Indoor management rule

In 1856 an English judge ruled that people transacting with companies are entitled to assume that internal company rules have complied with, even if they were not. This is known as the "indoor management rule”.

It means that if a person or a company signs a contract with a corporation, and the person representing the corporation gives every indication that he or she has the authority to bind the corporation, then it is a legal contract, whether or not, the person actually had the authority to act on the corporation’s behalf.

This makes perfect sense in the business world. However, the courts have ruled that the indoor management rule does not apply to condominium corporations.

It is quite clear that the purpose of the Condominium Act is to protect the condominium owners as the Act is categorized as consumer protection legislation. Therefore, the provisions of the Act pertaining to the execution of agreements has to be adhered to.

Where the board has authority

The board has great powers and can legally bind the condo corporation with most contracts with outside contractors.

However, to be in accordance with the Act, all decisions of the Board of Directors must be voted on at a meeting of the board where a quorum has been established. Further, contracts cannot be executed without authorization by a resolution of the Board.

A single member of the Board of Directors, including the president, cannot bind the condominium corporation. It is also possible that a contract is not binding when a majority of directors meet and decide to sign a contract, without informing the other directors and no resolution was passed at a duly held board meeting.

At many condos, this happens all the time and almost always, the president or the majority of directors get away with it.

Where the board does not have authority

There are certain situations where a board of directors may not have the authority to execute a contract unless the purpose of the contract has been put to owners of the corporation for a vote.

For example, if a corporation is going to undertake substantial additions, improvements or alterations to the common elements, this must be put to a vote of the owners.

This could include adding or removing visitor parking spaces, altering the front entrance way, installing bay windows in place regular windows, installing energy-efficient lighting or modernizing the front lobby.

Therefore, until the owners have voted in favour of the substantial addition, improvement or alteration, the board may not have the required authority to sign a contract for this work.

The board does not have the authority to assume a loan without obtaining authorization from the owners.

The contractor’s responsibility

Contractors should make sure their contract was passed as a resolution at a legally called meeting of the Board of Directors by asking for a copy of the minutes of the meeting that passed the resolution.

They should also insure that the contract is in compliance with the Act and the condo corporation’s declaration and by-laws.

Legal advice

If you are a director and you think that a contract has been signed by the president or by the majority of the board without a proper resolution being passed by a duly called board meeting, then you may want to seek an opinion from a lawyer who is experienced in condominium law.

I would suggest the same if you are an owner and it appears that the board has exceeded its authority.

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