Noteworthy costs awards were recently released in Middlesex Condominium Corporation No. 232 v. Owners, which we cited as number 6 in our top 10 condo law cases of 2012 as follows:

Faced with an increasingly unhappy ownership, the board commenced an application for appointment of an administrator. The owners then requisitioned a meeting to remove directors, prompting the board to make an unsuccessful bid for the requisition meeting to be delayed until after the application for appointing an administrator was heard. The court ultimately dismissed the board’s application to appoint an administrator, finding that s. 131 of the Condo Act was designed as a last resort for condominiums in perilous circumstances and not as a way to allow a board that has lost the confidence of the owners to get their way regardless of the democratic will of the owners. The court has not yet released its decision on costs, but given this board’s brazen disregard for owners’ democratic rights, this seems like a suitable case for the directors to be held personally responsible for the legal costs as in Boily v. CCC 145 above. The tactics used by the corporation in this instance were despicable.

While it may not be clear from this description, the MCC 232 case is made up of two components decided by different judges: The board’s application for appointment of an administrator that was heard by Justice Carey and, second, the board’s motion heard by Justice Bryant for an injunction to restrain an owners’ meeting to remove the board until after the application for appointment of an administrator was decided. Both components were dismissed and the old board was removed and replaced. The rulings on costs were subsequently reserved until February 11, 2013.  We understand that leave to appeal these costs rulings is presently being sought.

In the costs ruling on the failed motion for an injunction restraining the requisition meeting, Justice Bryant ordered the former board members to personally pay the unit owners’ legal costs of $15,000, being $3,000 for each of the five former directors.

In the costs ruling on the failed application for appointment of an administrator, Justice Carey ordered the former directors to personally pay the unit owners $21,300, being $4,260 apiece.

Added together, these two costs awards result in five very unhappy former condo directors, but the punishment may not yet be complete. These rulings only deal with the costs incurred by the unit owners in the litigation. They do not appear to address the costs paid or payable to the corporation’s lawyer for conducting the litigation. It is therefore possible that the new board might bring fresh proceedings to require the former board to pay those costs out of their own pocket. Given the courts’ findings in these two costs rulings, this may be a natural next step after any appeals have been decided.

In considering the issue of costs payable to the unit owners in this case, Justice Carey relied on the following findings of fact, which were common to both components of the case:

1. The former Board asked only one contractor to quote on the work that they wished to have done. While that quote was adjusted by the contractors, it remained as just one company’s opinion. The request for a second quote from the group representing a large number of residents was met with condescension and dismissiveness.

2. The board all participated in what I find was a pre-orchestrated termination of the Annual General Meeting (“AGM”) when the vote on financing the repairs went contrary to their wishes and they were facing a removal vote.

3. The former Board members, rather than agreeing to postpone the decision and seek another opinion as to remedying the building’s issues, brought an action to appoint an administrator and suspend the operation of democracy in the building based on what I found to be wildly exaggerated claims lumped together in their material under the heading “Uncertainty, Chaos and Anarchy”.

4. The former Board members had their counsel advise residents not to attend the meeting called for August 8, 2012 when they should have known that the facts claimed in that letter were not correct as there was no order prohibiting the meeting from going ahead.

5. The former Board members instructed their counsel to proceed with the application for the appointment of an administrator even though they had been voted out at the August 8 meeting. The former board members continued to use the MCC 232 designation and declined to participate in their personal capacity. This appears designed to avoid cost liability.

6. The former Board members tried to use their refusal to recognize the August 8th vote as further reason for the court to appoint an administrator and further evidence of chaos at the condominium as two groups were claiming to be the Board. They in effect tried to use their refusal to accept the democratic will of the majority of residents as a reason to suspend its operation.

Justice Carey went on:

[4] As a result of these findings I conclude that the Board was not acting in good faith in pushing ahead with this unnecessary litigation. It would be unfair to have the majority of residents who opposed the arbitrary measures of the former Board pay for their actions out of the Condominium’s reserve fund. The former Board members were in effect the true litigating parties.

[8] My conclusion that the former Board members were not acting in good faith precludes their indemnification pursuant to s. 38(2) of the Condominium Act, 1998.

[9] I have concluded that the facts here support an award of costs against the former Board members personally. Their behaviour was deliberate, egregious and requires sanction. Anything short of full indemnity costs would penalize the residents unfairly.

