With respect to any fiduciary duty or duty of care, there is a common misconception that an organization's charitable purpose may somehow immunize its directors from liability. In fact, the law in Canada seems clear that directors of charitable organizations do not enjoy any special privilege or immunity due to the nature of their work. Most charitable organizations in Alberta are formed under either the Companies Act, R.S.A. 2000, c. C-21 or the Societies Act, R.S.A. 2000, c. S- 14. Neither Act explicitly imposes a fiduciary duty or duty of care upon directors of charitable organizations. However, it is generally acknowledged that directors nonetheless owe a common law fiduciary duty and a duty of care to the organization. This requires directors to act honestly and in good faith, and to exhibit the skill and care of a reasonable person with their particular skills and experience, in the discharge of their duties. In this regard, directors of charitable organizations are held to at least the same standard as their for-profit counterparts. There is, not surprisingly, a tendency to pay less attention to volunteer work than to paid engagements. Yet, charities have been victimized by unscrupulous employees or consultants in a number of instances and directors can be held responsible if losses result from their oversight.
We also caution that there is a body of commentary and case law which suggests that since directors of charitable organizations collect and distribute funds for the public benefit, their duty may extend beyond the fiduciary duty, discussed above, to include the more demanding obligations of a trustee relationship. The elevated duty of a trustee, in comparison to that of other corporate directors, would prevent the trustee/director from having any conflict of interest in the discharge of his or her duties, unless authorized by a court. Furthermore, the standard of care imposed on trustees is objective in nature, and requires the skill, honesty and intelligence of an ordinary prudent man of business, regardless of the actual abilities of the trustee in question. The Courts in Canada appear to have retreated from this position, at least in some respects, but at the same time there are indications that the duties owed by directors generally may have become more demanding.
In respect of statutory liability, one likely source is the Charitable Fundraising Act, which regulates fundraising activities in Alberta (but does not apply to all fundraising charities). More specifically, the Charitable Fundraising Act applies when solicitation for funding occurs, and requires disclosure of certain information about the organization and its members. Personal liability under the Act may result not only from the actions of the directors, but also from the activities of the organization as a whole. Under this statute, a director of an organization that is found guilty of an offence can be imprisoned and/or fined up to $100,000 or three times the amount that the offender gains as a result of the offence.
The Income Tax Act is another common source of statutory, director liability. Pursuant to this Act, charities can incur liability in relation to the special tax status they possess. The loss of this special status can create personal liability for the directors of the charity, as the directors may be held liable for the acts, omissions or conduct of the organization which led to de-registration. Directors may also be held liable under the Income Tax Act if the organization fails to withhold employee income tax. This may be the principal concern for charitable organizations; however, liability can also arise in respect of GST, provincial sales and other taxes, to the extent charities are liable for the same. Revenue officials will pursue directors of charitable organizations where such funds are not withheld and remitted as required. Even where a charity may be entitled to a rebate, as with GST, directors are still vulnerable if, say, the charity is insolvent. Employing experienced professionals to ensure that such provisions of the Income Tax Act and other statutes are properly followed can substantially lessen the risk of personal liability attaching.
There are other statutes, including the Companies Act and the Alberta Corporate Tax Act, R.S.A. 2000, c. A-15, which can make directors responsible for various corporate acts or omissions, such as the corporation's failure to pay wages to employees or deduct taxes from employees.
The two common responses to these sources of liability are: indemnification by the organization; and/or the purchase of D&O Insurance.
In many (but by no means all) cases, a due diligence defence is available if the director can prove that he or she acted in good faith and made a reasonable effort to ensure that the organization took the correct, lawful or appropriate course of action. Where available, the nature of the due diligence defence can vary and particular care ought to be taken to obtain the reports or advice upon which the statute or regulation may require reliance. The defence can be difficult to establish, and again, one cannot expect much leniency simply because a charity is involved.
There are two significant concerns here. First, directors need to recognize that they have a duty which, even if not trustee like, is likely more onerous than in the past. Second, there are a number of statutory obligations imposed on charitable and other organizations, which can give rise to the personal liability of directors. Individual directors are more or less likely to be exposed to statutory liability, depending upon the particular activities of their organization.
The possible responses to these potential liabilities are much the same for all corporations: indemnification, D&O Insurance, and of course, taking care to fulfill one's duties. Indemnification by the organization, or related entities, can be an efficient source of protection for directors, but has significant limitations. Indemnification is of benefit only if or to the extent that the indemnitor has sufficient assets to meet all of the liabilities and costs incurred by a director, including legal fees and any award made by a court. Many charitable organizations would have insufficient assets at any one time to fund anything other than minor liabilities.
Like indemnification, D&O Insurance is also subject to drawbacks that can limit its effectiveness. D&O Insurance policies contain exclusion clauses which, among other things, will generally not cover fines or penalties imposed by statute. The Charitable Fundraising Act, unlike other sources of statutory liability, appears to impose a direct penalty, and does not merely make the director liable for the obligations of the organization. Accordingly, where the Charitable Fundraising Act or other penal provisions are a source of liability for directors, the protection offered by D&O Insurance may be restricted by the exclusion clauses within the coverage. It has also been suggested that some D&O Insurance policies may not apply when a statute makes a director liable for an obligation of the organization. These and other concerns need to be resolved with the insurer before the organization obtains such insurance.
The debate as to whether directors of charitable organizations are held to trustee or corporate law standards also bears upon the decision to insure or indemnify directors. If the directors are treated as trustees or something like trustees, indemnification or D&O Insurance may not be appropriate, since it would put the trust assets at risk for the benefit of the director. Having a court approve an insurance or indemnification agreement has been suggested as a means to provide a solution to this problem.
D&O Insurance can be expensive, and is generally limited by exclusion clauses and other restrictions; however, it may still be a wise investment for charitable organizations and, especially, for their directors. Legal commentators as well as court decisions in Canada, the United Kingdom, and United States emphasize that directors of charitable organizations need to recognize that they are generally subject to the same types of liabilities as those who control for-profit businesses, and who, unlike them, may be reasonably well paid for performing those duties. As such, operating without D&O Insurance can expose those who donate their time to govern the organization to significant and avoidable risk. Any decision to decline to take D&O Insurance requires a thorough review of potential exposure. Some charitable organizations may be such that their operations raise little potential for liability; others may not be materially different in this respect from for-profit corporations. In any case, any decision not to adopt protective measures should not be lightly taken.
Just as with for-profit organizations, directors of charitable organizations would be well advised to obtain a summary of the potential personal liabilities to which the activities of their particular organization exposes them, the nature of that liability and available defences. They can then ensure that appropriate checks and reporting systems are in place and that they are not simply proceeding in the hope that all is well.
With such an analysis in hand, the directors can then consider the merits of indemnifications and liability insurance. And, with respect to insurance, the directors should also obtain advice as to the scope of coverage available and the exceptions, to see if the same is indeed worthwhile.