Source: https://lawreformcommission.sk.ca/PaperLiabilityBoard.htm
Timestamp: 2019-04-20 20:45:10+00:00

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Volunteers and not-for-profit organizations make an important contribution to community life in Saskatchewan. Volunteers provide services to their communities ranging from soccer leagues for youth to advocacy for senior citizens. They contribute to a strong social fabric. Saskatchewan people have always known that they can improve the quality of life for everyone by cooperating to provide community services that would otherwise not be available in our sparsely-populated province. The ethic of community service has fostered strong democratic values and self-reliant local control of community development.
In addition to the social value of the services it provides, voluntarism makes a real contribution to the province's economy. The unpaid labour and charitable contributions that fuel the volunteer sector make Saskatchewan a better province in which to live and carry on business. One of the largest components of voluntarism is social service, providing benefits to the community that would otherwise require more tax dollars to support them. It has been estimated that nationally, the volunteer sector has total revenues and assets that make it comparable in size to the entire economy of British Columbia.
At the end of the millennium, voluntary organizations are facing a rapidly changing environment and fundamental restructuring of how they work. Changing government roles, increasingly diverse populations, and new economic and social realities facing both young and old are requiring the voluntary sector to broaden, deepen, and adapt its approaches - and to do all of these at once. . . .
There has been a general decline in trust in all public institutions and greater public scrutiny of the private sector as well as the voluntary sector. Although Canadians have a continuing belief in the sector and high expectations of it, they are looking more closely at how the voluntary sector works and how it spends its donated money. This public skepticism has been reinforced by an aggressive media. While a small number of disreputable organizations or activities are inevitable in the sector, the sector itself wishes to take all possible steps to develop ways of minimizing and containing these occurrences and building the confidence of the public in the sector as a whole(3).
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 in 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.
The board of directors of a not-for-profit organization is responsible for the management and direction of the organization. Board members carry a heavy responsibility, both to the organization of which they are part, and to the public which deals with it. The time and energy required of board members is often substantial, and the success or failure of an organization in carrying out its mandate often depends on the dedication of its board.
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, 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.
The potential liability of board members should not be exaggerated. Generally, board members are monitors, not managers. They are responsible only to the extent that they knew or ought to have known of potential problems and failed to remedy them. For example, while boards have been held liable in Canada for failure to take preventative measures against foreseeable sexual abuse and harassment,(6) they have also been exonerated when isolated incidents of abuse that could not have been expected to have occurred.(7) In addition, some protections for board members are available, though never fool proof, such as indemnity agreements, waivers, and insurance. Nevertheless, the risks are real.
Liability in the not-for-profit sector is not, of course, a problem for board members alone. In practice, board members are usually named as co-defendants in law suits brought against the organization as a body corporate. If the alleged injury or loss was caused directly by an employee or volunteer, he or she will also be joined as a defendant. While liability issues involving the organization, employees, and volunteers are significant, the liability of board members creates distinct and serious problems for the not-for-profit sector that justify addressing this issue independently of other liability concerns.
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 be, in the worst but not implausible case, be financially ruined.
A volunteer who is not a board member assumes some risk of liability. But in almost all cases, the liability will result from his or her own acts of negligence or dishonesty. So long as the volunteer is acting within the scope of his or her directions from the organization, it is unlikely that they will be held personally liable(12). The risk is therefore largely under the control of the volunteer, and is more easily guarded against by appropriate insurance than the risks potentially faced by board members. Board members may be held vicariously liable for the acts of volunteers or employees, and are jointly liable for decisions of the board, even if they did not directly participate in them.
As will be seen below, 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.
There is a very real danger that the viability and health of Saskatchewan's not-for-profit sector will be seriously compromised by fear of personal liability. While the fear may be exaggerated by media coverage and misinformation about the nature of potential liability, it is often justified. Few people will be willing to sit on the boards of not-for-profit organizations if they face a serious potential of personal liability for decisions taken in good faith or for the actions of individuals who work for the organization either as volunteers or as paid employees. For that reason, the Commission believes that alternatives to the existing liability regime should be investigated.
