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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