Source: https://lawreformcommission.sk.ca/directorsfinal.html
Timestamp: 2019-04-20 00:37:10+00:00

Document:
Until recently, few people who volunteered their time and skill to serve on the boards of not-for-profit community organizations were concerned about the possibility that they might be held personally liable for decisions made by the board. Many were probably not even aware that they might be sued, along with the organization itself, for harm caused by the organization's volunteers and employees. In fact, except in clearly defined cases (such as liability for back wages owed to employees), the risk that a board member might be successfully sued was small. But the climate in which the not-for-profit sector operates is changing. There is increasing concern about liability of board members, and what was once perceived as a minimal risk is now serious enough that it can no longer be ignored.
The Commission undertook a project on liability of board members in the not-for-profit sector in response to ongoing concern about the problem. Voluntarism plays an important role in Saskatchewan communities. It is vital that we do everything possible to ensure a healthy not-for-profit sector in the province. If fear of personal liability deters community-minded individuals from volunteering their service on not-for-profit boards, everyone will suffer.
During the course of the Commission's consultation with the not-for-profit sector, we found that concern about liability is very real. While many volunteer board members are uncertain about the scope of their potential liability, almost all are uneasy about the changing climate in which they now operate, and many feared that board recruitment will become more difficult for their organizations. At the same time, board members are acutely aware that the public increasingly demands that community organizations maintain high standards and remain accountable for their actions. They not only accept the principle of accountability, but welcome it as a necessary part of the philosophy of community service that led most of them into volunteer work.
The Commission is convinced that the challenge of maintaining a healthy volunteer sector requires a significant change in the law governing personal liability of board members. The problem is to strike an acceptable balance between the public's legitimate demand that the not-for-profit sector is accountable for its activities, and the need to afford protection to individual board members who conscientiously carry out their community service mandate.
There are several legal mechanisms that impose accountability on the not-for-profit sector. An organization that fails to adhere to the requirements of The Non-profit Corporations Act may be dissolved. An organization that receives public funds may lose its funding if it fails to carry out its responsibilities. The membership of a volunteer organization may replace a board that is not serving the organization and its clients in a satisfactory manner. If an organization's activities cause harm, the injured parties may sue it to obtain financial compensation. Finally, injured parties may also sue individual board members if responsibility for the harm can be linked to decisions made by the board.
Although all the other mechanisms listed above could no doubt be improved, only the individual liability of board members is a questionable means of ensuring accountability. It is true, as Samuel Johnson put it, that "nothing focusses the mind so much as the prospect of hanging". Potential liability may sometimes encourage board members to act more carefully and cautiously. But the price is high, and the benefit may be small. In the worst case, individual board members may be held personally liable for injury claims that will ruin them financially. Directors' and Officers' liability insurance is available, but the cost is often higher than many organizations can bear, and the scope of coverage is limited in any event. Many of the situations that are most apt to give rise to liability are difficult to predict, and difficult for even well-motivated board members to guard against.
A theme that the Commission heard repeatedly during its consultations was recognition that volunteer boards need access to education about their roles, well articulated codes of conduct, and improved models for structuring board activities. Initiatives in these areas are currently underway both provincially and nationally. The Premier's voluntarism initiative has identified needs. The Department of Culture, Youth and Recreation and other provincial agencies make education and consultation services available to boards. At the national level, the Canadian Centre for Philanthropy is currently designing a code of conduct for the not-for-profit sector.
The Commission has concluded that improved education of board members about their roles and responsibilities is the key to ensuring that the not-for-profit sector is accountable and responsive to public needs. Almost without exception, volunteer board members are motivated by a desire to serve the community through their organizations. If they sometimes fail, it is most often because they did not have access to the tools required for the job, not for lack of conscientious effort. In the increasingly complicated and often uncertain environment in which community organizations operate, education and assistance rather than escalating fear of personal liability is required.
Our consultations found that the not-for-profit sector would welcome limitation of the personal liability of board members. But the volunteer board members we consulted were equally concerned with ensuring that accountability is not sacrificed. The Commission recommends limitation of personal liability. However, we are of the opinion that such a change in the law should be part of a broader initiative. Limitation of personal liability is an appropriate part of the on-going revitalization of voluntarism.
New policies, both from governments and volunteer organizations themselves, will be required in the future to ensure that voluntarism continues to play its essential role in the community life of our province. The Law Reform Commission has initiated an Accountability in the Volunteer Sector Project in response to the challenges facing volunteer and not-for-profit organizations in Saskatchewan. This report addresses what the Commission believes is an important ingredient in redefining the legal framework in which the volunteer sector operates: The liability of volunteer board members (directors and officers) of non-profit organizations.
But the climate in which board members are recruited and serve is changing. The responsibilities of board members entail the possibility of personal legal liability for the actions taken by the board, and in some cases, for the actions of employees and volunteers. Because the board is jointly responsible for management of the organization, a board member may unwittingly expose himself or herself to liability by acquiescing in a decision made by the board or management employees. As the discussion of liability issues in this report will show, liability of board members of not-for-profit organizations is not new. But as society has become more litigious, public concern about the accountability of volunteer and not-for-profit service providers has grown, and concern about liability has increased. As the Broadbent Report suggested, the environment in which not-for-profit boards operate has become more complex. Issues such as sexual harassment and abuse reflect growing awareness of problems too often ignored in the past, but certainly increase the responsibility and potential liability of not-for-profit organizations and their board members. The hazards of board membership are no longer regarded by many prospective board members as negligible.