Wolfe asks: "Has director's liability become too excessive?". She answers her own question by suggesting that the public interest in ensuring accountability of not-for-profit activities 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.
1. The public must be satisfied that the not-for-profit sector is accountable for its activities. When the public's money is spent by volunteer organizations, whether raised by private donations, or from public sources such as lottery funds or grants, volunteer organizations are increasingly expected to be able to account for their stewardship. When volunteer organizations provide community services, they are increasingly held accountable by the public for the safety and quality of the services they provide.
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 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.
Application of these principles to the problem of liability of board members must begin by identification of the nature and scope of potential liability, and the extent to which there are existing mechanisms for mitigating liability. This is the topic of the next chapter of this report.
Finding the right balance should not compromise the accountability of not-for-profit organizations or deprive the public of the right to reasonable compensation for wrongs done by not-for-profit organizations. At present, the threat of personal liability is an inducement, perhaps the only legally-binding inducement, to board members to act diligently in carrying out their duties. The Commission has concluded, however, that both accountability and compensation can be ensured in better ways than holding volunteer board members personally liable for all board decisions and for acts done by the organization and its agents. These options will be considered in the final chapter of this report.
Most not-for-profit organizations are incorporated associations. Organizations that operate primarily in Saskatchewan are usually incorporated under the Saskatchewan Non-profit Corporations Act, 1995(15). National organizations are often incorporated under Part II of the Canada Corporations Act, which applies to non-share corporations.(16) In addition, clubs and some churches may be unincorporated associations. The discussion that follows will focus on organizations incorporated under the Saskatchewan Non-profit Corporations Act, but the principles applicable to federally incorporated non-share corporations are similar.
Perhaps the most important consequence of incorporation is the limited liability it confers on its members. This has been called the "fundamental attribute of separate [corporate] personality . . . [from which] most of the advantages of incorporation spring"(21). The Saskatchewan Non-profit Corporations Act provides that "no member of a corporation is liable for any liability, act or default of the corporation".(22) Thus a member of a not-for-profit corporation cannot be sued in consequence of decisions made by the board, or for the actions of other members, volunteers, or employees of the organization. A member who acts as a volunteer might be liable for his or her own negligence in dealing with members of the public or fellow volunteers, but never because of membership in the organization.
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 over all 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.
Third, board members are exposed to liability under certain statutes which "pierce the corporate veil". For example, under Saskatchewan legislation, board members of both business and not-for-profit corporations are personally liable for back wages owed to the corporation's employees. The number of statutory exceptions to limited liability is increasing, and now includes such things as liability for taxes and environmental damage.
Each of these categories of potential liability will be discussed in more detail below. However, it should be stressed at the outset that personal liability is the exception rather than the rule for honest and reasonably conscientious board members in the not-for-profit sector, even when something goes wrong in an organization. It is the possibility that exceptional circumstances will occur that expose board members to potentially catastrophic liability that feeds legitimate concern.
The Act prohibits delegation of certain board functions deemed to be critically important(29), but even when delegation is authorized, the board remains responsible for the decisions made by its delegates. Decisions made by officers and other board delegates must be reported to the board and approved by it. Under The Non-profit Corporations Act, ordinary board members and officers are placed under the same legal duty to the corporation(30).
The basic duties owed by board members, individually and collectively, to the organization they serve are diligence, prudence, and loyalty. The scope of potential liability to the organization can usually be discussed by considering each of these duties.
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 hoard position and then fails to attend meetings and/or actively participate in decision making is open to liability for mismanagement, nonfeasance or both(33).
Many charities have large boards because membership usually entails making a substantial contribution. While some directors may exercise their responsibilities with vigilance, others, serving primarily by virtue of their financial [fund raising] capacity, will neither be inclined, nor able, to carry out their duties adequately. The law however, does not distinguish among these types of directors. All are subject to the same duties; all are potentially subject to the same liabilities(34).
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 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 there 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).
