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July 21, 2014

Court of Appeal Confirms Condo Directors Can Hold Ethics Review Under By-Law

The Ontario Court of Appeal has upheld a by-law provision which empowers a condominium board of directors to hold an ethics review and disqualify one of its members if the board determines the member has breached the directors’ code of ethics on at least three occasions. The decision can be read here.

This is the first condo by-law of its kind.  We blogged about the by-law on August 8, 2012.

While Codes of Ethics for Directors have found some currency in the condo industry, there has, to date, been no dedicated enforcement mechanism.

We blogged about the decision in the Superior Court of Justice on October 13, 2013.  In the lower court decision, Justice McCarthy, of the Ontario Superior Court of Justice, stated as follows with respect to the by-law provision:

"The owners of the corporation lawfully and clearly empowered their elected Board of Directors to deal appropriately with ethical violations.  They did so in a democratic fashion.  The by-law was clearly authorized under the Act.  In passing By-law No. 9, the owners agreed to the ethical review."

The Court of Appeal has similarly endorsed the by-law as being consistent with the both the Condominium Act and the democratic principles upon which condominiums are based:

"Section 56(1) specifically contemplates the enactment of by-laws dealing with qualification, resignation and removal of directors. By-law No. 9 was passed by a vote of the owners of a majority of the units in the Condo, including the appellant, and the directors who were accorded the power under By-law No. 9 to determine whether one of their members had violated the Directors’ Code of Ethics were elected by the unit-holders.  To the extent that the Act enshrines democratic principles, they have been respected."

When Fine & Deo drafted the by-law one of the goals was to enable owners to empower their boards to disqualify unethical directors.

The by-law gives a condominium a potential tool to avoid the division in a community that a requisition to remove a board can cause.  A requisition to remove a director does not require a detailed explanation of the reason the requisitionists seek to remove the director.  And the director who is the subject of removal rarely has an adequate platform to defend themselves; it is no secret that requisition meetings are generally won on the strength of proxies which are obtained in the absence of the director whose removal is sought.

The by-law, on the other hand, leaves the determination in the hands of the directors who are most likely familiar with the conduct (or misconduct) of the board member in question.   Further, unlike a requisition meeting, the by-law gives the director the opportunity to defend him/herself.

In conducting an ethics review under such a by-law, condominium boards will have to be remain aware of the process they are using and ensure that it is fair.

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