CONTRACTS AND THE LAW
The Indoor Management Rule: Does it apply to condos?
By Nancy L. Houle, BAh, LLB
IN CORPORATE law, the indoor management rule is a very important principle.
Generally, a person (or a corporation) who enters into a contract with a corporation can
rely on the assumption that the representatives of that corporation have the legal authority
to bind the corporation. In other words, the person is not required to determine whether or
not the individual signing the contract on behalf of the corporation has the authority to do
so.
The courts, subject to some exceptions, will typically uphold the validity of a contract
that has been signed by a representative of the corporation, even if the representative did
not act within the scope of their authority.
This brings about the interesting question of whether or not the indoor management
rule is, or should be, applicable in relation to contracts executed on behalf of a condominium corporation.
In the condominium setting, there are many contracts that can be executed by the board
without involving the owners. However, there are many examples where a board of
directors may not have the authority to execute a contract unless the “purpose” of the
contract has been put to owners of the corporation.
For example, if a corporation is going to undertake substantial additions,
improvements or alterations to the common elements, this must be put to a vote of the
owners. Therefore, until the owners have voted in favour of the substantial addition,
improvement or alteration, the board of directors arguably does not have the authority to
enter into a contract for this work.
We recently had the opportunity of responding to a motion for an interlocutory
injunction in a very interesting case, much of which depended upon whether or not the
indoor management rule applied to condominium corporations.
In this case, the condominium corporation was in the process of entering into an
agreement with another service provider for telecommunications services when the
corporation received a letter from their current cable provider claiming that the
corporation was in breach of an existing agreement with the current cable provider. The
alleged agreement with the current cable provider prohibited the condominium
corporation from entering into any “bulk agreements” with any service provider.
In the end, it was discovered that a single board member had executed a document that
had been faxed to the corporation by the current cable provider. The document was
essentially presented to the corporation as a “renewal” of the existing access rights that
the current cable provider already enjoyed. Buried within this “renewal” was a new
provision that limited the corporation’s rights to enter into other telecommunications
agreements. This was the alleged agreement that the current cable provider was seeking
to enforce.
This “renewal” was never approved by the board of directors or the owners. In fact, the
board of directors was not aware of this “renewal” until receipt of a letter from the
current cable provider claiming that the corporation was in breach of an existing
agreement.
The current cable provider commenced a court action for one million dollars in
damages, and to seek an immediate order from the Court to prohibit the corporation from
completing its agreement with the other service provider.
It was the corporation’s position that the current cable provider was not entitled to rely
upon the indoor management rule. Citing the case of Winfair Holdings (Lagoon City) v.
Simcoe Condominium Corporation No. 46, we argued that the indoor management rule
has no application to condominium corporations.
The Court agreed, and stated as follows:
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 that [the current cable provider] 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.
I have serious doubts that the member of the Board knew or appreciated what he was
signing. I have no doubt that the execution of the agreement is not in conformity with the
provisions of the Condominium Act and therefore is not binding on CCC No. “X”.
The Court was clear that the “indoor management rule” has no application to
condominium corporations.
As such a condominium corporation, or a contractor seeking to enforce a contract,
should satisfy themselves, ideally when the contract is signed, that all applicable
provisions of the Condominium Act, 1998 and the corporation’s declaration and bylaws
have been met.
We know for example, that in spite of the indoor management rule, a commercial
lender will not make a loan without an opinion from the solicitor for the corporation to
confirm that the borrower has the legal authority to enter into the loan agreement.
Depending upon the value of the contract to the contractor, or the benefit of the contract
to the condominium corporation, the contractor or condominium corporation may take
steps to obtain an opinion on the legality of the contract so that the validity and execution
of the contract will not become an issue in the event of a subsequent dispute.
Nancy L. Houle, BAh, LLB, is an associate in the Condominium Group at Nelligan
O’Brien Payne based in Ottawa, ON.
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Condominium Manager Magazine – Fall 2005