Liability perhaps arises most often when board members do not pay enough attention to the finances of the organization. Volunteer directors may rely too completely on their treasurer, finance committee, or managerial employees, becoming mere "rubber stamps" for decisions made by others. Although board members are not usually responsible for debts of the corporation, liability can arise from a variety of financial transactions. For example, if the organization makes investments of its funds, the board may be held accountable if loss results because the investments were unacceptably risky, or were held when good advice would have suggested sale. Each director may be liable, and cannot usually plead that the treasurer's advice was relied upon(37). In a Saskatchewan incident recently reported in the media, a not-for-profit organization's manager failed to remit income tax deductions from employees to Revenue Canada. This created a statutory liability for board members when the organization became insolvent. The fact that payments to Revenue Canada had been withheld was reported in financial statements made available to the board, but board members did not appreciate the significance of the decision to withhold(38).
Lack of diligence in other areas of board activity is becoming more problematic as public demands for accountability in the not-for-profit sector increase. In addition to its role as monitor of the ordinary financial and management activities of the organization, the board has what has been called a "stewardship responsibility", which includes strategic planning and risk management(39). The board must assure itself that the corporation carries adequate insurance to cover possible personal injury claims against the organization, and that the way in which it carries out its programs do not create foreseeable and avoidable risks. Recent successful claims against athletic associations that did not take appropriate steps to vet coaches and volunteers to prevent sexual abuse of young athletes are examples of failures of organizational planning that were attributed in part to lack of diligence by board members(40).
(b) exercise the care, diligence, and skill that a reasonably prudent person would exercise in comparable circumstances.
(2) Every director and officer of a corporation shall comply with this Act, the regulations, articles, bylaws and any unanimous member agreement.
Prudence refers to the duty to make informed decisions in regard to the affairs of the institution. Directors are expected to avail themselves of the best information and/or guidance obtainable in making management decisions. To act out of ignorance when pertinent information was available also leaves one open to liability. Further, once the necessary facts are known, directors are expected to act with reasonable skill and intelligence in decision making. In other words, directors are expected to act as an ordinarily prudent man would under similar circumstances(42).
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, though 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 setting policy requiring such things as periodic mechanical inspections, mandatory reporting of problems by drivers, and replacement of aging vehicles.
1. The board member must refrain from profiting personally from institutional transactions.
Equity will refuse to permit the fiduciary to claim that he has done for himself something which might have been done by him in pursuance of his undertaking or in discharge of his obligation. A modern extension of the rule . . . is the proposition that a fiduciary is bound to surrender to his beneficiary all "secret profits" received by the fiduciary by reason of his position, whether the beneficiary has a proprietary or even a moral claim to them or not(48).
(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. . . .
(d) one with an affiliate. . .
(a) by reason only of that relationship . . . .
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 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.
The 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.
Thus, for example, if premises used by an organization in its programs are not kept in good repair, and injury results to a client or volunteer, the organization will be liable. While a finding that the organization failed to take reasonable steps to prevent injury does not necessarily imply fault on the part of the board, it may be liable if it knew or ought to have known that the state of repair of the premises was a source of risk to the organization, its volunteers, and clients.
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 is under strict instructions to take a group pf 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 pf 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.
Whether a lapse in supervising employees could be brought home to the board may depend on whether the board knew, or ought to have known, that the organization's methods of supervision were inadequate. Because the organization, not the board, is the master, the liability of directors and officers in such a case is not, strictly speaking, vicarious. However, in any case in which the harm done to a third party can be brought within the scope of employment of the wrong doer because of a failure on the part of the organization to supervise and control its agents, there is at least reason to suspect that the board's duty to monitor the organization's activities has been breached.
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 latter 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.
The Supreme Court did not consider the question of the personal liability of board members in Children's Foundation v. Bazley or Jacobi v. Griffiths . However, it is clear that board members are potentially liable. Lack of knowledge of potential risks at the operational level will not relieve the board of responsibility. It has been suggested that it is now the case that "a person in authority in an institution may be required to expand their knowledge . . . through special training and may be required to provide special education programs for other personnel."(75) This injunction undoubtably applies to the board of any service-providing organization.
(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, securities of a corporation 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].
