Reliable and timely advice for all of your condominium legal needs in Ontario.

Be the First to Know

Search by Topic

Should Condominium Corporations Indemnify a Rogue Director Who Has Been Ordered to Pay Costs?

For those following the case opposing a Durham condominium corporation to its former director Leslie Swan, the Court of Appeal has issued its decision on question of costs. Unfortunately, we will have to wait a while longer before we find out who gets to pay the piper, as the Court of Appeal has referred the question of costs back to the application judge.

The facts of this legal saga

The virulence of the dispute opposing this former director to the rest of the board (and by extension to the condominium corporation and its owners) is uncommon and troubling.  Swan, an owner and elected director, appeared to strongly oppose the corporation’s decision to retain a specific property manager.  The tone at board meetings and in email communications escalated and became threatening, insulting, confrontational and accusatory.  One of the director requisitioned a meeting of the owners to have Swan removed on the basis that he had failed to “act honestly and in good faith” and that he had “failed to exercise the care, diligence and skill” of a reasonably prudent person.  Swan commenced some 7 defamation court proceedings (some on behalf of the corporation, some against it, but most against other directors and against the property manager).  All of the claims commenced on his own behalf were dismissed.  He appealed all of these decisions.  Swan was eventually removed as a director at the owners’ meeting.  In parallel, there was a dispute surrounding a satellite dish Swan had attached to the common element roofs.

The corporation eventually turned to the courts.  It sought to have Swan declared a vexatious litigant and sought an injunction prohibiting him from having any contact with the board of directors and with the property manager.  The corporation also sought a declaration that he had failed to carry out his duties with the required care and diligence .  It also sought an order to have the satellite dish removed at Swan’s expense. Swan brought a cross-application seeking, amongst other reliefs, that some of the other directors be removed and that he be reinstated as a director and as president of the board.

In  the first instance, the application judge made numerous findings against Swan but did not grant all of the reliefs the corporation was seeking.  The judge dismissed Swan’s cross-application entirely.

Who should pay the legal costs?

The key issue in this matter now turns on the question of legal costs.

In the first instance, the corporation sought nearly $200,000 (on a full indemnity basis) or $126,000 (on a partial basis) against Swan.  Swan sought to be indemnified by the corporation against any legal costs. Eventually the application judge ordered Swan to pay only $45,000 in costs (on a partial basis).  Swan appealed.

Unfortunately for the corporation and its owners, the Court of Appeal concluded that it was unable to rule on the question of costs and it referred the question back to the application judge (where the parties will undoubtedly have to incur more costs to have the matter adjudicated).  The difficulty for the Court of Appeal was that some of the findings of the application judge were ambiguous. Although the applicant judge clearly found Swan to have failed to comply with his obligations, it was not clear whether (1) Swan had failed to act honestly and in good faith or (2) whether he had also failed to exercise the care, diligence and skill of a reasonably prudent person.  This, compounded with the language of the corporation’s by-law on indemnification, made it impossible for the Court of Appeal to render a decision on the question of costs.

Lessons learned

I initially hesitated on reporting on this case simply because we are no further ahead, with the dispute being referred back to the application judge.  However, there are already lessons to be learned.

There is an increasing number of reported cases where directors are personally hit with costs awards.  Directors will increasingly attempt to rely on the indemnification provisions found under section 38 of the Condo Act, which provides that a corporation may adopt a by-law indemnifying its directors against any liability and costs… provided that they are not adjudged to be in breach of their duty to act honestly and in good faith.  In this case, the language of the by-law appeared to have hindered the corporation’s case.Requesting that all directors sign a code of ethics and passing a well-written by-law allowing for the disqualification of directors having breached it may help in situations such as this one.

There is also an increasing number of reported cases where innocent owners are left to pick up the tab following the actions of a rogue director (see on posts on the Boily and on the Ballingall decisions).

While courts seem increasingly prepared to hold directors to a high standard of care, they appear to be hesitant to depart from the traditional rules costs. Indeed, traditionally, the “winner takes it all”.  By this, I mean that the winner can expect the defeated party to pay between 60% to 85% of the winner’s legal fees.  The problem with this in condominium cases is that it often leaves the innocent owners holding the bag.

Another inequity on the question of costs in the condominium setting stems from the fact that corporations can claim and recover any additional actual costs against an owner in breach of the Act or of the governing documents. This means that the corporation can be fully indemnified if an owner breaches his/her obligations towards the corporation.  That is a good thing.  However, when it is owners who are forced to bring a corporation to court to ensure that it complies with legal obligations, these owners are not awarded the same protection.  These owners who were faced with a corporation who refused to comply with its obligations must dig in their pockets to pay legal fees.  Think of the recent Ottawa Ballingall case where the president of the board was found not to have acted in good faith and where much of the dysfunction of the  board and of the acrimony that festered was attributed to his belligerence.  Still, in this case, the president was ordered to pay costs in the amount of only $15,000.  The corporation was ordered to assume $35,000 of the legal fees and the owners who went to court were left to pay an equivalent amount.

Bill 106 (the legislation aimed at amending the Condominium Act) is set to level the playing fields by allowing both owners and corporations to seek actual costs as against the others when they are victorious in obtaining a compliance order.

Related post