Organizational liability can of course have serious consequences. In the worst case, the organization will be left insolvent and in debt, and will likely be forced to dissolve. But in individual cases, it is likely that the void left by failure of a not-for-profit organization will be filled by another if a need for its services exists. While it may be appropriate as a matter of policy to protect valuable community services by limiting organizational liability in some cases, the right of injured parties to seek compensation from an organization that caused harm cannot be lightly dispensed with. When, on the other hand, a board member is found personally liable, the result can be personally devastating. An individual who joined a board out of a sense of community service may, in the worst but not implausible case, be financially ruined.
The liability of board members of not-for-profit corporations is almost identical to the liability of directors and officers of business corporations. But unlike a director or officer of a business corporation, a board member in the not-for-profit sector is usually an unpaid volunteer, who can devote only limited time and attention to his or her duties(13). While board members bring a variety of experience to the organization, many lack business or managerial experience. It is often difficult for volunteer board members to identify the risks that might lead to personal liability.
Arlene Wolfe, a legal advisor to charities, has asked the question: "Has director's liability become too excessive?" She suggests that increasing public concern about accountability has caused the pendulum to swing too far. The legitimate public interest in ensuring accountability must be balanced against the need to provide some security for board members in the not-for-profit sector.(14) The Commission agrees that the goal of law reform should be an appropriate balance that protects the public while ensuring a healthy volunteer sector in the province.
2. Volunteers and not-for-profit organizations must be afforded some protection against liability when they conscientiously carry out their community service mandate. Volunteers will be discouraged if they fear that the reward for their service is a law suit. Not-for-profit organizations may be forced to abandon essential community services if they are held liable for their decisions in the same way as the private sector or government.
Both in articulating its goals and in formulating its proposals, the Commission was assisted by the individuals and organizations who participated in our consultation process.
1. Volunteer organizations and board members. The Commission thanks Volunteer Saskatoon and Volunteer Regina who assisted us in setting up public meetings and circulating our consultation paper to volunteer organizations. We also thank the Saskatchewan Environmental Network which circulated the paper to its member groups.
2. Members of the Legal Profession who serve the not-for-profit sector. We thank the Saskatchewan Legal Education Society for assisting us in circulating our consultation paper to lawyers who participated in the Society's seminar on governance in the not-for-profit sector.
3. Public servants who assist the not-for-profit sector. We thank the public officials who took time to respond to our consultation paper, or to meet with us to discuss the issues.
Three ways in which the veil can be pierced can be identified(24). First, limited liability was never intended to excuse board members from their responsibility to act in the interests of the organization. The board has responsibility for directing the organization, and is accountable to the organization for their stewardship. Board members are fiduciaries, under a duty to act honestly and diligently. Breach of this duty will make board members liable to the organization. For example, if the board approves investments that a prudent investor would not have made, it may be in breach of its duty. The organization can then sue board members to recover the loss. Moreover, because board members are collectively responsible for management of the organization, even those who did not directly participate in the investment decision will be liable.
Second, because the board has overall responsibility for direction of the organization, it may be held responsible for injury done by volunteers and employees if it can be shown that the board, by its lack of diligence, contributed to the circumstances that led to the harm. For example, the board may be aware of a potential health problem in a shelter it provides to members of the public, and do nothing about it. If serious harm results, the organization may be sued. Board members would likely be held in such a case to be in breach of their duty to the organization, which could seek indemnity from them. In addition, board members might be joined as defendants in the law suit brought by injured clients of the organization.
Diligence refers directly to the duty to participate affirmatively and actively in the affairs of the governing board and the management of the institution. In more basic terms, the duty of diligence means that any individual who accepts a board position and then fails to attend meetings and/or actively participate in decision making is open to liability for mismanagement, nonfeasance or both(33).
In other cases, board members may be recruited because they have special knowledge of programs and services. A typical enough example is a Saskatchewan association of amateur naturalists. The board of the organization includes the field trip organizer, the chair of a committee that researches conservation issues, the editor of the newsletter, and other members active in the association's programs. While this appears to be a sensible and practical way to constitute a board, whether a board of this type will be diligent about the full range of the board's activities will depend more on the individuals recruited than on its structure.
Even experienced and well-motivated volunteer board members may find the demands made on their time by board business difficult to reconcile with other obligations. The time and attention which paid officers and board members of business corporations are able to give to the organizations they serve is of a different order than that which can be expected of volunteer board members in the not-for-profit sector. However, the law places the directors of not-for-profits and business corporations under much the same duties(36).
On the other hand, the prudence rule requires a high standard of care from all directors. The board is expected to inform itself and to carefully access information. Once again, the passive director is open to potential liability. If, for example, investment decisions must be made, the advice and information the board asks for must be adequate in the circumstances. The board must make itself aware of the risks. In all but the simplest cases, the board should satisfy itself that it is getting sound advice, and be prepared to seek a second opinion. Board members must seek out and carefully access information about all aspects of the organization's activities that may entail risk. It is no defence that the board, through willful blindness or mere inattention, was unaware of a potential problem. If a prudent person would have suspected a problem, the board, individually and collectively, may be held to account for the organization's losses if it did not take preventative steps.(45) Thus, for example, if vehicles are used in the organization's work, it is the board's responsibility to ensure that they are safe. This may mean setting policy requiring such things as periodic mechanical inspections, mandatory reporting of problems by drivers, and replacement of aging vehicles.
