ethical business conduct

Why develop a code of ethics for condo directors

Clearly spelled out values and expectations can reduce risks of rogue board member behaviour
Tuesday, December 9, 2014
By Josh Milgrom

Owners rightfully expect that directors will fulfill their role ethically and in the best interests of the condominium corporation. But what happens when a director fails to uphold a certain level of ethics or standards?

A code of ethics for condo directors helps ensure that they act honestly, ethically, and in the best interests of the corporation and serves a symbolic function by illustrating to owners the board’s values.

The standard of care

The Ontario Condominium Act sets out the broad standard of care required of directors: directors must act honestly and in good faith and exercise the care, diligence and skills that a reasonably prudent person would exercise in comparable circumstances. While this standard may be sufficient to ensure that directors act in the corporation’s best interests in most instances, a code of ethics for condo directors expands on this general standard by citing more specific values and expectations.

Some important provisions in a fulsome code of ethics include a broader definition of conflict of interest (the Act is limited to an interest in transactions and contracts); respect for democracy; zero tolerance for defamation, discrimination and harassment; continuing education; commitment to minimizing conflict; preparedness for meetings; and confidentiality of matters discussed at board meetings. A good confidentiality provision could outline that all matters discussed at board meetings are deemed to be confidential and will not be disclosed to any person (including spouses) unless otherwise determined by the board. All of these provisions could help strengthen the board of directors and reduce the potential liability arising from misconduct for both individual directors and corporations.

However, a code of ethics without an enforcement mechanism, without any “teeth,” has significant limitations. While a standalone code of ethics can be an effective tool to set the stage for removal, unless it is enshrined by bylaw, it is unlikely to be effective in effecting the removal of a director.

How can a code breach lead to removal?

The roles of directors and property managers are challenging at the best of times; governing and managing the corporation while dealing with a director who breaches a code of ethics can be an exponentially more daunting task. This is particularly so if the corporation does not have mechanisms in place to remove a director who breaches a code of ethics, other than requisitioning a meeting to remove the director pursuant to section 33 of the Act.

Section 33 permits owners to requisition a meeting for the purpose of removing directors before the end of their term. While this provision is helpful to remove a director in certain circumstances, a director’s breach of a code of ethics is not necessarily publicized to the owners who don’t have a seat on the board.

As a director, requisitioning a meeting for the purpose of removal of a fellow director can be uncomfortable, optically challenging, and politically difficult. What will the remaining owners think of the requisition? How will a director be able to avoid defaming the fellow director? Will the fellow director attempt to canvass the owners as well, potentially sharing confidential or misleading information?

Fortunately, section 56 of the Act provides that the board may make a bylaw governing the removal of directors. Many corporations with updated bylaws have taken advantage of this provision to prevent a corporation from being handcuffed by a rogue director without an effective mechanism for removal.

Gordon v. YRCC No. 818

The recent case of Gordon v. YRCC No. 818 dealt with a provision in a bylaw governing the removal of directors. This was the first time such a provision had been challenged in Ontario, although these types of provisions have been around since the Act came into force in 2001. Director removal provisions are growing in popularity as older corporations begin to update their bylaws.

YRCC No. 818’s bylaw provided that a director found to have breached the code of ethics three times will be deemed to have resigned. The bylaw also required an ethics review to be conducted by the remainder of the board to determine whether a breach had in fact occurred.

The board of directors conducted the ethics review and disqualified the director. The director then challenged the validity of the bylaw and the disqualification. He argued that only owners have the power to remove a director and that the bylaw was not valid.

The court disagreed with the director and found that a corporation is entitled to pass a bylaw that empowers the board to remove a director upon a breach of the code of ethics. The Act contemplates that the majority of owners can, through bylaw, give the board the ability to effect this type of removal.

Although the bylaw was upheld, the court concluded that the manner in which the ethics review had been carried out was unfair to the director. He was not given adequate notice of the ethics review or the substance of the case against him, which violated the principles of procedural fairness and natural justice. The court required the board to conduct a fresh ethics review within 90 days of the decision; one where the director would have adequate notice and information as to the case against him.

Following the decision of the court, the board of directors conducted a fresh ethics review. It again found that the director breached the code of ethics three times and should be disqualified.

The director appealed the decision. The Ontario Court of Appeal upheld the validity of the bylaw, thereby confirming a corporation’s ability to implement this important protection against directors who breach the code of ethics.

This decision serves as an important reminder to corporations involved in the removal of a director. With emotions running high and patience wearing thin, it is important to engage in a fair process leading up to and including the potential removal. Failure to do so could lead to the corporation being required to reinstate the director or conduct a fresh ethics review.

By proactively implementing a code of ethics and enshrining it in a bylaw, boards can minimize the risk of having to deal with the distraction and potential liability associated with a rogue director.

Josh is an associate in Aird & Berlis’ condominium group. His practice is focused on advising condominium corporations on all matters relating to the Condominium Act.