A recent decision of the Ontario Court of Appeal clarifies when a charity must indemnify its directors.
Pandher v. Ontario Khalsa Darbar was an appeal of the costs portion of an Ontario Superior Court of Justice decision in what appears to have been a bitter governance dispute between groups of members of a Sikh temple. Relying on the indemnity provision in the temple’s constitution, the appeal court decided that the costs of the successful minority directors were to be paid by the temple, not by the unsuccessful majority directors.
The Superior Court of Justice costs decision had found that “[t]o an extent it will be unfair to look to the Ontario Khalsa Darbar to pay costs. Surely the costs arose as a result of the action of its Board of Directors. In the end result it is appropriate that all defendants except the Ontario Khalsa Darbar be jointly and severally responsible to pay these costs” (of over $200,000).
However, the appeal court confirmed that absent male fides, it would give effect to the director’s indemnity provision in the temple’s constitution, and ordered that the costs of the successful directors be paid by the temple rather than the directors. The appeal court observed that “the primary purpose of indemnification is to provide assurance to those who become directors that they will be compensated for adverse consequences that ensue from well-intentioned acts taken on behalf of the corporation. This policy applies with force to not-for-profit organizations.” It turned down a new argument that the court should rely on its inherent jurisdiction over charities to refuse to apply the indemnity, but went on to doubt that the court had such a power.
The court’s willingness to apply the indemnity is an interesting conclusion that calls into question a long-standing position of the Ontario Public Guardian and Trustee (PGT). The PGT takes the position, consistent with the common law of trusts, that a director of a charity is not permitted to benefit directly or indirectly from the directorship. The PGT has traditionally extended its view of a director benefit to include director indemnities or insurance. As of 2001, a regulation under the Ontario Charities Accounting Act provides that it is not a breach of trust for a charity to indemnify its directors if it considers certain items prior to indemnifying:
- the degree of risk involved in administering the charity;
- how likely it is that the director, officer or trustee will suffer a financial loss through administering the charity;
- whether there are other practical means of significantly reducing the risk;
- whether the amount and cost of the insurance is reasonable given the risk to the director, officer or trustee of suffering a financial loss. If the risk of loss is low, the cost of insurance purchased by a charity should also be low;
- whether the cost of the insurance is reasonable given the revenue of the charity?
- it is not usually reasonable for a charity to spend a significant part of its income on liability insurance;
- whether the charity will benefit by giving the indemnity or buying the insurance. For example, the charity may attract better directors or be able to get more income if it buys the insurance.
This regulation confirms by implication the PGT’s view that absent this regulation, indemnity is a breach of trust as a matter of common law. In principle, this would be the case in provinces other than Ontario, notwithstanding that no such analogous saving provision exists.
The decision of the Ontario Court of Appeal suggests that the purpose of giving a directors’ indemnity is to assist the corporation by protecting directors, not to benefit the directors. After all, there would be no need for the indemnity absent being a director, so the indemnity is designed to put the director in the position that he or she would have been in without the office (a neutral position), not to provide a benefit. Thus, the court’s decision should give charity directors in Ontario and in other provinces considerable comfort about the enforceability of director indemnities absent male fides. Nonetheless, Ontario charities should continue to comply with the Charities Accounting Act regulation out of an abundance of caution.