(b) is a director or officer of or has a material interest in any person who is a party to a material contract or proposed material contract with the corporation.
However, the organization itself may be held liable to third parties . At least two types of tort injury create potential organizational liability. The acts and omissions of its volunteers and employees acting in the scope of their duties may be attributed to the organization under the doctrine of vicarious liability. Injuries on premises owned or leased by the organization may give rise to occupier's liability. In both cases, liability does not necessarily extend to board members as individuals as well as the organization, but it may. If decisions made by the board contributed to the circumstances that led to an injury, board members may be liable. The board's actions may amount, as the discussion in the last section suggested, to a breach of its duty to the organization. Board members may then be sued by the organization, claiming compensation from directors and officers for damages paid to third parties by the organization. In addition, the third party claimant may allege that the board contributed to the injury. In this case, the directors and officers may be directly liable to the injured party. Although the duty owed by board members to the organization is not the basis for the third party claim, it is certainly relevant in assessing the culpability of directors and officers for injuries caused by the organization.
To assess the scope of third party liability that board members currently face, and may face in the future, it will be necessary to consider each link in the chain that may connect a board member with an injury caused by an organization or its agents.
The difficulty in determining whether a not-for-profit organization will be vicariously liable for injuries committed by volunteers and employees lies in the phrase "scope and terms of employment". There is little problem concluding, for example, that if a volunteer who is under strict instructions to take a group of children to the zoo took them swimming instead, the organization would likely not be vicariously liable for any mishap that occurred at the beach(60). However, a master is expected to control and supervise its employees. Thus when a servant engages in "unauthorized acts so connected with authorized acts that they may be regarded as modes (although improper modes) of doing an authorized act", the master is vicariously liable.(61) This implies a duty on the part of the master to adopt policies and supervision techniques that minimize the risk that a servant will abuse his or her position.
In Children's Foundation v. Bazley, the Supreme Court of Canada suggested that in determining whether there is sufficient connection between the scope of employment and the harm done to impose vicarious liability, consideration should be given to, among other factors, the opportunity that the enterprise afforded the employee to abuse his or her power, the extent of power conferred on the employee in relation to the victim, and the vulnerability of potential victims.(62) Thus even in the case of a volunteer who takes children swimming instead of to the zoo, the organization employing the volunteer might be liable if it made insufficient effort to ensure that volunteers followed their instructions.
The recent Supreme Court of Canada decisions in Children's Foundation v. Bazley and Jacobi v. Griffiths have been described as "landmark decisions for non-profit and charitable organizations"(73) because of the expansive interpretation of scope of employment they set out(74). In the view of many advisors to the non-profit sector, the Supreme Court has created a test of liability that is, at least until it has been elaborated in other decisions, uncertain in its scope. In the past, for example, screening programs to weed out volunteers and employees that are potential risks have been regarded as a first line of defence. In Children's Foundation v. Bazley, however, the defendant organization had checked the identity of the worker who later committed abuse, and had been told that he was a suitable employee. Liability was attributed to the organization in large part because the vulnerability of potential victims, emotionally troubled children in residential care facilities, created an exceptional risk of abuse.
(1) Directors of a corporation who vote for or consent to a resolution authorizing the issue of a security pursuant to section 25 for a consideration other than money are jointly and severally liable to the corporation to make good any amount by which the consideration received is less than the fair equivalent of the money that the corporation would have received if the security had been issued for money on the date of the resolution [under s.25, subject to the articles, the bylaws and any unanimous member agreement, no security of a corporation shall be issued until it is fully paid in money or in property or past services that constitute the fair equivalent of the money that the corporation would have received if the security had been issued].
This defence will likely protect a director if an accounting system is in place for ensuring that deductions are made and remitted or if remittances were incorrectly reported in financial statements,(86) but provides little protection if the board of a corporation in financial difficulty agrees to postpone remissions in the hope that the organization's finances will improve.
The policy behind placing statutory liability on directors and officers is protection of the public. By piercing the corporate veil and imposing obligations directly on the "directing mind" of the corporation, legislators seek to ensure that corporate limited liability is not used to avoid obligations to third parties and the public. Personal liability has become increasingly attractive to policy-makers. Thus directors and officers have been made personally liable for offences and damages assessed against corporations in environmental protection legislation(87) and other legislation designed to protect the public interest.(88) The list of statutes in this category can be expected to grow in the future.
The Non-profit Corporations Act permits a corporation to indemnify its directors and officers for liabilities incurred as a result of their activities on behalf the corporation(90). It is not uncommon to include an indemnification clause in the corporation's bylaws. In addition, a director or officer who has been unsuccessfully sued or prosecuted has a right to indemnification for "costs, charges, and expenses reasonably incurred" in his or her defence(91) whether the corporation has an indemnity bylaw or not.
The scope of the indemnity protection which an organization can extend to its board members is controlled by The Non-profit Corporations Act. In the absence of court approval, a board member can only be indemnified for damages, costs, and expenses awarded in third party actions. Section 111(1) of the Act provides.
Despite its benefits, available directors' and officers' insurance has some pitfalls for nonprofit organizations(102). Although standard policies typically cover third party claims and claims made on behalf of the corporation against a director, they also contain certain exclusions. Some of these, such as fraud and criminal acts are perhaps not a problem, but standard policies also typically exclude claims for "bodily injury, sickness, disease, or death of any person, or damage to or destruction of any tangible property." Extended coverage to include injury claims is not generally available. In the result, insurance cannot be used to shield board members from the potentially large damages that might be awarded against them if they are held accountable for incidents of sexual abuse committed by volunteers.
