Board Legal Duties

It is important to be familiar with the legal duties required of a director on a governing board for a charity. As a director on a governing board for a charity, you can be held personally liable if you do not follow your legal duties as outlined below.

all directors on the governing board must have a recent and clear criminal record check and a recent and clear vulnerable sector check completed.

Duty of Care requires leaders to use reasonable care and good judgment in making their decisions on behalf of the interest of the organization.

Duty of Loyalty required leaders to be faithful to the organization, avoiding conflicts of interest.

Duty of Obedience requires leaders to comply with governing documents (bylaws, joint stocks, policies, etc).

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  • directors need to ask: what level of skill and care can reasonably be expected from a person with my knowledge and expertise
  • the subjective standard of care is different depending on the director's knowledge and experience (e.g. lawyers, accountants)
  • the minimum expectation would be the level of care expected from a reasonably prudent person managing his or her own affairs
  • directors of charitable corporations face additional obligations because they are subject to a higher order of fiduciary obligations similar to trustees with regard to charitable property
  • this fiduciary duty involves an obligation to act honestly, in good faith and in the best interests of the corporation which precludes the director from acting in a self-serving manner

Liability Risk for Lack of Corporate Authority

  • where directors act outside the scope of their authority contained in the governing documents, i.e. by undertaking activities that are outside the authority of the corporation's objects, they may be found potentially liable for the consequences of such decisions or actions
  • where necessary, amendments to the governing documents should be made by the corporation

Liability Risk for Negligent Mismanagement (Tort)

  • directors can be personally liable for torts committed by the corporation where their own conduct in managing the corporation also contributed to the victim's injury
  • if the carelessness in the oversight of the corporation's operations leads to injury, directors of charities and not-for-profits can be found liable in tort for negligent mismanagement for:
    • failing to adequately supervise the hiring of staff and volunteers
    • failing to monitor the on-going conduct of staff and volunteers, especially with regard to sexual abuse of children, harassment of employees, or abuse of vulnerable individuals
    • wrongful dismissal where directors acted with malice or otherwise improperly dismissed the employee
    • permitting unsafe conditions on corporation's property leading to an accident
    • negligent operation of a corporate vehicle involved in corporation's activities
    • knowingly drawing cheques against insufficient funds
    • failing to prevent depletion of the corporate assets
    • allowing unauthorized investments
    • paying excessive salaries, bonuses or benefits to the staff

Liability Risk in Contract

  • directors are generally not personally responsible for contracts they sign for the corporation provided they have the proper authority to do so, which is determined by the corporation's governing documents or by board resolutions
  • however, directors of charities and not-for-profits may face potential liability where:
    • they enter a contract lacking the necessary authority to do so
    • they do not properly identify the corporation in any contract or to the contracting party
    • the other party believes the director is signing his or her own name
    • they are found to have induced a breach of contract prior to the signing of the contract
    • they do not follow through to ensure that the corporation complies with a contract
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Liability Risk for Breach of Fiduciary Duty

  • as part of their fiduciary duty, directors have a primary obligation to exercise due diligence in overseeing and managing the corporation and its charitable property
  • exercising due diligence includes attending board meetings, supervising operations, monitoring compliance with corporate objects, and ensuring board resolutions are adopted by informed decisions of the directors
  • fiduciary duties are owed to the charitable objects of the corporation, the charity itself, its donors, and its creditors

Summary of Fiduciary Duties

  1. Duty to Act Honestly
    • directors must deal honestly with the corporation
    • conflicts of interest with the corporation are to be avoided and must be disclosed if any exist
    • directors must not act fraudlently
  2. Duty of Loyalty
    • a director's sole interest is to the corporation
    • the interests of the director must not be placed in conflict with those of the corporation
  3. Duty of Diligence/Duty to Act in Good Faith
    • directors must be diligent in attendance to their legal duties
    • where directors fail to attend to their legal duties, directors may have liability exposure
    • implementation of due diligence by the board of directors will provide good defence to claims of negligence and alleged statutory violations where directors can show that positive action was taken to ensure compliance by the corporation
    • where advice of a specialized nature is required by the corporation, directors must obtain services of qualified professionals
  4. Duty to Exercise Power
    • directors are responsible for managing the corporation
    • may delegate certain responsibilities and/or authority, but they must supervise
    • must pursue the corporate goals and objectives
    • directors must hold funds collected from the public in trust for designated charitable purposes
    • in order to justify accounts and decisions made regarding corporate assets, directors must properly maintain books, records, and minutes of the corporation
  5. Duty of Obedience
    • directors must comply with all applicable legislation and the corporation's governing documents
    • need to ensure that valid corporate decisions are implemented
  6. Duty to Avoid Conflict of Interest
    • directors must declare and avoid any conflicts of interest or anything that gives a director the appearance of personal benefit
    • where a conflict of interest arises, it must be declared, the director must not participate in and discussion or vote and, depending on the circumstances, the director may have to resign
    • directors cannot receive remuneration from the charitable corporation directly or indirectly

Children and Family Services Act (Nova Scotia)

  • certain person in the course of the professional or official duties who have reasonable grounds to suspect child abuse has or is about to occur have a duty to report it to the appropriate authorities
  • non-reporting of suspected child abuse is a provincial offence
  • charities, not-for-profits, and their directors and officers may be liable where its employees fail to report suspected child abuse and where child abuse occurs as a result of its failure to properly monitor its employees, volunteers, and operations.

A successful governing board is achieved by attracting successful and quality business and community leaders. Do you see yourself in this positive image? If so, we might have the right seat for you!

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