Strata litigation: Avoiding personal liability

More than 500 stratas operate in the Cayman Islands.  Each strata is managed through an elected Executive Committee whose members are usually between three and nine volunteers of varying backgrounds and experience. While the by-laws define the rights and duties of a strata and the procedures to be followed by an Executive Committee, the administration of a strata is often fraught with conflict and confusion which makes strata management ripe for litigation.
 
In the event of an error that results in loss to the strata or unit owners, both the strata and the Executive Committee members personally may be exposed to liability. This article outlines the importance of understanding the by-laws, common management errors and the precautions that committee members can take.
 
Executive Committee members have a duty to exercise a standard of skill and care in the performance of their duties. Although no member is held to a standard of perfection, the level of skill required is that which could reasonably be expected of a person having the knowledge and experience of the member in question. This subjective test means that a professional with experience in law, accounting or property management may be held to a higher standard than his fellow members who have no such qualification.
 
While no claims of this kind have yet to be adjudicated upon in the Cayman Islands, members of Executive Committees in other jurisdictions have been found personally liable. From their experience, below are some broad principles to assist members in the administration of their stratas:

In order to avoid defamation of a member, owner, or anyone that has dealings with the strata, it is important to keep a cool head at all times.  Avoid provocation and heated discussions and think before you speak or put pen to paper.
Always follow the procedures set out in the by-laws and document decisions carefully so that the Executive Committee members cannot later be accused of mismanagement of meetings resulting in unauthorised decisions. For each resolution, record in the minutes of Executive Committee meetings the exact wording of what was voted upon and the result.
 
Resist any temptation to use your role as a means of carrying out personal vendettas or of rewarding friends through favouritism.
 
Identify and document valid reasons if you deny specific requests of owners.
Avoid voting on decisions such as contracts between the strata and third parties when you have a conflict of interest.  If you have a direct or indirect conflict between yourself, your business or a family member and a decision that the Executive Committee is voting on, disclose the conflict and ensure that your by-laws provide proper protocol to address such situations.  Properly worded by-laws should set out how conflict situations are to be dealt with. 
 
Do not take any action in a discriminatory or uneven manner, especially when benefiting oneself above others.  Treat all owners fairly at all times and when it is impossible to do so, for example with the conduct of extensive repairs which cannot occur simultaneously, have the Executive Committee vote on a reasoned, transparent and systematic approach.
Obtain a professional valuation on a regular basis, perhaps every two or three years, and ensure that insurance requirements in the by-laws have been satisfied.
 
Executive Committee members can protect themselves by amending the by-laws to include an indemnification. The strata can indemnify the member for any costs, charges or expenses arising out of the execution of duties of office. Generally indemnification does not extend to a breach of the duty to act honestly and in good faith. However, where a genuine mistake has occurred, under an indemnity clause, whatever losses incurred would be paid for by the strata from monthly or special assessments. Caution should be taken when amending the by-laws and it is recommended to consult a lawyer for advice. 
 
Other jurisdictions expressly provide that an Executive Committee relying on professional advice (valuator, surveyor, attorney for example) is not liable for losses occurring when relying on professional advice.   While the Cayman Islands does not have such specific protection in its legislation, it is very likely that reliance on professional advice will insulate Executive Committee members from personal liability.    When in doubt, get advice from a professional.
 
Further protection can be purchased by way of errors and omissions insurance for losses arising from wrongful acts.  In this case, the insurer rather than the collective owners would then cover any losses resulting from errors provided again that the member’s conduct was honest and in good faith. If there is evidence of dishonesty, fraud or malicious conduct insurers will deny coverage and the member would once again be left exposed to personal liability.   Care must be taken to ensure that the Executive Committee members understand what exclusions of coverage exist under the policy.

Regardless of whether a strata owner uses the unit as an island getaway or as a permanent home, serving on the Executive Committee should not be an experience which creates unanticipated liability risks.  Foresight, legal or other professional advice, properly drafted by-laws and insurance can greatly reduce this risk of liability and litigation.

This publication is intended only to provide a summary of the subject mattered covered.  It does not purport to be comprehensive or to provide legal advice.  No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice.  © Appleby

 

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Legally Speaking: by Appleby’s Associates Ward Sykes and Nicole Bucher

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