Most American states and other jurisdictions that have rejected general immunity have opted instead for limitation of the personal liability of directors and officers.(111) This approach is more acceptable. Volunteers join boards to make a contribution to their community and their organization. They are motivated to assist the organization to do the job it sets out to do, and to serve to organization to the best of their ability. Their commitment is a strong incentive to protect the organization's interests and minimize risk to the public, other volunteers and clients. In the Commission's opinion there are better ways to insure that not for profit organizations are accountable than imposing fear of potential liability on community spirited directors and officers.
When a volunteer board fails, the reasons usually have little to do with factors that would be mitigated by fear of liability. Volunteer board members may have difficulty balancing the time required by board business with other obligations. As discussion of the challenges facing volunteer board members in the last chapter has sought to show, this is an inevitable problem when volunteers must be relied upon. Fear of personal liability will rarely make it possible for board members to find more time for the organization. In other cases, volunteer board members lack skill and experience in management roles, and thus may rely too readily on the advice of managerial employees and officers. However, the structure of not for profit boards also makes this problem inevitable. Volunteer board will appropriately include fund raisers and individuals whose experience lies in providing services rather than in business management.
Perhaps the most difficult problem for many volunteer boards is lack of adequate management plans and lack of the knowledge and experience necessary to manage risk. The Broadbent Report suggests that education and information are keys to ensuring accountability in the not for profit sector.(112) The volunteer sector itself recognizes the importance of educating its activists and sharing information. In Saskatchewan, following the lead of other provinces, " volunteer centres" have recently been organized to share information and training opportunities among local organizations. The Broadbent Report recommended adoption of codes of conduct by not for profit organizations. The Canadian Centre for Philanthropy is currently formulating a code of conduct for Canadian not for profit organizations. The provincial Department of Culture, Youth and Recreation and other government agencies promote education of boards and development of improved management plans. These initiatives will make a much more important contribution to insuring accountability in the volunteer sector than retaining the fear of personal liability for board members.
In the Commission's opinion, board members in the not-for-profit sector should be substantially relieved of personal liability. Any other approach to the problem of director's and officer's liability would be piecemeal and unsatisfactory. For example, it might be suggested that indemnity provisions in The Non-profit Corporations Act might be revamped to provide broader protection. However, since directors and officers are most apt to be sued when the corporation itself is also being sued, in many cases the corporation would not be financially able to honour its obligation to indemnify board members. There would be little practical value in broader indemnity provisions unless this reform could be coupled with expanded directors' and officers' insurance at affordable premiums. Given the concern in the insurance industry about increasing litigation, changes in directors' and officers' insurance is unlikely unless governments are willing to become insurers.
Civil liability for damage or injury resulting from any act, error, or omission made in the exercise of policy or decision making responsibilities if such person was acting in good faith and within the scope of his duties . . . (117).
Although much of the public concern about liability has focussed on tort actions brought by individuals injured by not-for-profit organizations, it is probably more common at present for directors to be sued for breach of their duty to the corporation. The discussion above has noted that volunteer directors operate under constraints of time, experience and knowledge quite different to those in the business sector. If the breach is innocent, due to an individual director's failure of judgment or reliance on other directors' and officers' advice, relief from liability would be appropriate.
3(3) For greater certainty, where damages are awarded against or any amount is paid by a non-profit organization in respect of damage caused by a volunteer of the organization for which the volunteer is not liable . . . , the organization has no right of recovery against the volunteer.
The policy considerations underlying the proposed immunity are based largely on the circumstances of volunteer directors and officers. Paid management employees of Saskatchewan not-for-profit organizations are not usually board members or officers within the meaning of The Non-profit Corporations Act. The Act permits compensation of directors and officers. Very few board members of Saskatchewan not-for-profit organizations receive substantial compensation. However, some are paid a per diem or honorarium for attendance at meetings, usually to partly compensate for lost income. Others receive expenses for attendance and travel. In practice, it may be difficult to distinguish a compensated director from one who is merely reimbursed, directly or indirectly, for expenses.
(ii) money or any other thing of value in lieu of compensation in excess of five hundred dollars per year . . .
In our opinion, this formula is more satisfactory. However, because Saskatchewan board members rarely receive significant compensation, it would be equally acceptable and simpler to make no distinction between compensated and purely volunteer directors and officers.
3. The immunity should extend only to acts done in the course of carrying out duties as a member of the board in good faith, and should not extend to fraud or profit-taking at the expense of the corporation.
The purpose of the immunity is protection of honest board members who act in good faith in their capacity as directors and officers. It is not intended to be a protection for board members who abuse their position or commit fraud against the organization or others. This limitation is at least implicit in all the immunity statutes we have examined. In our opinion, this is a critically important principle that should be stated clearly in the legislation.
4. The immunity should not exclude acts or omissions that may be deemed "wilful" or "grossly negligent", or which are criminal or statutory offences.
Several American immunity statutes and the Nova Scotia Volunteer Protection Act preserve liability for acts that are "wilful" or "grossly negligent". The appeal of such a limitation on the scope of the protection afforded by the legislation is obvious. However, from a legal point of view, such language is more problematic than useful. Both terms have been used in the law in other contexts, and both have created problems of interpretation. For example, at common law, the driver of a vehicle was liable for injury caused to a "guest passenger" only if grossly negligent. In practice, distinction between ordinary negligence and gross negligence was uncertain, and it was often difficult to predict whether a driver's behaviour would be held by a court to have been grossly negligent. In Saskatchewan and most other provinces, the uncertainty in the law was cured only when legislation removed the gross negligence requirement.
