee members

• The mission of the organisation

Whether committee members have a legal duty of care at common law to all such ‘owners’ depends on the particular circumstances. For example, there is clearly a relationship between a committee and its staff, as well as between the organisation and its clients. A person who has a duty of care for others is responsible for preventing reasonably foreseeable injury or damage that could result from one’s act, or failure to act. Should injury or damage that was not reasonably foreseeable in this way occur, the person with a duty of care will not have breached that duty. Although each case is judged on its merits, the principle of duty of care protects those who exercise it from legal liability should an event occur that could not be held to be reasonably foreseeable. The process is not a static one. Assuming a duty of care exists, and has been breached by the organisation, a claimant in negligence against the organisation would also need to establish that there was a causal link between the breach and the injury.

Risk management

Legal risk management is a proactive measure that helps create defences to potential legal liability. Situations that could result in litigation are prevented, in a similar way to occupational health, safety and welfare measures in the workplace. Risk minimisation strategies consist of management measures designed to engender a culture of compliance with the law and protection of the organisation from legal claims. Community organisations may choose to develop a risk management plan consisting of:

• identifying the risks faced by the organisation, its officers, staff and volunteers;

• evaluating the extent of such risks; and

• designing and implementing a risk management program through risk avoidance (that is, the organisation does not enter into a particular activity at all), risk control (ensuring adequate training, minimum qualifications of staff and comprehensive policies are in place to address potential risks), risk financing (estimating the cost of a risk over a period of time and building financial reserves to cover the cost of an eventual liability) and risk transfer (obtaining external insurance).

Insurance

There are a number of reasons for a community organisation to have adequate insurance, including:

1. to meet statutory obligations, such as occupational health and safety requirements;

2. to meet contractual obligations such as those required in funding agreements;

3. to cover liabilities arising from the general duty of care, such as professional indemnity insurance to cover claims rising frompoor advice given to clients;

4. to protect the resources of the organisation, such as burglary insurance to cover the organisation’s assets.