Board Members Behaving Badly Results in Personal Liability

Part 2 of 2: Professionals’ Opinions Make the Difference Between Payment and Protection

Post by: Khiam Nong

In a recent post, we outlined the cases of two condominium boards of directors who were chastised quite thoroughly by judges of the Superior Court for failing to fulfill their obligations to carry out their duties in a good faith manner.  In the case of Middlesex Condominium Corporation No. 232 (“MCC”), the Board brought two court proceedings in an attempt to forestall the unit owners’ rights to replace the Board.  In Boily v. Carleton Condominium Corporation (“CCC”), the Board ignored not only the will of the unit owners, but also a court order to construct the condominium’s courtyard to reflect its original design.  The members of the two Boards were adjudged personally liable for their actions and ordered to pay legal costs in MCC and construction costs in CCC.

Pursuant to subsection 37(1) of the Condominium Act, 1998 (the “Act”) directors and officers of corporations have a statutory obligation to carry out their duties (i) honestly and in good faith; and (ii) with the care, diligence and skill that a reasonably prudent person would in the circumstances.

While subsection 38(1) of the Act provides that directors and officers of corporations may from time to time be indemnified and saved harmless from liability incurred in the course of carrying out their duties, that protection is not afforded to those who do not act in good faith.

However, directors and officers should be aware that subsection 37(3) of the Act provides a mechanism by which directors and officers can maximize their chances of ensuring the protection built into the Act.  Subsection 37(3) provides:

Liability of directors

(3)  A director shall not be found liable for a breach of a duty mentioned in subsection (1) if the breach arises as a result of the director’s relying in good faith upon,

(a) financial statements of the corporation that the auditor in a written report, an officer of the corporation or a manager under an agreement for the management of the property represents to the director as presenting fairly the financial position of the corporation in accordance with generally accepted accounting principles; or

(b) a report or opinion of a lawyer, public accountant, engineer, appraiser or other person whose profession lends credibility to the report or opinion.

It may not always be financially feasible, necessary or reasonable for Boards to seek the advice of professionals in every situation.  However, in light of subsection 37(3), it is clear that clear professional advice should always be sought out whenever a Board proposes to take a controversial course of action or one that may have significant financial implications.

If directors and officers can demonstrate to a court that they relied in good faith on the opinions of the appropriate professionals, it may mean the difference between a court imposing personal cost consequences and a court granting the protection built into the Act.  In our opinion it would be an unexpected result for a court to find directors personally liable for costs if the directors have honestly and in good faith relied upon clear professional advice.  To do otherwise would frustrate the intention of this part of the legislation, which is to encourage the seeking out of professional advice before acting.

In the case of MCC, both judges noted the former Board’s failure to file evidence that the members of the former Board relied in good faith upon the opinion of a lawyer.  Mr. Justice Carey stated the following:

I have no evidence that the Board relied on legal advice in their actions.  I can only conclude that their legal counsel were instructed to take the steps they did.

His further statement below is somewhat of a concern and may provide some doubt on the protection offered by subsection 37(3).  He stated further:

The Board ultimately is responsible for their own decisions and cannot on these facts hide behind either their counsel or the Enerplan report.

This comment is with respect to an engineer’s report (not the legal advice provided to the Board).  It appears the Board may have been interpreting the report to reach conclusions not supported by the engineer’s report.  This highlights the need for professional advice to be clear in order to trigger the subsection 37(3) protection.

Mr. Justice Bryant stated:

Counsel for the members of the old Board did not file any evidence that the members of the old Board relied in good faith upon a report or opinion of a lawyer.

The statements of both judges suggest that the unfortunate outcome suffered by the directors and officers of MCC may have been avoided had they presented evidence to show that they relied on clear legal advice.

The best way for directors and officers to demonstrate that they took such a course is to present reliable evidence that they sought out and relied upon clear and unequivocal professional advice.  Boards must ensure that such advice is obtained in the form of written opinions and reports.  In court, documentary evidence will always serve as stronger evidence than oral evidence.

If the professional advice is not clear or is equivocal, the provider of the advice should be requested to clarify their opinions and recommend an unequivocal course of action.

If it is not possible to get clear and unequivocal professional advice on a proposed course of action, the Board must either decide to abandon the proposed course of action or accept that if the Board does proceed, the individual Board members may not be afforded the protection of subsection 37 (3).

Directors and officers must also be careful not to “shop” for the opinion that they want nor should they appear as though they are “shopping” for the opinion that best suits them.  It may be reasonable to obtain a second opinion on an issue, but if the second opinion supports the first opinion, seeking a third opinion will likely be viewed negatively by the courts if the third opinion contradicts the first two opinions and is relied upon by the Board in support of subsection 37 (3) protection.