1. Volunteer Lawyers Service Board of Directors Duties and Liabilities Terrie-Lynne Devonish December 7, 2004

2. Outline 1.Introduction 2.Corporations legislation 3.Duty of care for directors 4.Standard of care for directors 5.Examples of liability 6.Tips on meeting the duty and standard of care

3. 1.Introduction b Directors of a charity or non-profit organization can be held personally liable for certain activities b Personal liability will exist even if the organization is incorporated b Directors must understand their potential liability and know what steps to take to avoid liability

4. 2.Corporations Legislation b b Legislation sets out duty and standard of care b b Sections 165 and 171 of the Canada Corporations Act, R.S.C. 1970, c. C-32, as amended b b Section 134(1) of the Business Corporations Act (Ontario), R.S.O. 1990, c. C.44 as amended

5. 2.Corporations Legislation b b CANADA CORPORATIONS ACT b b The affairs of the company shall be managed by a board of not less than three directors. b b The directors of the company may, in all things, administer the affairs of the company, and may make or cause to be made for the company, any description of contract which the company may, by law, enter into

6. 2.Corporations Legislation b b ONTARIO BUSINESS CORPORATIONS ACT b b Every director and officer of a corporation in exercising his powers and discharging his duties shall (A)act honestly and in good faith with a view to the best interests of the corporation; and (B)exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances

7. 3.Duty of Care b Nonprofit organizations carry out their duties through their officers, directors, employees and volunteers b Board of directors is accountable for the activities of the organization and compliance with the law

8. 3.Duty of Care (Cont’d) b Because the board is responsible for the activities of the organization, they can be LIABLE for the activities of the organization

9. 3.Duty of Care (Cont’d) b Board members have a fiduciary duty of care b Must act with a reasonable degree of prudence b Act in good faith b Act with honesty, loyalty b Avoid conflicts of interest

10. 4.Standard of Care b Subjective standard b A directors must exercise a degree of skill that is reasonably expected from a person of his or her knowledge and experience

11. 4.Standard of Care (Cont’d) b e.g. A director of a non-profit organization who is a lawyer will have a different standard of care….

12. 4.Standard of Care (Cont’d) b …. Than a teacher on the non-profit board of directors

13. 5.Examples of Liability b (A)Contracts b (B) Tort b (C)Breach of fiduciary duty b (D)Breach of trustees duties b (E)Common law liabilities b (F)Statutory liabilities

14. 5.Examples of Liability (Cont’d) (A)Contract b Director enters into a contract without proper legal authority to sign the contract b By-laws should provide for authority to sign contracts

15. 5.Examples of Liability (Cont’d) (B)Tort b b Tort is a legal term meaning a wrongful act, resulting in injury or damage, on which a civil action may be based b b There are many different kinds of torts

16. 5.Examples of Liability (Cont’d) (B)Tort b Examples: b Non-profit employee trips on a broken step in the non-profit office b Users of a non-profit’s soup kitchen get food poison from ill- prepared food

17. 5.Examples of Liability (Cont’d) (C)Breach of Fiduciary Duty b b FIDUCIARY = agent of a principal or a company director, that stands in a special relation of trust, confidence, or responsibility in certain obligations to others

18. 5.Examples of Liability (Cont’d) (C)Breach of Fiduciary Duty b b Breach of fiduciary duty claim can accompany any other claim against the trustee b b e.g. Where users of the soup kitchen become sick, they can also claim breach of the fiduciary duty owed to them by the directors of the non-profit organization

19. 5.Examples of Liability (Cont’d) (D)Breach of Trustee Duties b Occurs when directors mismanage assets of the organization b Especially important for charities who hold assets in trust (e.g. scholarship foundations)

20. 5.Examples of Liability (Cont’d) (D) Breach of Trustee Duties b b In Ontario, courts have held that directors of charitable corporations must not receive remuneration or benefit from the corporation unless they get court approval first b b This does not apply to reimbursing directors for out-of-pocket expenses b b Uncertainty in other provinces

21. 5.Examples of Liability (Cont’d) (E) Common Law Liabilities b b Arises where directors act outside of the scope of their authority b b Authority for board of directors is contained in the articles of incorporation, mission statement, etc.

22. 5.Examples of Liability (Cont’d) (F) Statutory Liabilities b b Certain statutes provide for directors’ liability b b Examples: Liability for unpaid wages Failure to remit taxes to the government Failure to comply with registered charity requirements under the Income Tax Act Criminal code charges under the Anti- Terrorism Act

23. 6.Tips to Avoid Liability b Participate actively in the board meetings Read all board materialsRead all board materials Voice concerns at board meetingsVoice concerns at board meetings Vote at board meetingsVote at board meetings Attend board meetingsAttend board meetings b Understand scope of organization as set out in articles of incorporation or mission statement

24. 6.Tips to Avoid Liability b Understand and analyze financial statements and financial activities of the organization Regular review of financial activityRegular review of financial activity Receive reports from those responsible for managing organization’s assetsReceive reports from those responsible for managing organization’s assets

25. 6.Tips to Avoid Liability b Avoid conflicts of interest Declare any interests immediately with consultants, suppliers, etc.Declare any interests immediately with consultants, suppliers, etc. Avoid using third party providers in which a director has an interestAvoid using third party providers in which a director has an interest b Actively hire and review employees, particularly management

26. 6.Tips to Avoid Liability b Ensure directors are well trained and knowledgeable Understand legal issuesUnderstand legal issues Understand business of the organizationUnderstand business of the organization b Obtain professional advice when needed Legal adviceLegal advice Accounting/tax adviceAccounting/tax advice

27. 6.Tips to Avoid Liability b Directors and officers liability insurance Insurance for directors and officers of the organization personallyInsurance for directors and officers of the organization personally Covers the costs incurred by director/officer in the event that the director/officer is alleged to have breached his/her duty of careCovers the costs incurred by director/officer in the event that the director/officer is alleged to have breached his/her duty of care Often includes regulatory investigations as well as civil lawsuitsOften includes regulatory investigations as well as civil lawsuits

30. QUESTIONS?