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A Director Should Not Act Against the Rest of the Board

Last week, the court rendered a lengthy decision in the Ballingall matter.  In this court case, we represented a group of unit owners who successfully enforced the “single family” provision found in the corporation’s declaration.  Our previous post on this case focused on how the court enforced the condo’s single-family provision.  This post will focus on the court’s conclusions vis-à-vis a director’s legal obligations towards the condominium.  This case contains very valuable lessons for all directors as the court concluded that the condo president breached the standard of care owed to the corporation.

Factual Background

Since its inception, this condo’s declaration specifically provided that “each unit … shall be occupied and used only as a private single family residence and for no other purpose…”.  Despite this, many owners were leasing their units to unrelated tenants.  In fact, the corporation’s president leased four of his five units to unrelated students of a nearby university.

Towards the end of 2011, the prior board became aware of other court decisions which had enforced single-family provisions similar to its own.  The board then consulted with its lawyer who recommended that the corporation adopt a rule that would expand the definition of what constituted a “single family”.  Following the advice of its lawyer, the corporation also proposed adopting a grandfathering clause which would allow landlords with existing tenancies to be grandfathered from any change.  This proposed rule was circulated for discussion at the 2012 AGM.  At this same AGM, the director who owned and rented four units to unrelated student was also elected.

In the months that followed, this new director engaged in an active campaign to ensure that the new proposed family rule would be voted down at the following AGM. The judge described as follows the campaign advanced by this director:

His emails to other Board members were aggressive, highly critical, and, at times, threatening.  His letters to owners and his postings on his personal website showed the same level of disrespect to his fellow Board members, and his utter disdain for the steps they were trying to take to deal with the single family residence restriction in the Corporation’s Declaration.  He thought nothing of accusing fellow Board members of dishonesty and bad faith, and of knowingly contravening the law.  In fact, he considered himself more conversant in the law than anyone else at CCC 111 and, most significantly, than the Corporation’s lawyer…

Indeed, this director sent numerous letters to owners and even published on his website the legal opinions the board was receiving from the corporation’s lawyer.  He publicly criticized these opinions and purported to explain legal principles to owners despite not being a lawyer.  He also refused to return his key to the management office despite a resolution adopted by the board to this end.  As the AGM approached, this director’s next line of attack was to demand to be given access to the proxies submitted by the owners on the new proposed family rule.  On advice of the corporation’s lawyer, he was denied access to the proxies.  This was not well received by this director.

Eventually, at the AGM, the new proposed rule was defeated by a vote of the owners.  The board then concluded that it had an obligation to enforce the declaration as it existed and, under the guidance of its lawyer, started to implement measures to prevent the leasing of units to unrelated tenants.

The relationship between the directors further deteriorated with allegations of improper conduct being levied back and forth.  The environment became very toxic.  This lead to the resignation of two directors.  One resigned as a result of the unrelenting pressure and of what he perceived to be threats from the opposing camp and the other resigned as a result of the board’s apparent inability or unwillingness to enforce the single-family provision contained in the declaration.

As soon as the composition of the board changed, the director seeking to avoid the enforcement of the single-family provision became president of the corporation.  He then rescinded all of the previous board’s attempts to uphold the single-family provision.  This is when a group of owners sought the assistance of the courts.

The Breach of the Standard of Care

One of the questions for the court was to determine the standard of care owed by directors to their condominium corporation.  The “standard of care” is the level of prudence, caution or care expected from condominium directors.

On this, section 37 of the Condominium Act, 1998 provides that every director and officer shall act honestly and in good faith and shall exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.  Directors in breach of this standard may be held personally liable for their actions since section 38(2) of the Act prohibits corporations from indemnifying directors who were adjudged to be in breach of their duty to act honestly and in good faith.

The judge noted that as a general principle, directors are assumed to have acted in good faith unless the contrary is proven.  However, in this case, she was of the view that this director breached the standard of care expected of him and that he did not act in good faith.

The judge elaborated on what a reasonably prudent director would not have done in the same circumstances:

A reasonably prudent director of a condominium corporation, attempting to meet his responsibilities as a director, would not undermine Board decisions, mislead unit owners as to the Board’s responsibilities and their efforts to meet those responsibilities, encourage unit owners to distrust the Board, undermine the legal advice from the Corporation’s legal counsel, mislead unit owners as to what that advice entailed, provide his own legal advice to unit owners, and on one occasion post to his personal website legal advice received by the Board without the consent of the Board.  A reasonably prudent director, acting in good faith, would not make the Board dysfunctional, would not promote antagonism and dissent on the Board, and would not threaten other Board members.  A reasonably prudent director would not put his own economic interests ahead of the legitimate interests of all categories of unit owners.  A reasonably prudent director would seek a compromise that respected the disparate, but legitimate, interests of all unit owners in the context of the community established by the Corporation’s Declaration, By-laws, and Rules.

For these reasons, the court concluded that this director breached his obligations under section 37 of the Act.  She concluded that this director “did not act in good faith in regard to the Board’s obligation to enforce the single family residence restriction in the Declaration in a way that took into account the legitimate interests of all unit owners.

Lessons Learned

Directors are entitled to have their own opinion and they do not have to always agree with their fellow board members.  That being said, every director should abide by the decision of the majority and the board should be acting as one.  Directors should not solicit owners to vote against a recommendation from the board.  Debates are healthy, but they should occur at the board level.  Directors should not air their dirty laundry in public.  As importantly, directors should recuse themselves from any debate or vote if they find themselves in a position of conflict (for more information on this see our blog on conflicts of interests).  Finally, in the event that a director does not like the direction the majority of the board is taking, it may be preferable for that person to resign and start his or her own campaign as an owner as opposed to do it as a director.  Basically, even when a director disagreed, he or she should not act in a way as to render the board divisive and dysfunctional.

Perhaps the most important lesson of all: when in doubt, seek legal advice and follow it.

Condo Jeopardy
Lawyer's Edition

Dec. 7 @ 5pm
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