Once again, we are of the opinion the immunity provision should be as straightforward as possible, providing clear protection for those who serve on not-for-profit boards. Concepts such as gross negligence and wilfulness have proved to be too vague to provide consistent, predictable guides to behaviour, and should be avoided.
The Nova Scotia Volunteer Protection Act also denies protection to a volunteer whose actions amount to commission of an offence. This rule may be appropriate in legislation that applies to volunteers other than board members. Consider, for example, a volunteer driver who causes a traffic accident. To the extent that commission of an offence, such as reckless or careless driving, implies greater culpability than simple negligence, it may be good public policy to continue to allow recovery of damages from the driver if he or she commits an offence. However, we do not believe that this distinction can appropriately be extended to preserve the vicarious liability of board members. Whether the driver's actions amount to the offence of reckless or careless driving is not something within the control of board members. If board members should not be liable for the negligent acts of others, no good purpose would be served by preserving vicarious liability for offences committed by others.
Adoption of a general immunity from civil liability of the kind recommended above will not relieve board members from specific liabilities imposed by statute. In some cases, it may be appropriate to reconsider statutory liability under provincial statutes. Once again, it must be recognized that volunteer directors and officers should not be equated with their counterparts in business corporations. Thus, for example, it may not be appropriate to make volunteer directors personally liable under environmental protection legislation. The non-profit corporation is not apt to be used as a shell to avoid responsibility for activities that are dangerous to the environment.
Some of the statutory liabilities within provincial jurisdiction have persuasive policy foundations. In particular, liability for wages under The Non-profit Corporations Act and The Labour Standards Act cannot be easily dispensed with. If employees are not paid for work done because the board has applied available funds to other purposes, board immunity should not prevent the employees from seeking compensation. Placing the responsibility on the directors who agreed to divert funds required to pay wages is fairer than allowing the burden to fall on the employees. A director or officer who objects to diversion of funds may register a dissent in accordance with The Non-profit Corporations Act to avoid personal liability. The Act affords another protection to board members: They are entitled to rely on financial statements presented to them, so they will not be liable if misled by erroneous or fraudulent reports that conceal the wage debt. For that reason, the Commission is not prepared to recommend any change in the liability for wages presently imposed in Saskatchewan law.
1. Michael H. Hall and Laura G. Macpherson, "The Structure of the Charitable Sector: A Provincial Perspective", Canadian Centre for Philanthropy, Research Bulletin, Vol. 2, No. 3 (August 1995). The authors report that "Saskatchewan has a larger percentage of its charities in the Recreation category than any other province (7.1% vs. the national rate of 3.8%). The percentage of charities that are Social Service organizations is second only to Quebec. Places of Worship and Hospitals comprise a higher percentage of charities than in most other provinces".
2. Volunteer Sector Round Table, Final Report of the Panel on Accountability and Governance in the Voluntary Sector, February, 1999. (Chapter 1).
3. Final Report of the Panel on Accountability and Governance in the Voluntary Sector, February, 1999. (Chapter 1).
4. S. L. Ward, Tort Liability of Nonprofit Governing Boards, (New York) Garland Publishing, 1993, p. 8.
5. For example, it has been noted that in Saskatchewan, "Lawyers are frequently asked to sit on non-profit corporation boards. Lawyers are viewed as having strong ties to the business community and as such should be good fundraisers . . . [Board membership] can enrich and broaden a lawyer. It can also be a good marketing opportunity": Donald R. Morgan, "Risks and Myths about Directors of NFP's", Risk Management for Directors of Non-profit Organizations, Saskatchewan Legal Education Society, December, 1998, p. 1.
7. AIB et. al v. YWCA 4 ACWS (3rd) 445.
8. Donald R. Morgan, "Risks and Myths about Directors of NFP's", and James M. Scharfstein, "The Prudent Board Member" in Risk Management for Directors of Non-profit Organizations, Saskatchewan Legal Education Society, December, 1998.
9. See, for example a recent report under the headline "Charity on hook for $116,000 in unpaid tax deductions" (Saskatoon StarPhoenix, April 11, 2001). The news item reported that "A former director of [ a local not-for-profit corporation] says he was shocked to find out he may be personally liable for part of the more than $116,000 . . .owed to Canada Customs and Revenue".
10. Arlene D. Wolfe, "Liability of Directors and Officers of Non-share Corporations", Fit to be Tithed: Risks and Rewards for Charities and Churches, Department of Continuing Legal Education, Law Society of Upper Canada, November 10, 1994, p. E-28.
11. S. L. Ward, Tort Liability of Nonprofit Governing Boards, (New York) Garland Publishing, 1993, p. 10.
12. Gerald Kemp, The Legal Status of Volunteer Workers and Volunteer Organizations, The Volunteer Centre of Calgary (Calgary, 1980), p.51.
13. Board members of not-for-profit corporations may receive "reasonable remuneration" for services and expenses (Saskatchewan Non-profit Corporations Act, 1995). However, most of the nearly 5,000 registered charities in Saskatchewan have small budgets, and can rarely offer board members more than remuneration for out-of-pocket expenses.
14. Arlene D. Wolfe, "Liability of Directors and Officers of Non-share Corporations", Fit to be Tithed: Risks and Rewards for Charities and Churches, Department of Continuing Legal Education, Law Society of Upper Canada, November 10, 1994, p. E-29.
