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.

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Board Members Behaving Badly Results in Personal Liability

Part 1 of 2

Post by: Khiam Nong

Recent decisions of the Ontario Superior Court of Justice demonstrate that members of Boards of Directors of condominium corporations who do not carry out their duties in a good faith manner risk personal liability as they will not be afforded the protection of the indemnification provisions of the Condominium Act, 1998 (the “Act”).  The Boards of two condominium corporations have learned this lesson the hard way after being ordered to pay thousands of dollars out of their own pockets.  The former members of one Board were ordered to pay legal fees after unnecessarily bringing court proceedings against unit owners.  The members of another Board were ordered to pay for the costs of construction necessary to comply with a court order.

Middlesex Condominium Corporation No. 232 v. Middlesex Condominium Corporation No. 232 (Owners and Mortgagees of)

Middlesex Condominium Corporation No. 232 (“MCC”) required extensive repairs to the building envelope.  In 2011, the then Board obtained a quote from one contractor only, who eventually determined that repairs could be made for $755,000.  At the time, MCC’s reserve fund had only $143,000.  The Board prepared a “borrowing” bylaw whereby it proposed to borrow the balance of the funds required for the repairs.  The Board planned on putting the bylaw to a vote at the annual general meeting (“AGM”).

Prior to the AGM, a group of unit owners requested copies of documents relevant to the repairs, requested that the Board suspend negotiations with the contractor to allow them time to review the documentation and requested that they be allowed to post a notice regarding the plans.

The Board advised, through its lawyer, that it would allow supervised access to some documents but not all, that it would not suspend negotiations with the contractor and that it would not engage in a consultation process.

Thereafter, the unit owners requisitioned an owners’ meeting pursuant to s. 46 of the Act, to be held concurrently with the AGM.  They moved to defer the vote on the bylaw and to replace the existing Board with a new Board.

At the AGM, the proposed bylaw was defeated.  Before the election and unit owners’ requisition to remove the Board could be heard, the Board ended the meeting.

The Board then brought an application in the Superior Court pursuant to s. 131 of the Act requesting that an administrator be appointed and a subsequent motion for an injunction to prevent the unit owners’ requisition from being heard prior to the appointment of an administrator.

The injunction motion was heard first by Mr. Justice Bryant, who outright rejected the Board’s submissions that the unit owners were frustrating the work of the Board, and that allowing the requisition meeting would create instability and jeopardize the safety of the building occupants.  He found that the sole purpose of the Board’s application was to prevent the unit owners from exercising their statutory right to have the Board removed, which motive is clearly inappropriate and inconsistent with the Act.

After the injunction hearing, the unit owners held a meeting and a new Board was elected.  The former Board refused to accept the validity of the meeting and instructed its lawyers to proceed with the application to appoint an administrator.

That application was heard by Mr. Justice Carey.  While the Board materials characterized MCC as “ungovernable” and “stumbling into the ‘abyss’ in ‘chaos,’” Justice Carey stated that the language used in the Board’s materials was “exaggerated” and “alarmist.”  He confirmed that the unit owners’ actions in the circumstances were reasonable, considering the behaviour of the Board.

Justice Carey held that the election of the new Board was valid and that there was no reason why an administrator should be appointed.  He stated that s. 131 was designed as a last resort and that it was “not intended to be used to allow a board which has lost the confidence of the majority of owners to get their way regardless of the democratic will of the owners.”

Both judges released their decisions on the costs of both hearings in February of this year.  Both rulings demonstrated the courts’ displeasure at the board members’ abuse of power and refusal to carry out the will of the majority of unit owners.

Mr. Justice Carey described the former Board’s behaviour as “deliberate, egregious and requir[ing] sanction.”  He ordered the former Board members to pay $21,300 in costs.

Mr. Justice Bryant held that the injunction application was unnecessary, tenuous, without merit and improper as it was an attempt to deprive the unit holders of their statutory right to remove a board with which it was dissatisfied.  All of this behaviour was found to be in contravention of the Board’s duty to act in good faith.  In the result, the five members of the former Board were ordered to pay $15,000 in costs.

As noted by Mr. Justice Bryant, had costs been awarded against the former Board instead of against the individual directors, it would have produced a “perverse result” as a condominium board acts on behalf of the Corporation.  Awarding costs against the Corporation would have unfairly prejudiced individual unit owners as the structure of condominium corporations requires that unit owners bear a corporation’s costs.

Boily v. Carleton Condominium Corporation 145

In a similar, and maybe more baffling saga, the Board of Carleton Condominium Corporation No. 145 (“CCC”) decided not only to disregard the will of the unit owners, but also the will of the Court.  In so doing, the Board members were chastised quite severely by the Court for their behaviour.

