By Ray Mikkola
Contractors who deal with condominium corporations should be aware of recent reports in the press of a case involving alleged construction fraud and mortgage fraud perpetrated by a property manager.
The story of the $20-plus million fraud was first reported by The Toronto Star in September 2011. The number of condominium corporations affected by the alleged fraud now stands at nine and counting, and police are continuing their investigation.
The story has centred mostly on the impact of these alleged crimes on condominium corporations and unit owners. However, other affected parties may also include their lenders and those who thought they were dealing with signing officers duly authorized to contract on behalf of the condominium corporations’ boards. This case raises some interesting questions, such as when is a contractor entitled to rely on the apparent authority of a person who executes a contract on behalf of a corporation? Well, it depends on whether the contractor is dealing with a business corporation or a condominium corporation. The law treats them very differently.
Ties that bind
In most circumstances when dealing with a business corporation, the law in all provinces protects a contractor who has signed a contract in good faith. The Business Corporations Act of Ontario contains an important provision commonly known as the ‘indoor management rule.’
In essence, it says contractors who deal with a director or officer of a business corporation (or someone with authority to bind the business corporation) can safely assume this person can bind the business corporation, unless they have knowledge to the contrary.
So as long as a contractor is dealing with the director or officer, the corporation will be bound to the terms of the contract, even if it turns out its bylaws require, for example, two directors to sign. To help assure contractors they are dealing with a director, business corporations are required to publicly file the names of directors periodically.
All bets are off, however, when a contractor is not dealing with a business corporation, but rather a condominium corporation. Here, the courts in Ontario and Alberta have held at the highest level that the indoor management rule does not apply.
Courts have found contracts signed by a condominium director in circumstances where the Condominium Act (or the condo corporation’s bylaws or declaration) was not followed, are not binding.
This can obviously present a significant problem for a contractor who thought the condominium corporation was bound by the contract. The task of confirming the validity of contracts with condominium corporations is made more challenging by the fact they do not file the names of their directors in any public register.
So what can a contractor do to ensure the condominium corporation client is bound to its contract? First, the contract should be signed by all the corporation’s directors. If that is not possible, the contract should be accompanied by a board resolution certified to be true by the secretary.
Unlike businesses, condominium corporations are required to have a corporate seal. While the Condominium Act is silent on the reason and use of the seal (except to make true copies), the contract should be signed under seal as proof the signatories had access to the corporate records. Even a sealed copy of a resolution is deemed by the act to be an accurate version of the original in the condominium corporation’s minute book.
For a significant contract, it is important to review the corporation’s bylaws to ensure its execution is in compliance. Bylaws are registered in the land registry office and can be obtained in electronic form by any member of the public. (In Ontario, any member of the public may search a title, register a discharge or a construction lien, etc., at the land registry office on a ‘one-off basis.’ Special rules apply to the registration of deeds in Ontario. Access to electronic registry records in other provinces may differ). The validity of significant contracts—particularly where they involve improvements to the common elements—should be confirmed by a legal opinion by the condominium corporation’s lawyer. (Contracts regarding improvements to the common elements may require notice to or approval by the unit owners to be effective).
Contractors should be aware special rules apply when they are contracting with condominium corporations. Contracts for clearing snow or cutting grass require less due diligence than those for the renovation of common elements costing millions, but the law is the same.
One question remains: Is the condominium corporation bound to the contract? A ruling by an Ontario judge states the following:
Contracts cannot be executed without authorization by resolution of the board…. Given the nature and possible consequences of this agreement on the parties, I would have thought the [contractor] would have made sure their contract received approval of the board of directors if they wanted a binding agreement. That is why the legislature enacted the Condominium Act. If all condominium owners are to be bound by an agreement, it must comply with the act…
Clearly, the failure of a contractor to confirm the validity of a contract’s execution by a condominium corporation may result in there being no contract to enforce. This can, and has, left a party without a remedy.
Ray Mikkola specializes in condominium law and is a partner in the commercial real estate practice at Pallett Valo LLP in Mississauga, Ont. He can be reached at email@example.com.