Justice Bryant’s conclusions were similar:

[18] Based on the material filed before me, I find that the old Board acted in bad faith when it brought an [application for an] injunction to prevent the unit holders from exercising their statutory right to remove the old directors and elect the new directors pursuant to s. 46 of the Act. This Court in dismissing the application for an injunction stated:

The Court finds that the Board’s motion is for the sole purpose of preventing the owner’s from exercising their rights to hold a Requisition Meeting to remove the Board Members from office and preventing their statutory right to elect a new Board.

[20] The application for an injunction was an unnecessary step in the proceeding. The old Board members tried to maintain its positions as Directors when they no longer represented the majority of unit holders. It was improper because it attempted to prevent unit owners from exercising their statutory right to remove the older directors and elect new directors. I find that the Applicant’s application for an injunction was tenuous and without merit.

The legal advice given to the old board is a noteworthy issue in this case. In his costs ruling, Justice Carey said:

[5] I have no evidence that the board relied on legal advice in their actions. I can only conclude that their legal counsel were instructed to take the steps they did.

Similarly, Justice Bryant said:

[17] Counsel for members of the old Board did not file any evidence that members of the old board relied in good faith upon a report or opinion of a 1awyer. Counsel for the old Board did not file any new material on the matter of costs. Counsel recycled documents previously filed . . . which had been filed to support the request for the appointment of an administrator . . .

The legal advice given to the board is important here because condo directors can ordinarily expect to be indemnified for amounts incurred as a result of their acts or omissions while acting as directors. The entitlement to indemnification is restricted, however, by subsection 38(2) of the Condo Act, which provides:

No director or officer of a corporation shall be indemnified by the corporation in respect of any liability, costs, charges or expenses that the person sustains or incurs in or about an action, suit or other proceeding as a result of which the person is adjudged to be in breach of the duty to act honestly and in good faith.

As for how a condo director can avoid being found in breach of the duty to act honestly and in good faith, subsection 37(3)(b) of the Condo Act provides:

A director shall not be found liable for a breach of a duty [to act honestly and in good faith] if the breach arises as a result of the director’s relying in good faith upon,

(b) a report or opinion of a lawyer, public accountant, engineer, appraiser or other person whose profession lends credibility to the report or opinion.

While a quick read of this subsection may suggest that directors can protect themselves simply by obtaining a legal opinion that supports their views or justifies their acts, the “relying in good faith” wording actually provides the court with significant discretion in deciding whether directors are properly entitled to protection. 

The concept of “reliance in good faith” can beautifully and effectively eliminate the potential abuse of directors shielding themselves with opinions given by unqualified professionals or based on inaccurate or incomplete information, or that the directors know or ought to know are plainly wrong or inapplicable. This wording can further eliminate the potential for directors to cherry-pick seemingly helpful portions of a report or opinion, take statements out of context or draw far-fetched conclusions.

The judges in the MCC 232 case also found that the extent to which directors can rely on an opinion has reasonable limits. As Justice Carey said:

The Board ultimately is responsible for their own decisions and cannot on these facts hide behind either their counsel or the [engineers’] report.

Even if this former board had produced proof that the corporation’s lawyer had given an opinion stating that it was both possible and appropriate to use litigation as a means to quash the owners’ democratic rights or to seek appointment of an administrator, it was open for the court to find that the directors could not rely in good faith on such an opinion and, in so doing, remove the protection afforded by subsection 37(3)(b). The lesson: A condo board cannot shield itself from liability simply by obtaining a lawyer’s opinion that matches their plans or view of the world. A court will take a long hard look at the situation and determine for itself whether the directors are entitled to indemnity.

Although some might say that these costs rulings represent a dark day for condo directors and will dissuade owners from volunteering to serve on their condo boards, we applaud the result in this case as a victory for common sense and fairness. These rulings affirm the vital principle that condo directors are expected and required to be responsive to their constituency and respect the democratic rights of the unit owners.

The only directors who have anything to fear from the proposition in this case are those who:

• fail to hear, understand and respond to their owners’ concerns;
• maintain an adversarial stance with owners rather than collaborate constructively;
• think their solutions are the only ones and that owners can provide no useful input;
• use the corporation’s power and resources to suppress owners’ rights;
• employ dirty tricks at annual general meetings;
• disobey the letter or spirit of the Condominium Act; or
• refuse to leave graciously after being democratically dismissed.

With rulings like this one, our courts tell us that the days of condo boards running roughshod over owners’ rights without consequences are over. Directors who fail to heed this warning risk their fortunes.

[Update:  In a decision dated January 10, 2014, the Divisional Court reversed Justice Bryant’s ruling after finding that the applicable “straw man” test was not applied.  The court upheld Justice Carey’s ruling, finding that the “straw man” test had been applied correctly.]