15. Non-profit Corporations Act, 1995, S.S. 1995 c. N-4.2 (effective May 15, 1995) as amended by the S.S. 1997, c.T-22.2; and 1998, c.C-45.2. A few membership-based organizations such as co-operatives, condominium associations, political parties and credit unions are governed by special statutes. While these organizations share some characteristics with not-for-profit associations, they have been excluded from the scope of this report.
16. Canada Corporations Act, R.S.C. 1970, c. C.32.
17. L.C. Gower, The Principles of Modern Company Law, Stevens & Sons (London, 1975), p. 10. The Non-profit Corporations Act distinguishes between "membership corporations" that "carry on activities that are primarily for the benefit of its members", such as a sports or recreation clubs, and "charitable corporations" that are registered as charities and "carry on activities that are primarily for the benefit of the public". However, both types of not-for-profit corporations have members (though in some charitable corporations, the membership and the board may be essentially the same). The distinction is not of much significance in the present context.
19. The terminology used is somewhat variable. Some associations refer to board members as "trustees" or "executive members", and the board itself may be called the "executive". However, the term "director" is used in The Non-profit Corporations Act. The duties imposed on directors and basic rules for their selection contained in the Act obviously apply, whatever designation they may be given by the association.
21. L.C. Gower, The Principles of Modern Company Law, Stevens & Sons (London, 1975), p. 79.
23. Donald R. Morgan, "Risks and Myths about Directors of NFP's", Risk Management for Directors of Non-profit Organizations, Saskatchewan Legal Education Society, December, 1998, p. 2.
24. This classification follows Daniel L. Kurtz, Board Liability: Guide for Nonprofit Directors, Moyer Bell (New York, 1988), p.91, but similar classifications are explicitly or implicitly adopted by most writers on the subject. See for example Harvey, "The Public-Spirited Defendant and Others: Liability of Directors and Officers of Not-For-Profit Corporations, 17 Maryland Law Review, 665 (1984).
26. Daniel L. Kurtz, Board Liability: Guide for Nonprofit Directors, Moyer Bell (New York, 1988), p.8. Large boards appear to be the rule in the not-for-profit sector. Kurtz (p. 5) notes that "Nonprofit boards, with some categorical exceptions (for example, private foundations) . . . tend to be substantially larger than business corporations . . . . [One] survey puts the average size of nonprofit boards upwards of thirty".
27. s. 108(1). In business corporations, officers are usually employees, not board members. In not-for-profit corporations in Saskatchewan, officers are usually board members, and management employees are usually not designated "officers". This appears to be common practice throughout North America (Kurtz, p. 124).
29. s.102(3) prohibits delegation of submission to the members of matters requiring the approval of the members, filling vacancies on the board, appointing an auditor, issue of securities without board authorization, purchase etc. of securities issued by the corporation, approval of financial statements, or amendment of bylaws.
30. See s. 109 (set out below).
31. Sealy, "Fiduciary Relationships"  C.J.L.69. Several classes of fiduciary duty are recognized. The discussion here applies to fiduciaries in Sealy's "Category II", which arises when someone has been "entrusted with a job to be done" on behalf of others. Corporate directors are placed in this category by Sealy. See also Note, "Corporations: Fiduciary Duty", 24 Catholic University Law Review, 656 (1975).
32. Meinhard v. Salmon 1163 N.E. 545 (1928), N.Y. C. App.
33. S. L. Ward, Tort Liability of Nonprofit Governing Boards, (New York) Garland Publishing, 1993, p. 65.
34. Daniel L. Kurtz, Board Liability: Guide for Nonprofit Directors, Moyer Bell (New York, 1988), p.30. Expansion of board size to give recognition to fund raisers appears to be common practice for charities. The charities that raise the most money appear to have the largest boards (Uterman and Davis, "The Strategy Gap in Not-for-Profits", Harvard Business Review, 30 (May-June 1982).
36. Manning, "The Business Judgment Rule and the Director's Duty of Attention: Time for Reality", 39 Business Law 1477 (1984).
38. "Charity on hook for $116,000 in unpaid tax deductions" (Saskatoon StarPhoenix, April 11, 2001).
39. James M. Scharfstein, "The Prudent Board Member", Risk Management for Directors of Non-profit Organizations, Saskatchewan Legal Education Society, December, 1998, p. 5.
40. See the discussion of vicarious liability below.
41. s. 109. Except for Ss.(3), which generally prohibits relieving a director or officer of the duties imposed by the Act, this provision essentially codifies a rule adopted by the courts in common law jurisdictions. The qualification in SS. (3), referring to s. 136(5) only applies to cases in which management has been transferred to members by a "unanimous shareholder agreement". The Canada Corporations Act does not contain a statutory prudence rule, but the common law equivalent undoubtably applies to federally incorporated not-for-profit corporations. On the background and history of the prudence rule, see generally L.C. Gower, The Principles of Modern Company Law, Stevens & Sons (London, 1975), p. 210, and S. L. Ward, Tort Liability of Nonprofit Governing Boards, (New York) Garland Publishing, 1993, p. 57.
