Ontario Court of Appeal Extends Business Judgment Rule to Boards of Condo Corporations

In 3716724 Canada Inc. v. Carleton Condominium Corp. No. 375 (decided August 2016), the Ontario Court of Appeal recognized and applied the business judgment rule to the decision of the board of a condominium corporation, which is a type of corporation without share capital. Therefore, the case is significant for other types of non-business corporations, including charitable and other not-for-profit corporations.

1. Facts

The respondent, 3716724 Canada Inc. ("371"), owned several commercial parking spots in a mixed-use condominium located in the ByWard Market area of Ottawa. It rented out the spots on a monthly basis, but wanted to start renting them out on a hourly basis to increase its profits.

371 asked Carleton Condominium Corp. No. 375 (the "corporation") to approve changes to the common elements required to make that shift. The board's concern from the outset was the security implications of the changes, including the fact that they would make it easier for trespassers to enter the building, which was located in a high-crime area of Ottawa with a significant transient population.

Ultimately, the board refused to approve the requested changes unless 371 agreed to provide either:

● a parking booth at the parking lot entrance with a full-time attendant; or

● a full-time security officer who would patrol the parking area.

371 refused these requirements, resulting in an impasse. 371 then brought proceedings against the corporation under the oppression remedy provision of the Ontario Condominium Act, 1998.

2. Rulings

(a) Ontario Superior Court of Justice

The application judge ruled in favour of 371, finding that the board's security concerns were reasonable but that the measures put forward by 371 sufficiently lowered the safety risks to a point at which insisting on a full-time security guard became prohibitively expensive and, therefore, unreasonable, and that 371 should be permitted to make the changes without having a unit-holder vote.

(b) Ontario Court of Appeal

Writing for a unanimous Court of Appeal, Associate Chief Justice Hoy reversed the decision of the application judge, finding that he had erred by substituting his judgment for that of the board, which had been exercised following a fair process and having regard to reasonable safety concerns.

Justice Hoy explicitly adopted and applied the business judgement rule as follows:

The "business judgment rule" accords deference to a business decision, so long as it lies within a range of reasonable alternatives. It reflects the reality that directors, who are mandated ... to manage the corporation's business and affairs, are often better suited to determine what is in the best interests of the corporation.

... Provided that ... the directors' decision is found to have been within the range of reasonable choices that they could have made in weighing conflicting interests, the court will not go on to determine whether their decision was the perfect one.

She held that, although the business judgment rule was developed in the context of for-profit businesses, the rationale underlying the rule in the corporate law context is also applicable to condominium corporations. For example, the board's security concerns arose in part as a result of the corporation's location, and the knowledge of the directors of the area is clearly an advantage that they have over any court subsequently reviewing their decision.

Courts should be careful not to usurp the function of corporate boards. The question is not whether a reviewing court would have reached the same conclusion as the board. Rather, it is whether the board reached a decision that was within a range of reasonable choices. If it did, then it cannot be said to have unfairly disregarded the interests of a complainant.

Here, Justice Hoy found that the board's decision requiring a security guard as a condition of approving the changes to the common elements fell within the range of reasonable alternatives. It was open to the board to conclude that the increased security risk outweighed 371's commercial interests. Accordingly, she allowed the condominium corporation's appeal with costs against 371.

3. Key Observations

Despite its name, which reflects its origins in case law involving share capital corporations, the business judgment rule is a governance rule that applies to all types of corporations: business corporations, charitable corporations, share capital social clubs, condominium corporations (such as in the Carleton Condominium Corp. No. 375 case) and other types of non-share capital corporations. The recognition of the general applicability of the business judgment rule and its application to the facts of this case are significant contributions to the development of the law applicable to not-for-profit (NFP) corporations.

Board decisions made in good faith and after a fair process are entitled to a wide ambit of protection from challenge by disaffected members. Cases such as Carleton Condominium Corp. No. 375 reinforce the deference that courts give board decisions under the business judgment rule and act as a bastion against attempts to have courts second-guess board decisions.

371 was successful on its original application. Fortunately for the state of NFP corporate law, however, the condominium corporation appealed and the Court of Appeal set matters aright.

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