In this case, the condominium complex required extensive repairs to the garage, which repairs affected the courtyard landscaping of CCC.  The Board advised the owners that it intended to put in place a landscape design that differed from that in place prior to the garage repairs.  Some owners were of the view that such modification required approval of 66 2/3% of the ownership.  The Board was of the view that the modification was maintenance, which did not require a vote.

A group of owners requisitioned a special owners’ meeting so that a vote could be held.  The Board refused to provide a list of registered owners which was required to organize the meeting.  The Board then called its own special owners’ meeting to submit its proposed landscape configuration and put it to a simple majority vote.  The Board also advised that it would commence demolition the following day regardless of the outcome of the vote.

The owners brought an urgent motion for an injunction to stop the Board from holding its meeting and to stop any modifications to the courtyard landscape until further order, which motion was granted.  The issue of whether the modification was a substantial change that required 66 2/3% approval was adjourned to a later date.

Thereafter, the parties reached a settlement whereby the owners’ meeting was permitted to proceed.  The Board’s proposed modification would be put to a vote requiring 66 2/3% approval.  The settlement was reflected in executed Minutes of Settlement.

The vote took place and the proposed modification failed to achieve the requisite level of owner approval.

The Board then took the position that there was no settlement agreement and sought to continue with the application in court.  The owners responded by bringing a motion to enforce the Minutes of Settlement.

Mr. Justice Beaudoin found that there was indeed an agreement in place and that it should be enforced.  He ordered that the courtyard landscaping be reinstated to its former design and advised the parties that they should seek further direction from him should they require it.

In spite of the Court’s clear direction, the Board went ahead and reinstated the landscaping in accordance with its own design, in complete disregard of the will of the other unit owners.  The unit owners brought a contempt motion.  They asked that the Court: (i) find the Board members in contempt of court; (ii) order the Board members to comply with court’s order; (iii) order the Board members to reinstate the courtyard landscaping to its original configuration; (iv) order that costs of additional work be borne by the Board members personally; and (v) order that costs of the motion be borne by the Board members personally.

Mr. Justice Beaudoin found that in substituting their own landscaping design, the Board members clearly and unequivocally breached his previous order, and that such breach was intentional.  He stated the they “acted neither honestly and in good faith, nor as a reasonably prudent person.”

In considering the issue of costs, he stated that it was necessary to hold the Board members accountable for their actions, as a failure to do so would result in all other unit owners paying for the restoration of the courtyard landscaping through common elements fees, which would be unfair in the circumstances.

The individual Board members were ordered to personally bear the additional costs, including labour and material, of reinstating the original landscape configuration.  While the issue was not addressed in the decision, it is likely that the restoration work will amount to a significant personal cost for each Board member – a high price to pay for a preferred landscape design.

Final Comments

Board members must always remember that they have been elected to serve the will of the unit owners.  Board members should not take such a task lightly and must ensure that they understand the remedies available to dissatisfied unit owners and the willingness of courts to enforce those remedies against Boards that do not carry out their duties in good faith.

 

Case Comment: Demetriou v. Carleton Condominium Corp. No. 59

Post by: Craig Robson

The reasons and result in the recent case of Demetriou v. Carleton Condominium Corp. No. 59 [2012] O.J. No. 465 (Small Claims Court) appear to us be in error, but it is doubtful there will be any appeal taken to correct the error (given the rarity of appeals from Small Claims Court decisions).

The Court in this matter concluded:

“52     The plain meaning of section 89 dictates that a Condominium Corporation has a clear duty to its unit owners to repair a damaged unit to its standard unit type when first built. It excludes an obligation to repair improvements to the unit done by an owner.”

Despite the fact the decision refers to section 89 of the Condominium Act, it appears the provisions of that section were misunderstood by the Court.

The operative part of section 89 states:

89.  (1)  Subject to sections 91 and 123, the corporation shall repair the units and common elements after damage. 1998, c. 19, s. 89 (1).

The Court appears to have completely overlooked the opening qualifier – “Subject to sections 91 and 123…”.  Section 91 of the Condominium Act clearly states:

91.  The declaration may alter the obligation to maintain or to repair after damage as set out in this Act by providing that,

(a) subject to section 123, each owner shall repair the owner’s unit after damage;

(b) the owners shall maintain the common elements or any part of them;

(c) each owner shall maintain and repair after damage those parts of the common elements of which the owner has the exclusive use; and

(d) the corporation shall maintain the units or any part of them. 1998, c. 19, s. 91.

In this case, the declaration of Carleton Condominium Corp. No. 59 clearly provides that the unit owners are to repair their units after damage.

It is hard to understand how the Court could come to the conclusion noted above given the clear wording of section 91 and the Declaration.

The Court’s conclusions on what constitutes a standard unit for the purposes of repair and insurance obligations under the Condominium Act are likewise suspect.

It is to be hoped that this decision does not become recognized authority by any higher Court, given the apparent error in reasons and the result.

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