Potential for director's liability substantial

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Charitable and nonprofit organizations in Canada are facing a wide variety of legal issues. Sometimes, these issues are of the organization's own making through inadvertence, negligence or misunderstanding, and they may, as a result, be involved in legal proceedings they could have avoided.

In other situations, the law has changed affecting organizations that do not always know about the changes. A lack of knowledge can have serious and negative effects. For example, the enactment of lobbyist registration legislation in Ontario will potentially have significant impacts on charitable and nonprofit organizations.

Each month this column will explore a legal issue confronting charitable and nonprofit organizations. Our intention is not, however, to provide legal advice for specific factual situations, and each organization should obtain legal advice from its own independent legal counsel. Rather, this column is intended to provide information to officers, directors and staff of the organizations on developments in the law and to identify some legal issues that may affect them as nonprofit managers.

Directors are accountable

Nonprofit organizations carry out their activities through their officers, directors, staff and volunteers. The board of directors is accountable to ensure, among other things, that the organization carries out its mandate and does so in accordance with the law. Sometimes the level of accountability and the due diligence expected of the members of the board of directors is very high, exposing the directors to potential personal liability for damages and to prosecution. The members of the board of directors are also where much of the action takes place - action that provides benefits to communities through charitable activities. It is appropriate, therefore, for this first column to begin a review of the role of directors and the potential for liability that they face.

All directors, whether of charitable or business corporations, in carrying out their functions must achieve a "standard of care". In general, that standard of care for directors of charitable corporations is a subjective one, rather than objective. The subjective standard requires that a director exercise the degree of skill that may reasonably be expected from a person of his or her knowledge and experience. Under this subjective test, a lawyer or accountant would usually need to achieve a higher level of care than a person without similar training.

By contrast, directors of business corporations under modern business corporations legislation must meet an objective standard of care, i.e., exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.

The standard of care concept is one that has developed at common law, based on the statutory provisions of older 19th century incorporating statutes such as the Ontario Corporations Act. The duties of directors under those statutes flow, in part, from their statutory obligations to manage the affairs of the corporation.

Duties similar to those of trustees

The common law has also established other duties for directors that are fiduciary in nature. These fiduciary duties require directors to act with a reasonable degree of prudence, to be diligent, to act in good faith and with honesty and loyally, and to avoid conflicts of interest. In the case of directors of charitable corporations, the duties have been described as being akin to those of trustees.

Charitable and nonprofit organizations operate in the community. There are other statutory and common law obligations and duties that arise from this reality. For example, if the organization has employees, then the directors may have liability for unpaid wages, vacation pay and source deductions. Similarly, if the organization owns property, it will be required to comply with the laws that are applicable to other property owners, including planning law, environmental protection and so forth. The directors have responsibilities and potential for liability under a wide spectrum of statutes. Depending upon the activities of the organization, the potential for liability is substantial.

How have the courts viewed the role of the directors? And who is a director? Have directors been held liable? Next month we will review what happened to directors of a nonprofit corporation that failed to remit taxes withheld from employees.

Don Bourgeois is an Ontario lawyer who has practiced in the charitable and nonprofit area of law and is an officer and director of several organizations. He is the author of The Law of Charitable and Nonprofit Organizations and The Law of Charitable and Casino Gaming, both published by Butterworths Canada. He can be reached by e-mail at don_bourgeois@hotmail.com.

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