The Ontario Court of Appeal recently considered the application of the oppression remedy provision in the Ontario Condominium Act, 1998, SO 1998, c 19 (the "Act"). In doing so, it engaged in a useful – and rare – discussion of the "business judgment rule" outside of the corporate law context, while reinforcing the basic elements of the rule familiar to corporate and securities law practitioners.
Background
In 3716724 Canada Inc. v. Carleton Condominium Corporation No. 375, 2016 ONCA 650 ("Carleton Condo"), the Court of Appeal overturned an application judge's decision that a condominium board had unfairly disregarded the interests of the respondent, the owner of a number of parking units in a downtown Ottawa condominium complex.
The respondent sought to convert its parking spot rental business from monthly to hourly rentals to increase profits. To do so, it required the approval of the appellant Board to make changes to the condominium garage. The Board determined that the proposed changes would make the condominium, which was located in a high-crime area, less safe. The Board elected to treat the changes as "substantial", triggering a provision of the Act that required the condominium's unit holders to vote on the change and approve it with a 2/3 margin.
Accordingly, the appellant insisted that a full-time security guard needed to be hired, without which it would refuse to approve the requested change. The respondent then commenced an application under s. 135 of the Act, on the basis that the Board's decision was unfairly prejudicial and unfairly disregarded their interests.1
The application judge held that the respondent had a reasonable expectation of operating a short-term parking facility at the condominium, and the Board unfairly disregarded that expectation in arriving at its decision and insisting on a full-time security guard. The application judge ordered that the respondent should be permitted to make the changes, without holding a unit-holder vote as required under the Act.
The Appeal Decision
The Court of Appeal allowed the Board's appeal, overturning the application judge's decision on two grounds.
First, the Court found that the application judge improperly relied upon an affidavit filed by the respondent as fresh evidence. This affidavit, which contained information about the cost of a full-time security guard that the application judge relied upon in his ultimate findings, was only intended to be used in a bifurcated damages portion of the case, and was not to be considered on the hearing of the Application itself. Thus, the judge relied on evidence not properly before him in reaching his conclusion.
Second, the Court held that even if the fresh evidence was properly before the Court, the application judge fell into error by improperly substituting his own judgment for that of the Board, which came to a fair and reasonable decision.
Business Judgment Rule
In arriving at this decision, the Court reviewed the extensive treatment of the "business judgment rule" in Canadian appellate courts, including the Supreme Court of Canada's leading decision on the matter in BCE Inc. v. 1976 Debentureholders, 2008 SCC 69. It repeated and adopted the well-worn interpretation of the rule, such that a reviewing court – which will generally be in a less favourable position to make decisions about the subject corporation – will not second-guess the decision of a board that has acted fairly and reasonably.
The Court noted that the rule's application was not limited to the corporate law context in which it arose. It drew parallels between the duties of directors and the oppression remedy found in the Act, and those found in business corporations statutes, stating:
[51] ...the rationale underlying the business judgment rule in the corporate law context is also applicable to condominium corporations. As representatives elected by the unit owners, the directors of these corporations are better placed to make judgments about their interests and to balance the competing interests engaged than are the courts. For instance, in this case the security concerns arose in part as a result of the condominium's location, and the Board members' knowledge of that area is clearly an advantage that they enjoy over any court subsequently reviewing their decision.
With this background, the Court determined that the Board acted honestly and in good faith, and reached a reasonable decision that required it to balance the security interests of the condominium with the commercial interests of the respondent:
[59] ... [The Board was] entitled to consider the security implications for users of the common elements. It did not ignore or treat the interests of the respondent as being of no importance. It simply – in good faith and after a fair process – determined that legitimate and reasonable competing interests were more important. Its decision not to approve the requested changes to the common elements unless the respondent hired a security guard was within a range of reasonable choices.
Takeaways
Carleton Condo does not rewrite the book on the business judgment rule, but affirms its application in a new context that will be of interest to practitioners of corporate law and condominium law alike.
First, the Board's decision in this case was not made subjectively or without extrinsic support. The fact that both the Board and the respondent had commissioned security assessments, which were relied upon by the Board, was a definite factor in the Court of Appeal's decision to uphold the Board's original decision.
It is also notable that in this case, the appellant Board was required to weigh highly disparate interests of different classes of stakeholders – that is, the commercial interests of a parking unitholder, and the broader personal security interests of other condominium owners.
The Court noted that there are occasions where a board cannot balance "like against like", and might be required to make choices that prejudice one interest of one class of stakeholder. This does not mean that the stakeholders' interests will be "unfairly disregarded" so as to render the Board's decision oppressive.
As a result, if a board – on Bay Street or Main Street – can be shown to have engaged and balanced competing interests in good faith, its resulting decision will continue to be given deference by reviewing courts in accordance with the business judgment rule.
Case Information
3716724 Canada Inc. v. Carleton Condominium Corporation No. 375, 2016 ONCA 650
DOCKET: C61559
DATE: August 30, 2016
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Footnotes
1 Act, s. 135(2): 2) On an application, if the court determines that the conduct of an owner, a corporation, a declarant or a mortgagee of a unit is or threatens to be oppressive or unfairly prejudicial to the applicant or unfairly disregards the interests of the applicant, it may make an order to rectify the matter.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
