Board members in a homeowners or condominium association make decisions every month that affect their neighbors' money and property. Budgets are set, contracts are signed, rules are enforced, and repairs are approved. Not every decision will turn out well. The business judgment rule is the legal principle that keeps a reasonable decision made in good faith from becoming a personal liability for the volunteer who made it.
This article is general information and is not legal advice. The association's attorney should be consulted.
What the Business Judgment Rule Is
The business judgment rule is a doctrine developed by courts. In general terms, a court will not second-guess a board's decision when the board acted within its authority, in good faith, and with reasonable care. The question is not whether the decision was the best one in hindsight. The question is whether it was made honestly, on an informed basis, and for the benefit of the association.
The Florida Standards Behind It
Most Florida community associations are not-for-profit corporations, and their directors are subject to section 617.0830 of the Florida Statutes. That section requires each director to act in good faith, in a manner the director reasonably believes is in the best interests of the corporation, and with the care that an ordinarily prudent person in a like position would reasonably believe appropriate under similar circumstances.
The association statutes add a fiduciary duty. Under section 720.303(1), officers and directors of a homeowners association are subject to section 617.0830 and have a fiduciary relationship to the members. Section 718.111(1) gives condominium officers and directors a fiduciary relationship to the unit owners.
Section 617.0830 also allows a director to rely on information, opinions, reports, and financial statements prepared by officers, employees, attorneys, accountants, and other professionals the director reasonably believes are competent, as long as the director does not know of something that makes the reliance unwarranted. This is one of the most useful protections a board has.
Section 617.0834 further limits the personal liability of directors and uncompensated officers for monetary damages. Liability is generally limited to situations where a director breached his or her duties and the breach involved conduct such as a criminal violation, an improper personal benefit, willful or intentional misconduct, or recklessness or bad faith. The exact standards should be reviewed with the association's attorney.
How Boards Earn the Protection
A board's decisions are easier to defend when they show a careful process. Good practices include:
- Gathering information. Bids, reports, and the relevant sections of the governing documents should be reviewed before a vote.
- Consulting professionals. Engineers, attorneys, accountants, and insurance professionals should be asked for advice on matters within their expertise.
- Staying within authority. The board should confirm that the governing documents and Florida law allow the action being taken.
- Avoiding conflicts. Any personal or financial interest should be disclosed, and the affected director should not take part in a decision where the conflict rules apply.
- Deciding at a noticed meeting. Votes should be taken at properly noticed board meetings, not by email.
- Documenting the reasons. Minutes should reflect what was considered and why the decision was made.
What the Rule Does Not Cover
The protection is not unlimited. It does not shield conduct that is outside the board's authority, decisions made in bad faith, self-dealing, or reckless disregard of a known risk. Ignoring a professional's warning about a safety issue, for example, is much harder to defend than following that advice. Accepting a kickback from a vendor is a crime under Florida law and is never protected.
Directors should also remember that the rule protects the decision-making process. It does not excuse a failure to make decisions at all. Deferring necessary maintenance or ignoring a known violation can itself be a breach of duty.
Insurance and Indemnification
Directors and officers liability insurance is another layer of protection for volunteer board members. The policy limits, exclusions, and who is covered should be reviewed at each renewal. Many governing documents also provide for indemnification of directors, and those provisions should be read alongside the policy. More on the board's responsibilities is covered in
the role of the board of directors.
Getting the Right Support
Condominium Associates does not give legal advice, and the association's attorney should be consulted on any question of liability. The documentation, bid gathering, and meeting procedures that support good decisions are part of the day-to-day work of professional management. Expectations for that role are covered in
setting expectations for your HOA management company. To talk about support for your board,
contact us.
