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Conflict of Interest: Better Safe Than Sorry

With ethics and governance being such a hot topics in the corporate and political world, you won’t be surprised to hear that condominium corporations are no stranger to these concepts.  Directors must be conscious of the standard of care expected from them and of the risk of conflict of interest.

Sections 40 and 41 of the Ontario Condominium Act, 1998 (the “Act“) deal with conflicts of interest and provide a detailed procedure regarding the disclosure of any conflict of interest by a director or officer of a condominium corporation. In summary, directors who have, directly or indirectly, a material interest in a contract or transaction involving the corporation or being contemplated by the corporation must:

  1. disclose to the corporation, in writing and in a timely manner, the nature and extent of his or her interest; and,
  2. not be present during the discussions at a meeting, and not vote or be counted towards the quorum on a vote with respect to the contract or transaction.

Pursuant to the Act, a director or an officer who does not comply with the requirements of sections 40 and 41 of the Act may be held accountable to the corporation or to its owners for any profit or gain realized from the contract or transaction. It is therefore very important for directors and officers to get familiarized with such requirements.

The concept of conflict of interests was well illustrated in the Boulanger case.  In this case, owners who were being sued by the corporation for non-compliance called their own special meeting of owners. Their proposed agenda had several items, including the removal of the board, the revocation of the lawsuits commenced by the corporation against them, and a motion to authorize them to keep their flooring, which did not comply with the declaration.

At the special owners meeting, these owners were elected as directors and thereafter all items on the agenda were adopted. The directors who had been removed then started an action to denounce several procedural irregularities and the new directors’ conflict of interest. The court made several findings and sided with the previous board.

The court had serious concerns with respect to the way the special owners meeting had been conducted. The court stated that the newly elected directors were advancing their own personal interests when they derailed the legal proceedings commenced against them by the corporation and noted the obvious conflict of interest The court decided to void all decisions taken at the meeting, including the removal of the previous board.

Although the Boulanger case is from the Province of Quebec, the moral of this story is universal and is applicable to condominiums in Ontario. A director or an officer who has a material interest in a contract, a transaction or a lawsuit involving the corporation should always recuse himself or herself from any discussion or vote at the board level. When it is unclear whether a conflict of interest exists, directors should err on the side of caution to avoid personal liability.