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The remains of a Canadian flag can be seen flying over a building in Attawapiskat, Ont., on November 29, 2011. The Federal Court says it was "unreasonable" for the federal government to appoint a third-party manager for the financially troubled First Nations community of Attiwapiskat.

Adrian Wyld/THE CANADIAN PRESS

Ottawa should not have responded to a housing crisis in the impoverished first nation of Attawapiskat by dispatching a third-party manager to deal with what was in fact a problem of resources, the Federal Court has ruled.

In a decision that takes federal bureaucrats to task for decisions made as the deplorable conditions in the remote Northern Ontario community were gaining worldwide attention, the court says the government was unable to prove any financial mismanagement on the part of Attawapiskat's chief and council.

Therefore, the dispatching of third-party manager Jacques Marion to Attawapiskat over the objections of Chief Theresa Spence and other community leaders was entirely "unreasonable," Justice Michael Phelan wrote in a ruling released Wednesday. The appointment of Mr. Marion "did not respond in a reasonable way to the root of the problems at Attawapiskat nor to the remedies available" in the funding agreement struck between Ottawa and the first nation, Mr. Phelan wrote.

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It is a decision that could have a profound impact on the relationship between the government and other first nations going forward, said Brendan van Niejenhuis, one of the lawyers who represented Attawapiskat in the case.

First, Mr. van Niejenhuis said, it means the courts do not have to defer to the government's interpretation of the contracts it has with native communities. And second, it means the government will have to have solid evidence of mismanagement before it thinks about sending a third-party overseer to a reserve in the future, he said.

A spokesman for John Duncan, the Minister of Aboriginal Affairs, said the government is disappointed with the court's decision and will review it to determine the appropriate next steps.

But Stan Louttit, the grand chief of Mushkegowuk Council which includes Attawapiskat, said the decision shows that the government erred in the imposition of a third-party manager while the community was in crisis.

Attawapiskat declared a state of emergency in November, 2011, when a severe housing shortage left more than two dozen families without adequate shelter with winter setting in. The department responded by providing money for 22 modular homes, but also sent Mr. Marion into the community and ordered an audit of the band's spending, alleging that millions of federal dollars had been misspent. That prompted Attawapiskat to take the government to court.

Mr. Marion was removed from the community in April, but the first nations community pressed on with its suit, saying it was important to obtain an official declaration that the money it received from Ottawa had been handled correctly.

Judge Phelan made it clear in his ruling that Prime Minister Stephen Harper and his cabinet were not to blame for the federal response to the situation in Attawapiskat. "The problem," he wrote, "does not lie at the feet of the political masters but in the hands of the bureaucracy."

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And it would be wrong to suggest that the department was unconcerned about the situation, the judge said. But there "seems to have been a lack of understanding of [Attawapiskat's] actual needs and an intention on the part of officials to be seen to be doing something."

Charlie Angus, the New Democrat MP who sounded the alarm about conditions on the reserve, said he believes the ruling sets a precedent. "Here is a community that said, 'Wait a minute, we didn't do anything wrong, we were just asking for help,' " Mr. Angus said. "They have been vindicated."

Carolyn Bennett, the Liberal critic for aboriginal affairs, said the ruling makes it clear that Attawapiskat was punished for drawing attention to its housing situation and the "dishonest blame game has been exposed."

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