How Can Condo Directors Avoid Personal Liability?

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http://www.condoreporter.com/wp-content/uploads/2013/05/board-meeting-with-documents.jpgWe have, in the recent past, blogged about the Boily case. In this Ottawa case, a board of directors was found to be in contempt of court and was ordered to personally pay in excess of $96,000 in legal costs. Many have asked for an update on this matter and for advice on how directors can protect themselves against personal liability.

To stay out of trouble, directors should remember what are their roles and obligations. There are often misconceptions behind what is a director’s “job”. The board of directors is mandated to manage the affairs of the corporation on behalf of the owners. They are not “elected officials” with an “agenda” and “electoral promises to keep”. Their job is not to please “constituents” or “take sides”. They are, of course, entitled to their opinion, but they should always keep in mind that they are there to act in the best interests of the corporation – not in their own interest. They are, in essence, the “guardians” of the assets of the corporation.

Directors should act independently and impartially. They should treat everyone with an even hand and have, as their sole objective, the best interests of the corporation.

The Condominium Act also provides that directors should always disclose any personal interest they may have, directly or indirectly, in a transaction or contract being considered by the corporation. This disclosure of interest must be done in writing at the earliest opportunity and the director must recuse him or herself from any discussion or vote on the question. In fact, the director should not even be counted towards quorum when such transactions or contracts are being considered.

The best guidance for how a director should conduct himself or herself is found in the Condominium Act. Section 37 of the Act specifically provides that directors have a duty to act in good faith, to act honestly and to exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. While a Director is not entitled to delegate his/her duties, they are entitled to reasonably rely, in good faith, on the opinion obtained from an expert – such as a lawyer or an engineer. The best preventative measure is, therefore, to consult with these professionals before making important decisions or when in doubt, and to follow the advice of these professionals.

As a second measure of protection, the corporation should ensure that it has sufficient Directors and Officers liability insurance coverage. This kind of insurance is often referred to as “D&O insurance”. This insurance coverage will kick in to defend and indemnify the Directors, provided that they have acted honestly and in good faith.

Finally, directors should also make sure that the corporation has adopted a by-law providing for the indemnification of its directors against all costs, charges, expenses, actions, suits or proceedings. This will ensure that directors are indemnified and saved harmless from law suits, provided (you’ve guessed it) that the director acted honestly and in good faith.

The winds are changing in Ontario with respect to directors’ personal liability. There are numerous recent cases which have resulted in directors being personally liable. In these cases, courts have imposed on directors substantial legal costs. Directors will only be able to rely on the statutory protections if they act honestly, in good faith and if they exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. It is paramount for directors to seek solid legal and other professional opinions prior to moving forward with contested or unpopular measures.

As for the Boily case, the directors and the corporation have appealed the decision of contempt. The appeal will be heard this fall. In the meantime, a judge has appointed an Administrator for this corporation to deal with all issues related to the appeal and to the past use of the Reserve Fund to pay for legal fees. The Administrator was also appointed to deal with the AGMs, the elections and any vacancies on the board. The board consented to this appointment, after having conceded that it was in an unmanageable conflict of interest.

We will post a future blog once there is a decision on the appeal.