the Rogue Board, the Rogue Director - Association of Condominium ...

Law Lights — CAUTIONARY TALES
Failures in Governance
— The Rogue Board,
The Rogue Director
By John A.A. Deacon, BA, LLB
Often, when a condominium
director seeks professional
advice on what constitutes
his/her due
diligence, the best
response is to consider
the Condominium
Act’s exemption
from director’s liability.
That exemption
is expressed in section 37 of the
Condominium Act (the “Act”), and
may be paraphrased:
• that a director shall not be found
liable for a breach of duty if the director
relies on a contract property
manager, an officer or an auditor
that presents a financial statement,
or alternatively relies on a report or
opinion of a lawyer, public accountant,
engineer, appraiser, or otherwise
recognized professional.
In the final section of this article
entitled “The Law”, I will go into
more detail concerning judicial pronouncements
of what level of dili-
gence is due from a condominium
director and a condominium board
of directors.
First, though, I will give examples
from my condominium law practice
of a breach of that standard by a
board and by an individual director.
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■ The Rogue Board
What manager or advisor to a
condominium corporation has
not gone through the communitywrenching
experience of owners
voting on whether or not to remove
an entire board of directors from
office? Whether this results from
a failure of the board of directors
to properly administer the condominium
(often involving substantial
expenses resulting in the need for a
large increase in monthly common
expenses or a special assessment),
or other political factors, the sense
of community of the owners is often
shattered by this action.
One condominium board of directors
was removed by a well organized
group of requisitionists for
a number of reasons, including a
change in the ethnic demographic, a
lack of trust, combined with a large
increase in common expenses.
The board that was removed had
made the best of a very bad situation.
The common expense assessment
had for years, and through the decisions
of many different boards of
directors, been inadequate to pay for
necessary building repairs that were
very expensive, and so the major repairs
had been postponed until postponement
was no longer possible.
Then in 2001 the new Condominium
Act, 1998 came into force with the
mandatory compliance with a reserve
fund study requiring a full funding
contribution plan within ten years of
the first comprehensive study.
Owner information meetings
were called and held, attended by
the engineer who prepared the comprehensive
reserve fund study, the
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corporation’s auditor, lawyer and
condominium manager. Three such
meetings were held to fully explain
the need for substantial additional
owner contributions.
As soon as notice of the increase
in common expense contribution
was sent to owners, a requisition
meeting to remove the board was
initiated and the board was removed
– a new board from the new ethnic
majority being elected. The new
board fired the engineer, auditor and
lawyer. The manager resigned.
The assessment increase was reversed
and the professional advice
ignored.
There are no condominium police,
and there was no owner willing
to incur litigation costs personally to
force the new board to comply with
the law. It is unknown whether the
new auditor qualified the audit of
the annual financial statement, nor
the inevitable negative impact on
unit resale values when purchasers
became aware of the underfunded
reserve and noted the state of disrepair
of the building.
However, in my experience such
a condominium will enter a downward
spiral of community dysfunction
and reduced unit values from
which it is difficult to recover.
Appointment of a condominium
administrator under section 131 of
the Act is beyond the scope of this
article but will often add yet another
burden of expense on unit owners
further reducing unit values.
While recovery is possible, it is
long and owners will suffer significant
hardship. In this case it is clear
that the due diligence is to rely on
professional advice, swallow the bitter
pill of common expense increases,
reverse the decline of building
standards and underfunded reserve
to preserve and increase unit values
in the short to immediate term.
■ The Rogue Director
What condominium director has
not received an earful of complaint/
criticism from a unit owner?
It is very tempting for that elected
director to take responsibility for
the problem, despite the fact that
the sole legal authority of a director
is to inform him/herself and make
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decisions at duly constituted meetings
of the board (officers have some
additional authority between board
meetings).
The proper response to an owner
is accordingly that the matter will be
brought up at the next meeting of
the board of directors if it cannot be
handled by management in the interim.
The matter may even require
an emergency meeting of the board,
but an individual director can do
little or nothing.
In fact, if a director purports to
act for the condominium corporation
in responding to the owner, the
result can be an undermining of the
authority of the board of directors
and its contract property manager.
If an individual director takes action
to deal with a perceived problem,
not only is the governance of the
condominium undermined, but the
corporation could incur legal liability,
as could the individual director.
In one case a condominium director
believing an owner’s complaints
to be justified, circulated an owner
survey (omitting the other directors
and known supporters) inviting
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■ 50 ■ CM Condominium Manager Magazine, Fall 2008