(d) a payment contrary to section 177 or 225 [certain payments to members on dissolution etc.](76).
All of these matters are examples of breach of duty deemed to be particularly serious. Most involve preferences to directors, officers, or certain members of the corporation. It is likely that in almost all situations in which this provision applies, board members would be personally liable even if the provision did not exist.
Directors and officers are also personally liable for breach of a variety of other provisions in federal and provincial legislation. The liability under these statutes is usually to third parties injured by the corporation or to government agencies. Apparently without exception, these statutes apply to business corporations as well as not-for-profit organizations.
60 Where a corporation is guilty of an offence mentioned in section 57, every officer, director, manager or agent of the corporation who directed, authorized or participated in the commission of the offence is also guilty of the offence and is liable on summary conviction to the penalties for the offence that are set out in section 58 whether or not the corporation has been prosecuted.
61 In a prosecution of an offence pursuant to this Act, any act or neglect on the part of a manager, agent, representative, officer, director or supervisor of the accused, whether or not the accused is a corporation, is deemed to be the act or neglect of the accused(77).
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 that 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 seeks to ensure that corporate limited liability is not 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 law presently provides several mechanisms that allow board members to guard against potential liability. All of them are useful, though it is likely that many board members and not-for-profit organizations are unaware of what is available to protect directors and officers. And while available protections should be part of the risk-management plan of any not-for-profit organization that faces significant potential liability, none of them are "magic bullets" that will confer immunity on directors and officers.
(c) sends a dissent by registered or certified mail or delivers it to the registered office of the corporation immediately after the meeting is adjourned.
(2) A director who votes for or consents to a resolution is not entitled to dissent pursuant to subsection (1).
A dissent will protect a board member from liability for acts approved by the rest of the board. However, the dissent rule does not protect against liability for management decisions that do not come before the board if, as will often be the case, board members should have been aware of the decisions. Similarly, it is hardly possible to use the right of dissent to guard against omissions, such as failure to put an adequate system of supervision of volunteers in place.
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, directors and officers who have 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 in third party actions. Section 111(1) of the Act provides.
Since there is little authority on the grounds on which the court might approve an indemnity in such a case, the requirement of court approval makes indemnification bylaws less attractive to prospective board members.(96) As the discussion of potential liability above has shown, a third party claim may rest on an allegation that the defendant organization failed to supervise and control its volunteers and employees. If a claim made on this basis is successful, it may be possible in turn for the organization to allege that its directors and officers breached their duty of care in conducting the organization's affairs. Even if a corporation generally takes a charitable view of its board, the incentive to avoid paying third party damages by passing responsibility to individual board members may be strong, particularly if the litigation has created rifts within the organization. In the result, an organization might oppose payment of an indemnity in court.
However, the most important limitations on the value of indemnity bylaws has little to do with their statutory foundation. Indemnification is merely a promise to compensate a board member for costs and damages in a law suit. It does not, of course, affect the right of the claimant to collect damages from the board member. Thus the indemnity is only as good as the corporation's ability to pay it. Thus as Kurtz observes, "the comfort afforded by indemnification may be illusory if an organization lacks the resources to meet its indemnification obligations."(97) The danger is increased by the fact that in most third party actions, both the organization and its directors are named as defendants. It is unusual for judgment to be given against directors and not against the corporation as well. Thus the organization may have most difficulty paying an indemnity just when indemnity protection is needed.
Because indemnification is not mandatory, the protection may be withdrawn. If there is a change in board membership, the indemnity may be withdrawn to expose former directors to liability.(98) Since litigation often has a divisive effect on organizations, the danger that board members facing legal action will be left unprotected is very real.
Unfortunately, many not-for-profit corporations do not carry directors and officers insurance(101), though it can be purchased as a rider to the general insurance policy covering the organization.
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 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 avoided against them if they are held accountable for incidents of sexual abuse committed by volunteers.
The not-for-profit sector in Saskatchewan depends on the willingness of volunteers to serve on boards. It is volunteer directors and officers who are often at the heart of a not-for-profit organization. If concern about liability issues discourages citizens from serving on volunteer boards, the community fabric of our province will suffer. The problem of directors and officers liability should be confronted before it reaches dangerous proportions.
