Are you on a Board of Directors?
Your training and expertise as a lawyer and your good judgment are skills that organizations want in a director. Law firms often encourage their lawyers to sit on client corporate boards. Because your liability as a director could possibly extend to liability for the firm, you and your firm should understand the legal obligations and risks involved, decide whether you both want to assume these risks and plan on how these risks might be offset by liability insurance.
As a lawyer practising in Nova Scotia, your professional errors and omissions policy will not cover you if you are sued in your capacity as a director. Coverage under this policy is only for professional errors and omissions that occur when rendering professional services to others.
The Policy defines “professional services” as:
- services normally provided or supervised by a lawyer within the scope of a usual lawyer-client relationship;
- services rendered in alternative dispute resolution as an arbitrator or a mediator or in equivalent role; and
- incidental services that are substantially related to services described in paragraph (a), but do not include Ancillary Activities.
The Policy also states that the insurance coverage does not apply to a claim arising out of an insured’s acting in the capacity of director or officer of any enterprise other than LIANS or the Nova Scotia Barristers’ Society (clause 3.9).
D&O Insurance Coverage
Before agreeing to act as a director, you should determine if directors’ and officers’ (D&O) insurance coverage is maintained by the organization and if there is any litigation pending. If D&O coverage is maintained, ask about the scope, limits, exclusions and reporting requirements of the policy. Get and keep a copy of the policy if you join the board. If coverage is not maintained, think carefully before joining the board.
Because of your potential liability, you should understand the coverage and reporting requirements of any D& O coverage that you or the corporation might have. This type of coverage is normally a “claims-made” coverage. This means that to be covered, the claim must have been made against you during the policy period and you must report it to the insurer before the policy expires. Whenever you have knowledge of a claim or facts or circumstances that could give rise to a potential claim against you as a director, you should report this immediately to your insurer.
Make sure the corporation’s or organization’s staff is aware of this important reporting requirement. When you report a claim or potential claim, keep a copy of the report for your own records.
Getting your own D&O coverage is also something you might consider. The Canadian Bar Insurance Association (CBIA) offers coverage designed to sit above the company’s primary directors’ and officers’ liability insurance policy and a corporations’ indemnification, if any.
If You Do Give Legal Advice to the Board
During your tenure as a director, it may happen that an issue for which your legal expertise is well known arises, and you are asked to provide legal advice to the board and you do so. Be clear that you are giving advice as a lawyer (if that is the case), so as to avoid insurance coverage issues. Also ensure that you:
- have a detailed written retainer for the legal services you provide;
- give advice in writing, whenever possible;
- document in writing all verbal advice given;
- confirm in any written or verbal communication to the board whether your advice is given pursuant to your retainer for legal services, or whether you opinion is offered as a director; and accurately reflect in your billings to the organization whether the account is for legal services or simply for expenses as a director or officer.
An overview of statutory liabilities
Provincial and federal statutes impose many different liabilities on directors. Some of these statutes are noted below. This is not intended to be an exhaustive list.
Pursuant to provisions of the Income Tax Act, you could be held personally liable for un-remitted federal income tax withheld from wages or salary paid to employees. While there are provisions in the Act that provide protection from liability if you exercise due diligence, the burden of proof is on you, to prove on a balance of probabilities that you exercised due diligence in your role as a director. Whether you will be found to have exercised due diligence will depend on the factors and circumstances of the particular case and your particular skills.
Depending on the circumstances, as a director you could face fines or even imprisonment for serious violations of our Criminal Code. Claims against directors have been made in various other areas as well, including employment, the environment and securities.
In the case of Allen v. Aspen Group Resources Corporation, 2009 Can LII 67668 (On S.C.), G.R. Strathy J. considered whether the essential elements existed for a cause of action in a claim against a lawyer and his law firm relating to the lawyer’s statutory liability as a director and for the lawyer’s negligence. He found that the action could proceed both against the lawyer and his law firm for the solicitor’s alleged negligence and the alleged breach of his statutory obligation as a director.
Directors of Non-Profit Organizations and the Volunteer Protection Act
While the Volunteer Protection Act, SNS 2002, c 14, provides some protection to volunteers of a “non-profit organization”, you should not rely solely on this legislation to protect you in your capacity as a director of a “non-profit organization”.
You must fit within the definition of volunteer, as defined in s. 2(h) of the Act to receive protection under it. Volunteer is defined at s. 2 (h) of the Act as follows:
“volunteer” means an individual performing services for a non-profit organization who does not receive in respect of those services
(i) compensation, other than reasonable reimbursement or allowance for expenses actually incurred, or
(ii) money or any other thing of value in lieu of compensation in excess of five hundred dollars per year,
and may include a director, officer, trustee or employee of the organization.
If, for instance, you receive money or any other thing of value, in lieu, in excess of five hundred dollars per year, or are compensated for performing services as noted above, you would not receive the protection of the Act.
As well, this Act does not override federal legislation relating to directors that imposes statutory liability on them. For instance, it does not override any liability directors may have for remittances of source deductions under the Income Tax Act (see s. 227.1 (1) & s. 242).
Therefore, it is important that you attend meetings and keep yourself well informed about the organization’s activities and finances. Get monthly confirmation in writing, from the treasurer, that there has been compliance with the various taxing statutes that allow for a due diligence defence. See that this confirmation is included in all meeting minutes. Review minutes to ensure accuracy.
Always exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances, recognizing that often a higher standard of care is expected of professionals such as lawyers and accountants.
Finally, be mindful that your professional liability insurance does not provide coverage for liability arising as a result of your actions as a director. See paragraph 3.9 (Part III) of our policy for more information.
If you serve as a board director the following resources and cases will help you better understand your role and responsibilities and what you can do to minimize your risk when acting as a director:
Broder, Peter, ed. (2002). Primer for Directors of Not-for-Profit Corporations: Rights, Duties, & Practices. Ottawa: Industry Canada
Canadian Bar Association (August 2008). Task Force on Conflicts of Interest: Final Report, Recommendations & Toolkit
Carter, Terrance BA, LL.B and Jacqueline Demczur, BA, LL.B (November 2013). “Legal Risk Management Checklist for Non- Profit Organizations”
D’Silva, Alan L.W., Patrick O’Kelly and Ellen M. Snow. (Summer 2007) “Lawyers on Boards – Assessing the risks and limiting the liability”. LawPRO, vol. 6, no. 2
Daley, Helen and Simon Bieber (2015) Directors’ and officers’ liability in Canada, Toronto, Ontario: Lexis Nexis Canada, 2015.
Priest, Margot and Barry Reiter (2006). Directors Duties in Canada, 3rd ed. Toronto, Ontario: CCH Canadian Limited
Rappaport, Michael (Summer 2010). “Danger: Lawyer on Board – A recently certified class action could discourage lawyers from sitting on boards”. p.26. Toronto, Ont: CCCA Magazine
Reiter, Barry (2016). Directors’ Duties in Canada, 6th ed., Toronto, Ontario: LexisNexis Canada, 2016.
Allen v. Aspen Group Resource Corporation, 2009 CanLII 67668 (ON.S.C.)
Bremner v. Canada, 2009 FCA 146 (CanLII)
Hanson v. Canada, 2000 CanLII 16336 (F.C.A.)