42. S. L. Ward, Tort Liability of Nonprofit Governing Boards, (New York) Garland Publishing, 1993, p. 65.
43. Re City Equitable Insurance Co. Ltd.  1 Ch. 407 (C.A.) (England).
44. Donald R. Morgan, "Risks and Myths about Directors of NFP's", Risk Management for Directors of Non-profit Organizations, Saskatchewan Legal Education Society, December, 1998, p. 2, assumes that codification was not intended to impose a stricter rule than the common law and equity. It is worth noting in this context that trustees are heldby equity to a higher standard than was demanded of directors. Trustees, whatever their background, are expected to exercise the care of "a prudent man of business". In some American jurisdictions and under the Ontario Charities Accounting Act, directors of charitable organizations are considered to be trustees, and thus held to the higher standard. See Arlene D. Wolfe, "Liability of Directors and Officers of Non-share Corporations", Fit to be Tithed: Risks and Rewards for Charities and Churches, Department of Continuing Legal Education, Law Society of Upper Canada, November 10, 1994, p. E-6.
45. Jane Doe v. Board of Commissioners of Police for Municipality of Toronto (1990) 72 DLR (4th) 480.
46. S. L. Ward, Tort Liability of Nonprofit Governing Boards, (New York) Garland Publishing, 1993, p. 65.
47. Harvey, "The Public-Spirited Defendant and Others: Liability of Directors and Officers of Not-For-Profit Corporations, 17 Maryland Law Review, 665 (1984) states that "the greatest number of complaints asking relief against officers and directors as individuals allege conflict of interest or wrongful taking of a corporate opportunity".
48. Sealy, "Fiduciary Relationships"  C. L. J. 69.
49. See Canadian Aero Service Ltd. v. O'Malley  S.C.R. 592.
50. s. 107. Omitted portions are procedural. Section 98 of the Canada Corporations Act provides for similar disclosure.
51. Lac Minerals Ltd. v. International Corona Resources Ltd.  2 S.C.R. 574.
52. James M. Scharfstein, "The Prudent Board Member", Risk Management for Directors of Non-profit Organizations, Saskatchewan Legal Education Society, December, 1998, p. 15.
53. American Law Institute Principles of Corporate Governance: Restatement and Recommendations, Tentative Draft No. 4.
54. Daniel L. Kurtz, Board Liability: Guide for Nonprofit Directors, Moyer Bell (New York, 1988), p.97.
55. See, for example, comments by Arlene D. Wolfe, "Liability of Directors and Officers of Non-share Corporations"and John P. Hamilton, "Sexual Abuse" in Fit to be Tithed: Risks and Rewards for Charities and Churches, Department of Continuing Legal Education, Law Society of Upper Canada, November 10, 1994, and Michael Pucylo and Miller Thompson, "Vicarious Liability Imposed on Charities and Non-Profit Organizations", Edmonton Federation of Community Leagues, 2001.
56. Allen Linden, Canadian Tort Law, (5th Ed.), Butterworth's, (Toronto, 1993), p. 619. Distinctions are made in the law between social guests, business invitees, and trespassers. The highest duty is owed to invitees, which includes clients and volunteers of not-for-profit agencies.
58. Halsbury's Laws of England (3rd ed.), vol. 28 (1959), p. 50.
59. "A volunteer is a person, who, not being under a paid contract, puts himself under the control of an employer to act in the capacity of a servant."( Halsbury's Laws of England (3rd ed.), vol. 28 (1959), p. 47).
60. Gerald Kemp, The Legal Status of Volunteer Workers and Volunteer Organizations, The Volunteer Center of Calgary (Calgary, 1980), p.53.
61. Salmond and Heuston, Salmond on the Law of Torts, (19th ed.), (London, Sweet & Maxwell), 1987. P. 520.
62. Children's Foundation v. Bazley,  2 S.C.R. 534.
63. Daniel L. Kurtz, Board Liability: Guide for Nonprofit Directors, Moyer Bell (New York, 1988), p.98.
64. A complete account of the increasingly complex legal issues in sexual harassment and abuse cases will not be attempted here. For present purposes, it is enough to show that concern about third party liability for harassment and abuse is justified. For more complete discussions, see John P. Hamilton, "Sexual Abuse", Fit to be Tithed: Risks and Rewards for Charities and Churches, Department of Continuing Legal Education, Law Society of Upper Canada, November 10, 1994, and Michael Pucylo and Miller Thompson, "Vicarious Liability Imposed on Charities and Non-Profit Organizations", Edmonton Federation of Community Leagues, 2001.
70. M.T. v Poirier  O.J. no. 1046.
71. Jane Doe v. Board of Commissioners of Police for Municipality of Toronto (1990) 72 DLR (4th) 480 (Ont. C.A.).
72. When adequate precautions have been taken, the doctrine of vicarious liability has been held not to apply, even if there was close contact between the abuser and the victim, as for example, between a worker and victim in a youth club Jacobi v. Griffiths  2 S.C.R. 570; AIB et. a.l v. YWCA 4 ACWS (3rd) 445.
73. Michael Pucylo and Miller Thompson, "Vicarious Liability Imposed on Charities and Non-Profit Organizations", Edmonton Federation of Community Leagues, 2001.
75. Susan Vella, "Sexual Abuse: The Civil Remedy", Law Society of Upper Canada, 1993.
77. The Occupational Health and Safety Act, 1993, S.S. C. O-1.1 as amended.
79. The Labour Standards Act, R.S.S 1978 c. L-1 as amended, s. 63. Since this Act also provides on its own terms that directors and officers are liable for wages, the liability applies to directors and officers of organizations incorporated under the Canada Corporations Act.