A general immunity in tort would not achieve an acceptable balance between the protection of the integrity of not for profit service providers and the public interest.
Most jurisdictions in the United 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 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 advise 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 the information 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. 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 Not for profit Corporation Act might be revamped to provide broader protection. However, unless this reform could be coupled with expanded directors and officers insurance at affordable premiums, there would be little point in pursuing it. Given concern in the insurance industry about increasing litigation, changes in directors and officers insurance is unlikely unless governments are willing to become insurers.
Limitation of personal liability of board members in the not-for-profit sector has been widely adopted and accepted in the United States(113). The American experience can serve as a guide to law reform in Saskatchewan.
Note that the immunity would not extend to fraud or dishonesty. The Alaskan immunity provision is similar, providing that directors and officers of not-for-profit corporations are immune from tort liability except in cases of gross negligence.(115) Other states depart from the Illinois/Alaska formula is various directions. In Tennessee full tort immunity is conferred on directors, presumably even in cases of wilful fault or gross negligence.(116) The California provision applies only to nonprofit "directors, officers or trustees" who are "not compensated for their services", but volunteer board members are immunized against all 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).
1. Directors and officers of not-for-profit corporations should not be personally liable (unless otherwise excepted) in any civil action, including both third party actions and actions brought against a director or officer on behalf of the corporation, that arises out of an act or omission connected with the responsibilities of a director or officer. Although much of the public concern about liability has focused 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.
In addition, the potential liability of directors for third party torts is most apt to arise in cases in which a breach of the directors' duty to the corporation to manage its affairs in a prudent manner might be alleged. Directors and officers should be immune from both direct third party actions, and actions on behalf of the corporation to recoup damages from board members that have been paid to third parties.
2. All directors and officers of not-for-profit corporations should be covered by the immunity, whether they receive compensation or not. 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 Not for Profit Corporation Act. However, the Act permits compensation of directors and officers. Some are paid a per diem or honorarium for attendance at meetings, and others receive expenses for attendance. In practice, it may be difficult to distinguish a compensated director from one who is merely reimbursed, directly or indirectly, for expenses. The immunity provision should be as straightforward as possible, providing clear protection for those who serve on not-for-profit boards. For that reason, no distinction should be made 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 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.
4. The immunity should not exclude acts or omissions that may be deemed "wilful" or "grossly negligent". Once again, the immunity provision should be as straightforward as possible, providing clear protection for those who serve on not-for-profit boards. In other areas of tort law, concepts such as gross negligence have proved to be too vague to provide consistent, predictable guides to behaviour.
5. The immunity should not affect statutory liabilities of directors and officers under Saskatchewan law, but consideration should be given on a case by case basis to modifying or removing statutory liabilities with respect to directors and officers of non-profit corporations. Adoption of a general immunity from civil liability of the kind recommended above will not relieve board members from specific liabilities imposed by statute. It 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 there 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 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 Not for Profit Corporation 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 made or agreed to divert funds required to pay wages is fairer than allowing the burden to fall on the employees. A director or officers who objects to diversion of funds may register a dissent in accordance with The Not for Profit Corporation 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 b mistaken or fraudulent reports that conceal the wage debt. For that reason, he Commission is not prepared to recommend any change in the liability for wages presently imposed in Saskatchewan law.
1. Directors and officers of not-for-profit corporations should not be personally liable (unless otherwise excepted) in any civil action, including both third party actions and actions brought against a director or officer on behalf of the corporation, that arises out of an act or omission connected with the responsibilities of a director or officer.
2. All directors and officers of not-for-profit corporations should be covered by the immunity, whether they receive compensation or not.
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 fraud or profit-taking at the expense of the corporation.
4. The immunity should not exclude acts or omissions that may be deemed "wilful" or "grossly negligent".
5. The immunity should not affect statutory liabilities of directors and officers under Saskatchewan law, but consideration should be given on a case by case basis to modifying or removing statutory liabilities with respect to directors and officers of non-profit corporations.

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