Written by Murray J. Perelman and Ronald W. Fichter
Court decisions holding corporate directors personally liable for acting in bad faith tend to be few and far between in Canadian jurisprudence. The recent Ontario Court of Appeal decision in Boily et al v Carleton Condominium Corporation 145 et al, 2014 ONCA 574, did just that. Although at first blush Boily appears to deal with condominium law, it also has some important messages for corporate directors. The decision in Boily is a reminder of the expensive personal consequences that can result from directors breaching their duties as board members – regardless of their level of compensation or the nature of the corporation on whose board they sit.
In 2011, after making extensive repairs to the underground garage of an aging condominium complex, the landscaping of the courtyard above the garage required restoration. The condo board proposed updating the courtyard with a new landscaping design, while a number of owners wanted it to be restored to its original state. The board and the owners could not agree on how to proceed, whether the board required the approval of the owners, and if they did require the approval of the owners, whether it was by a simple majority vote or a 66-2/3-percent approval level. After a preliminary to and fro between the board and the owners, the owners requisitioned a meeting of owners to submit the new landscape design to a 66-2/3-percent vote which the board ignored. Instead, concerned that any further delays would lead to increased costs, the board began the landscaping work and called their own owners meeting at which they intended to seek a simple majority vote approval for the new landscaping design. The owners sought and obtained a court order enjoining the board from authorizing any work and from holding the owners meeting they had called. The two sides then negotiated and entered into a settlement arrangement, which was incorporated into minutes of settlement, that included a requirement for a 66-2/3-percent owners approval of the proposed new landscaping design. That meeting was held and the vote only received the support of 60.5 percent of the owners. That led to the board arguing that the minutes of settlement were unclear and that they were thus not bound by the settlement. The owners obtained a court order confirming that the minutes of settlement were clear and that the board was to reinstate the landscaping to its original state.
In a later proceeding, the owners were awarded costs of that latter proceeding, which confirmed the minutes of settlement, totalling $32,525.84, of which $12,000 were to be paid personally by the four directors.
When the actual work proceeded some months later, it had elements of both the original design and the new landscaping design that had not been approved by the 66-2/3-percent vote. Even after the owners suggested they were not adhering to the Court's order, the board continued with the hybrid restoration. The owners' lawyer communicated with the board in an attempt to resolve the dispute. The board resisted those approaches, which then led to the owners' lawyer warning the board that he had instructions to move for contempt. It was only at this point in the lengthy proceedings that the board finally hired a lawyer. The board's lawyer attempted to justify the board's actions and authority to make some of the changes to the original landscaping that were contemplated in the new design. That then led to a motion by the owners to have the board found to be in contempt.
The board was found in contempt of court and the motion judge ordered that the four directors personally pay any costs necessary to properly restore the landscaping back to its original state, which, based on estimates, would cost the directors approximately $100,000 each.
In finding the board to be in contempt, the Court stated that as reasonable as the board may have been in believing that they knew the best course of action in restoring the landscaping, it did not give them the right to act in defiance of a court order. Reference was made to Sections 17(1) and 37(1) of the Condominium Act 1998, S.O. 1998, c.19. Section 17(1) of the Condominium Act, provides that the Corporation is to "manage the property and the assets… on behalf of the owners". Section 37(1) requires every director, in exercising the powers and discharging the duties of his or her office, to "act honestly and in good faith" and "exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances". Section 134(1) of the Business Corporations Act (Ontario), R.S.O. 1990, c.B.16, as amended (the OBCA) is very similar to Section 37(1) of the Condominium Act, the only difference being that the duty to act honestly and in good faith is modified by "with a view to the best interests of the corporation".
The motion judge concluded that the directors had acted neither honestly and in good faith, nor as a reasonably prudent person. He referred to the history of motions, minutes of settlement, the board's failure to seek counsel or further clarification and the like and concluded that the board had "adopted a narrow and self-serving interpretation of [his] order and chose to reinstate elements that they preferred, despite the decision of this Court". He also concluded that the board could not rely on Section 17(1) of the Condominium Act as "[t]o grant the deference sought by the [condo directors] would be to allow Boards to disregard court orders, regulations and legislation".
The board appealed. On appeal, the board was still found to be in contempt.
The majority in the Court of Appeal pointed to the point in time at which the board lost the 66-2/3-percent vote, attempted to repudiate the minutes of settlement, and were then subject to an order enforcing the minutes of settlement as the time when their conduct went from "ill-advised to contemptuous". The Court used words like "stubbornly", "recklessly", and "[taking] matters into their own hands" to describe the conduct of the board thereafter.
However, the Court looked at the fines levied and sought to determine whether they were appropriate as fines for contempt of court. The Court of Appeal pointed out, as a mitigating factor regarding penalty, that the directors' contemptuous conduct had to be considered knowing that there was no evidence to suggest that their actions were motivated by personal gain, vengeance or any reason other than the directors "felt they knew best". But the Court of Appeal also noted that the directors' failure to seek legal advice until well down the road in the dispute at the point at which they were threatened with a motion seeking to have them found to be in contempt was an aggregating factor. In the words of the Court of Appeal: "[t]hey could and should have retained counsel as soon as the [owners] opposed the [new landscaping design]".
The Court of Appeal also noted that the most important objective of a contempt penalty is deterrence, specific and general. In discussing deterrence, the Court pointed out that context was of particular importance and that the case "engage[d] the broader issue of the governance needs of condominium corporations". The Court of Appeal noted that the directors were volunteer board members of a not-for-profit corporation, and that the penalty imposed needed to be sufficient to deter these directors and other "similarly situated individuals" from "like conduct", but at the same time not be so onerous as to deter condominium unit owners from serving on condominium boards, those owners who step forward being "essential to the functioning of a growing residential population".
The Court also noted that it was important that the penalty fit the crime. In this case, what needed to be addressed was the "seriousness of the disrespect of the Court, not the severity of any resulting harm". The ability of the directors to pay also had to be taken into account.
On that basis (i.e., as penalties for contempt; not as damages for breach of duty), the original penalty was determined to be too high. The personal fine for each director was lowered to $7,500 each.
Section 38 of the Condominium Act provides for indemnification of directors and officers. Of relevance here, Section 38(2) provides that a director is not to be indemnified in respect of any action, suit or other proceeding in which the director is found to be in breach of the duty to act honestly and in good faith. Section 136(3) of the OBCA, while broader, includes a similar limitation. A request for indemnification by the directors in this particular case was met by the Court of Appeal asking: "[h]ow could their deliberate violation of a clear court order be accurately described other than as a failure to act in good faith?"
Even the reduced penalty of $7,500 is still on the high end of the typical range for contempt penalties. If the Court was assessing liability for a breach of fiduciary duty, the directors' personal penalties could have been much higher.
Pending a further appeal, the directors are responsible for paying a fine of $7,500 each and have already personally shared the $12,000 in costs previously awarded to enforce the results of the original vote. These penalties are not insignificant, especially for individuals who are typically volunteers.
The Court of Appeal took pains to point out that, even after a finding of contempt, the parties to this dispute "have the power to settle their differences on their own terms".
Although there was a dissenting opinion in the case, the dissent was solely on whether the order breached was "clear and unequivocal", which the dissenting judge felt was not the case.
So will Boily's personal penalties make directors think twice about joining a board, especially a not-for-profit board where directors are typically not remunerated? While it should make directors think carefully about their actions as directors, the acts complained of in Boily were so over the top that the decision should not put a chill on the ability of corporations to attract new talent to their boards. But Boily does serve at least to help set outer parameters on bad behaviour by directors.