81. Income Tax Act, R.S.C. 1985, c.1 (5th Supp.) s. 227.1.
82. Canada Pension Plan Act, R.S.C. 1985, c. C-8 s. 36 (making s. 227.1 of the ITA applicable to CPP deductions).
83. Employment Insurance Act, S.C.1996, c. 23 ) s. 54(2) (making s. 227.1 of the ITA applicable to EI deductions).
84. Excise Tax Act, R.S.C. 1985, c. E-15 , s. 323.
85. Income Tax Act, s. 227.1 (3). In addition, Revenue Canada can look to directors and officers only if execution against the corporation has not been successful, or the corporation is insolvent or undergoing liquidation (s. 227.1(2)).
86. Arlene D. Wolfe, "Liability of Directors and Officers of Non-share Corporations", Fit to be Tithed: Risks and Rewards for Charities and Churches, Department of Continuing Legal Education, Law Society of Upper Canada, November 10, 1994, p. E-19.
87. See for example the Canada Environmental Protection Act,1999 S.C. 1999, c. 33 and the Hazardous Products Act R.S C. 1985, c. H-3.
88. For example, business practices offences under the Competition Act.
90. s. 111. The Canada Corporations Act, s. 93, also permits indemnity, but the provision may apply to directors only.
93. Arlene D. Wolfe, "Liability of Directors and Officers of Non-share Corporations", Fit to be Tithed: Risks and Rewards for Charities and Churches, Department of Continuing Legal Education, Law Society of Upper Canada, November 10, 1994, p. E-11.
94. Daniel L. Kurtz, Board Liability: Guide for Nonprofit Directors, Moyer Bell (New York, 1988), p.105, commenting on similar standards in American legislation, observes that "for example, although a well-intentioned, honest, but mistaken approval of an economically disadvantageous transaction might violate a director's duty of care, in . . . [states with this standard in indemnity statutes], a director generally still can be indemnified."
96. Daniel L. Kurtz, Board Liability: Guide for Nonprofit Directors, Moyer Bell (New York, 1988), p.104.
98. Dale Linn, "Insurance Coverage", Risk Management for Directors of Non-profit Organizations, Saskatchewan Legal Education Society, December, 1998, p. 6.
99. s. 111(4). Clause (b) allows an organization to protect its board members when they serve on the boards of affiliates. More generally, when a professional or business person is asked to sit on a non-profit board, his own firm may protect him by purchasing "outside directors" insurance. For example, law firms may purchase outside director's insurance through the Canadian Bar Association to protect members who serve on corporate boards.
100. Daniel L. Kurtz, Board Liability: Guide for Nonprofit Directors, Moyer Bell (New York, 1988), p.108.
101. This is part of a larger problem in the not-for-profit sector. A study in Alberta found that "many agency directors were confused about the kind of insurance they carried and uncertain about what coverage they had. General knowledge about the kind of insurance that is available . . . was lacking".(Gerald Kemp, The Legal Status of Volunteer Workers and Volunteer Organizations, The Volunteer Center of Calgary (Calgary, 1980), p.58).
102. For a summary of available D&O insurance, see Dale Linn, "Insurance Coverage", Risk Management for Directors of Non-profit Organizations, Saskatchewan Legal Education Society, December, 1998.
103. Daniel L. Kurtz, Board Liability: Guide for Nonprofit Directors, Moyer Bell (New York, 1988), p.99.
104. See for example James M. Scharfstein, "The Prudent Board Member" in Risk Management for Directors of Non-profit Organizations, Saskatchewan Legal Education Society, December, 1998.
105. Daniel L. Kurtz, Board Liability: Guide for Nonprofit Directors, Moyer Bell (New York, 1988), p.99.
106. Donald R. Morgan, "Risks and Myths about Directors of NFP's", Risk Management for Directors of Non-profit Organizations, Saskatchewan Legal Education Society, December, 1998, p. 1.
108. Final Report of the Panel on Accountability and Governance in the Voluntary Sector, February, 1999. (Chapter 1).
109. For example, in Maryland, charities are immune from tort liability (Maryland Code 48f. 480 (1991). In Arkansas (Ark. Code 23-79-210 ) and Colorado (Nonprofit Corporation Act, 1986, 7-20-108), not-for-profit corporations are liable in tort only to the extent of their insurance coverage.
111. Legislation in other jurisdictions will be discussed below.
113. For discussion of the American legislation see, Daniel L. Kurtz, Board Liability: Guide for Nonprofit Directors, Moyer Bell (New York, 1988), chapter 5. S. L. Ward, Tort Liability of Nonprofit Governing Boards, (New York) Garland Publishing, 1993, (appendices), provides a state-by-state summary of relevant American law.
114. Ill. Not for Profit Corporation Act 24b.
115. Alaska Statutes 09.17.051 (suppl. 1991).
116. Tenn. General Corporations Act 48-1-852.
117. California Corporation Code 5239 (1990).
118. S.N.S. 2002, c. 14 (assented to May 30, 2002). The Act includes certain other exceptions. For example, a volunteer who fails to obtain any required license, certification, or insurance is not relieved of liability. These exceptions are not relevant in regard to directors and officers acting in their capacity as board members.
119. The Nova Scotia legislation appears to have responded to a specific problem: A case in which fraud was committed by a professional fund raiser engaged by not for profit organizations. It was feared that board members who acted in good faith and without knowledge of the fraud might nevertheless be held liable along with the professional fund raiser. In our opinion, this is a significant liability issue. However, the legislation also protected other volunteers, such as canvassers who collected contributions in good faith. In our view, this protection was likely not necessary to ensure that canvassers would not be found liable.

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