Thursday, March 17, 2011

Managing the Risks of Board Responsibility for Deficiencies in the Common Property; Requesting Reports In Contemplation of Litigation

A Board of Directors of a condominium corporation is, with some limited exceptions, responsible for the common property located within their condominium project.  This obligation is created both pursuant to the Condominium  Property Act  (Alberta) and the bylaws of the condominium corporation.  When concerns arise with elements or aspects of the common property it is prudent for the Board of Directors, usually through the assistance of the condominium corporation's property manager, to have a third party contractor assess the elements and aspects of concern.  It is best if the contractor who provides the report is not also offering to do any required work and perhaps quoting on doing the work.  The addition of the prospect of being hired to do the work creates can create a conflict of interest and can lead self interested contractors to exaggerate the conclusions reached simply to scare the Board of Directors into hiring the contractor.

When an independent contractor inspect the elements and aspects of concern in the common property the contractor will usually produce a written report or summary of the results of the assessment.  The third party contractor report will often include recommendations in respect of steps which could or should be taken to deal with the elements of the common property which are of concern.   The provision of the report by the contractor provides knowledge to the Board of Directors.

This transition from a Board of Directors with a concern about the common property to one with knowledge of a deficiency usually brings with it a concomitant obligation.  That is the Board of Directors must follow the recommendations in the report or they run the risk that they have breached their fiduciary duty which they owe to the owners in the condominium corporation.  If the Board of Directors acts on the recommendations and remedies the deficiencies then the obligation of the Board of Directors has been satisfied.  However, what happens if the Board of Directors ignores the recommendations and does nothing to remedy the deficiences?  The recent case of Guenther v. The Owners, Strata Plan KAS431 out of the Supreme Court in British Columbia demonstrates this dynamic well.

The failure to follow the recommendations could give rise to the Board of Directors and individual Directors being sued by owners or mortgagees.  In this legal action the report of the third party contractor is required to be disclosed by the Board of Directors and forms the basis of the evidence which supports the allegation of breach of fiduciary duty.  In this regard the report is usually discussed at a meeting of the Board of Directors and the Minutes of that meeting will usually make reference to the report.  This process of receipt by the Board of Directors and reflection in the Minutes creates a record, available to all owners and mortgagees, that the Board of Directors are now aware of the deficiencies with the common property. 

It is not prudent for a Board of Directors to put themselves in this situation.  In legal actions the obligation to disclose documents is limited if a document is protected by privilege.  For those of you interested in exploring privilege beyond the scope of this blog entry you may wish to review the recent report prepared by Adam Dodek B.A., J.D., LL.M., of the University of Ottawa for the Canadian Bar Association.  One of the types of privilege which would be helpful to a Board of Directors is to retain the third party contractor to assess the elements and aspects of the common property in contemplation of litigation.  This form of privilege is associated with the general proposition that consultation by a client with the client's lawyer is protected communication.  To come within this type of privilege the Board of Directors should consult with a lawyer about the potential legal issues related to the elements and aspects of the common property of concern.  Following from this the Board of Directors should instruct their lawyer to retain the third party contractor on behalf of the Board of Directors.  The third party contractor then delivers the report to the lawyer.  The lawyer in turn provides the report to the Board of Directors.  When the report is discussed at the meeting of the Board of Directors this context is clearly stated in the Minutes and the Board would be wise to go in camera (that is off the record) to discuss the report.  This minimizes the reference to the report in the Minutes and makes it clear that the Board of Directors will be treating this report as privileged.

The result of this process and treatment is that the Board of Directors can argue that the report need not be disclosed if litigation is commenced from a failure of the Board to remedy the deficiencies. Moreover, the protection of the document allows the Board of Directors to respond to the recommendations in a more orderly manner rather than becoming panicked by strong recommendations of the third party contractor or even worse by a self interested contractor.

In situations where there is a possibility that a Board of Directors will not follow or not follow the recommendations provided by an independent contractor in a timely manner, Directors and Boards of Directors would be wise to consider retaining a lawyer to do their best to cloak the production of the contractor's report under the privilege of the report being made in contemplation of litigation.