owners to express their opposition
to the board’s policy. Some owners
did respond as invited, and others
responded with anger that the
board’s authority was being undermined,
and concern of the impact
that this action would have on the
community as a whole.
Very worried of the governance
dysfunction that could result from
a divided community, the board of
directors held an owner information
meeting and sought legal advice on
how to restore understanding and
respect for the checks and balances
inherent in a properly functioning
governance structure. It was felt necessary
to re-affirm to owners their
right to provide input through proper
channels, and that a reasonable
and timely response to issues raised
would be given. Without an atmosphere
of respect and confidence
from owners as well as among the
directors, creativity and responsiveness
of the board could be replaced
by mistrust and anger.
A paragraph of the advice provided
to that board is useful to restate
here:
“Every director brings a different
perspective to board meetings and is
fully entitled to take every reasonable
opportunity to impress upon
his/her fellow directors the importance
and correctness of that director’s
position. Once the discussion
is completed and the matter determined
by majority vote, then the decision
is a decision of the corporation
and may be relied on by members of
the corporation and third parties. In
the event of a dissenting vote, the
dissenting director would have the
right to have his/her dissent noted
in the minutes of the board meeting,
although this is usually an extraordinary
event. It would not be appropriate
for any director to relate to other
owners the confidential discussions
and presentation of points of view by
individual directors or officers unless
so disclosed in the minutes.”
■ The Law
In 1986, Buock J. in Dixon v.
Deacon et al stated:
“There is a dearth of case law on
the issue of duty of care, and accordingly
it is difficult to say precisely to
what depths one must sink in order
to be liable in negligence. Conduct
unbecoming a director would seem
to include deliberately ignoring the
affairs of the corporation and also
transfer of control to persons whom
one knows to be dishonest or irresponsible.
Lesser sins are likely to be
forgiven on the basis of the ‘business
judgment’ rule provided that the
individual responsible can plausibly
claim to have acted in good faith.”
Section 122 of the Canada Business
Corporations Act and section
134 of the Ontario Business Corporations
Act both echo the wording
of the Ontario Condominium Act
requiring: “the care, diligence and
skill that a reasonably prudent person
would exercise in comparable
circumstances.” As a result of the
identical wording, case law from the
business corporation world apply to
condominium corporation directors.
I had reviewed cases that found:
• relying on a trusted manager
protected credit union directors
from liability for losses;
• bank directors were liable for
losses caused by an employee be-
CM Condominium Manager Magazine, Fall 2008 ■ 51 ■

cause they allowed him to continue
working despite knowing that he
was not trustworthy.
In re Brazilian Rubber Plantations
and Estates, Ltd., [1911], the
court held that the directors of a
rubber importing company could
“undertake the management of a
rubber company in complete ignorance
of everything connected with
rubber, without incurring responsibility
for the mistakes which may
result from such ignorance.”
The definitive statement on the
subject in Canadian law is from the
Supreme Court of Canada in the
Peoples Department Stores Inc. case
in 2004 which affirmed:
“Directors and officers will not
be held to be in breach of the duty
of care under s. 122(1)(b) of the
CBCA if they act prudently and
on a reasonably informed basis.
The decisions they make must be
reasonable business decisions in
light of all the circumstances about
which the directors or officers knew
or ought to have known. In determining
whether directors have
acted in a manner that breached the
duty of care, it is worth repeating
that perfection is not demanded.
Courts are ill-suited and should be
reluctant to second-guess the application
of business expertise to
the considerations that are involved
in corporate decision making, but
they are capable, on the facts of
any case, of determining whether
an appropriate degree of prudence
and diligence was brought to bear
in reaching what is claimed to be a
reasonable business decision at the
time it was made.”
The current standard quoted
above from the Peoples case shows
how much the law concerning director
liability has evolved.
■ Conclusion
Attending all possible board
meetings, acting prudently and on
a reasonably informed basis, participating
in decisions, noting opposition
when appropriate and not
acting outside meetings of the board
of directors should keep a condominium
director out of the courts
and indemnified by the corporation
and its insurance.
As referred to in the first sentence
of this article, it is safest for directors
to act in reliance on professionals
and properly presented financial
statements – when in doubt get good
advice and rely on it.■
John A.A. Deacon, BA, LLB, is a senior
partner in the law firm Deacon,
Spears, Fedson & Montizambert.
This article has been prepared with
the assistance of law student Ananthan
Sinnadurai.
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■ 52 ■ CM Condominium Manager Magazine, Fall 2008