Legal

July 13, 2023 Published by Golden Horseshoe Chapter

Making Tough Decisions - Tips to Assist Directors Communicate Legal Obligations

From the Volume 16, Summer 2023 issue of the CCI GHC Condo News Magazine

The Board of Directors has a fiduciary duty to act honestly, in good faith, and in the best interests of the condominium corporation. This duty requires the Board of Directors to make tough decisions that prioritize the long-term welfare and success of the community, even if these decisions may be challenging or unpopular.

There are many situations where the Board must make tough decisions that will have a direct financial and personal impact on all the owners and unfortunately that obligation is often unappreciated and negatively targeted. At times, this results in Board members hesitating to make important decisions, which in the long term will result in positive momentum for the corporations’ assets, for fear of upsetting the ownership who may not agree with the decision either based on a lack of understanding or a penny-wise and pound-foolish mentality. 

For Board members to increase their confidence in their role when a tough decision is necessary, this article will assist with using the legal framework of both the Condominium Act and Directors and Officers liability coverage to effectively communicate to owners the duty of the Board and the obligation to act on their behalf in the best interest of the Corporation.

The common industry “joke” is that during the election for directors a candidate may say the maintenance fees will be lowered and they are usually elected. However, the sad truth is that owners are not educated enough on the legal obligation of Board members. As Patrick Greco, Partner at Shibley Righton LLP states, “As tempting as it can often be for a condominium director to run for election on a platform of reducing maintenance fees at any cost, such as by delaying a necessary major construction project, the role of a condominium Board, and of its constituent directors, is not to curry favour by making “popular” decisions. Under section 27(1) of the Condominium Act (the “Act”), it is to manage the affairs of the corporation which, pursuant to section 17 of the Act, include managing, controlling, and administering the property and assets of the Corporation and ensuring compliance with the Act and the corporation’s declaration, by-laws and rules.”

Owners should therefore be using this criterion to elect directors and directors should be using this criterion to communicate to owners that they have the legal obligation to make decisions that at times may be unpopular.

Owners should also be educated on the fact that Directors must also follow the recommendation of a qualified professional. As Patrick Greco explains, “Section 37(1) of the Act makes very clear that every director and officer must act honestly and in good faith, and exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. Nowhere in that legal standard are duties to “make the decision that the most owners like” or “make the cheapest decision”. The easiest way to ensure that a director fulfills these duties is found at the very next section of the Act (s. 37(2)), which provides that a director shall not be found liable for a breach of those duties if they rely, in good faith, upon a report or opinion of a lawyer, public accountant, engineer or other qualified professional.”

Section 37(2) is often overlooked by owners because they have a friend who knows better, or they can google a better way to resolve an issue. While it is fully reasonable to utilize outside resources to complete a list of questions to ask these qualified professionals, if not followed the Board may risk losing their Directors and Officers insurance coverage.

Tom Gallinger BBA, FCIP, Senior Vice-President of Atrens-Counsel Insurance Brokers expands on this, “Condominium corporations have an obligation to carry D&O insurance to protect the condo as well as the directors and officers from wrongful acts, errors or omissions of those directors that may result in financial loss to a third party. When directors are making decisions, they should also make sure they are complying with any insurance policy provisions to ensure they have protection in the event a related lawsuit should arise. The Condominium Act lays out the requirement to purchase D&O insurance but also specifies that it is only to protect directors who are acting honestly and in good faith.”

Patrick provides the real-life example of a major construction project. “In most cases, the Corporation is tasked with the maintenance and repair of the common elements. The Board must rely on the advice of a licensed engineer to determine what work must be done (and how and when) in order to keep the property safe and avoid further degradation. A Board that ignores this advice or “opinion shops” until they eventually find an engineer who tells them what they want to hear is not only failing to fulfill their legal duty, the directors are putting themselves at risk of personal liability.

Section 38 of the Act provides that any indemnification of directors and officers in a corporation’s bylaws will not protect someone who has breached their duty to act honestly and in good faith.”

Being mindful of these two important facts will further assist directors to communicate that the Condominium Act requires owners to act in good faith and they can do so by relying on the opinion of qualified professionals and the failure to do so may result in personal liability against them.

As owners are educated in the responsibilities of the Board of Directors by communicating the legal obligations, members of the Board should feel more confident in their ability to make tough decisions. This will hopefully relieve some stress from those owners who will allow themselves to understand rationale thinking. Of course, there will be instances and owners who will always disagree despite the information before them. Utilizing a qualified management company who has experience and training in conflict resolution to create distance between the Board acting in a professional role and the Board acting as owners living peacefully in the condominium is important to help support that distinction. When the team of qualified professionals, management company and Board of Directors are working towards the same goal and clearly communicating the roles and responsibilities of each using the information in this article, the Corporation should be set up for success to make any decision however difficult it may seem.

Colin Ogg, RCM, LCCI
Maple Ridge Community Management Ltd

Special thanks to Patrick Greco, Partner at Shibley Righton LLP and Tom Gallinger, Senior Vice-President of Atrens Counsel Insurance Brokers.