2007 BCCA 183 Dockside Brewing Co. Ltd. v. Strata Plan LMS 3837

Before:	The Honourable Madam Justice Prowse
	The Honourable Mr. Justice Low
	The Honourable Madam Justice Levine

G. S. Hamilton	Counsel for the Appellants
R.J. Sewell, Q.C. and S.A. Griffin	Counsel for the Respondents
Place and Date of Hearing:	Vancouver, British Columbia
November 21 and December 8, 2006
Place and Date of Judgment:	Vancouver, British Columbia
March 27, 2007

Written Reasons by:

The Honourable Madam Justice Levine

Concurred in by:

The Honourable Mr. Justice Low

Dissenting Reasons in Part by:

The Honourable Madam Justice Prowse (Page 34, Paragraph 98)

Reasons for Judgment of the Honourable Madam Justice Levine:

Introduction

[1] This appeal concerns a dispute between two groups of owners of lots in a strata corporation. One group, represented by the appellants, took control of the strata council, and approved expenditures for legal expenses to support litigation in circumstances where the statutorily required approvals for the litigation could not be obtained. The other group, which included the respondents, continuously objected to the strata council's actions on the basis that the strata council was acting in conflict of interest and contrary to the best interests of the strata corporation.

[2] In their petition brought under s. 33 of the Strata Property Act, S.B.C. 1998, c. 43, the respondents sought an order requiring the appellants to indemnify the strata corporation for the legal expenses. The chambers judge found that the expenditures were "unreasonable and unfair" to the strata corporation; that the appellants failed to disclose their conflicts of interest; and that they did not act honestly and in good faith. He ordered the appellants to pay $190,398.99 to the strata corporation, and special costs.

[3] The appellants claim that the chambers judge erred in finding that they had a conflict of interest in a "contract or transaction with the strata corporation", and in any event, they acted in good faith, on the advice of legal counsel.

[4] The underlying dispute in this case has been the subject of multiple legal proceedings. The relevant events occurred from 2002 through 2005, involving numerous court proceedings, three meetings of the strata corporation, many meetings of the strata council, and extensive correspondence among lawyers and the various parties. The chambers judge set out the facts in detail in his reasons for judgment ((2005), 46 B.C.L.R. (4th) 153, 2005 BCSC 1209), and made findings of fact that support his conclusions that the appellants had conflicts of interest they failed to disclose, did not act in good faith, and could not rely on the advice of their legal counsel as a defence to the allegation of lack of good faith.

[5] The appellants do not dispute the chambers judge's findings of fact; they argue that the facts do not show they had any conflict of interest, and if they did, they were reasonable in relying on the advice of their lawyers. Despite their position that they do not dispute the facts as found by the trial judge, the arguments on appeal focused on the evidence and the facts, rather than the law.

[6] From my review of the voluminous documentary evidence, and the affidavit and cross-examination of one of the appellants, Khoon Wah Alfred Tan, I conclude there is no basis to interfere with the chambers judge's decision, on either the facts or the law. I agree that the appellants were in a conflict of interest with the strata corporation, did not act in good faith, and cannot rely on their lawyer's advice as a defence to the claim that they were not acting in good faith.

[7] It follows that I would dismiss the appeal.

Statutory Framework

[8] The impugned actions of the appellants while acting as members of the strata council are best considered in the context of the pertinent provisions of the Act.

[9] A member of a strata council owes both a statutory fiduciary duty and a statutory duty of care in the management of the affairs of the strata corporation. Section 31 of the Act provides:

Council member's standard of care

31 In exercising the powers and performing the duties of the strata corporation, each council member must

(a) act honestly and in good faith with a view to the best interests of the strata corporation, and

(b) exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances.

[10] Section 32 of the Act requires a member of a strata council to disclose a conflict of interest in a contract or transaction with the strata corporation:

Disclosure of conflict of interest

32 A council member who has a direct or indirect interest in a contract or transaction with the strata corporation must

(a) disclose fully and promptly to the council the nature and extent of the interest,

(b) abstain from voting on the contract or transaction, and

(i) while the contract or transaction is discussed, unless asked by council to be present to provide information, and

(ii) while the council votes on the contract or transaction.

[11] The petition was brought under s. 33 of the Act. Section 33 provides a remedy for failure of a strata council member to comply with s. 32. Section 33 provides:

Accountability

33 (1) If a council member who has an interest in a contract or transaction fails to comply with section 32, the strata corporation or an owner may apply for an order under subsection (3) of this section to a court having jurisdiction unless, after full disclosure of the nature and extent of the council member's interest in the contract or transaction, the contract or transaction is ratified by a resolution passed by a 3/4 vote at an annual or special general meeting.

(2) For the purposes of the 3/4 vote referred to in subsection (1), a person who has an interest in the contract or transaction is not an eligible voter.

(3) If, on application under subsection (1), the court finds that the contract or transaction was unreasonable or unfair to the strata corporation at the time it was entered into, the court may do one or more of the following:

(a) set aside the contract or transaction if no significant injustice will be caused to third parties;

(b) if the council member has not acted honestly and in good faith, require the council member to compensate the strata corporation or any other person for a loss arising from the contract or transaction, or from the setting aside of the contract or transaction;

(c) require the council member to pay to the strata corporation any profit the council member makes as a consequence of the contract or transaction.

[12] The legal expenditures approved by the appellants as members of the strata council were for the purpose of funding legal proceedings having the object of setting aside contracts to which the strata corporation was a party. The appellants no longer dispute that their actions were in violation of s. 171 of the Act, which requires that before an action is brought by a strata corporation, it must be approved by a three-quarters majority of the owners:

Strata corporation may sue as representative of all owners

171 (1) The strata corporation may sue as representative of all owners, except any who are being sued, about any matter affecting the strata corporation, including any of the following matters:

(a) the interpretation or application of this Act, the regulations, the bylaws or the rules;

(b) the common property or common assets;

(d) money owing, including money owing as a fine, under this Act, the regulations, the bylaws or the rules.

(2) Before the strata corporation sues under this section, the suit must be authorized by a resolution passed by a 3/4 vote at an annual or special general meeting.

(3) For the purposes of the 3/4 vote referred to in subsection (2), a person being sued is not an eligible voter.

(4) The authorization referred to in subsection (2) is not required for a proceeding under the Small Claims Act against an owner or other person to collect money owing to the strata corporation, including money owing as a fine, if the strata corporation has passed a bylaw dispensing with the need for authorization, and the terms and conditions of that bylaw are met.

(5) All owners, except any being sued, must contribute to the expense of suing under this section.

(6) A strata lot's share of the total contribution to the expense of suing is calculated in accordance with section 99 (2) or 100 (1) except that

(a) an owner who is being sued is not required to contribute, and

(b) the unit entitlement of a strata lot owned by an owner who is being sued is not used in the calculations.

[Underlining added.]

The Chambers Judge's Reasons for Judgment

[13] The chambers judge's decision reflected his analysis of these statutory provisions. He found (at para. 69) that the failure of the appellants to disclose their conflict of interest in accordance with s. 32 did not meet the standard of s. 31. The actions of the appellants could not be characterized as acting "honestly and in good faith", and did not meet the standard of "the care, diligence and skill of a reasonably prudent person in comparable circumstances".

[14] He found further (at para. 73) that s. 171(2) indicates the intention of the legislature that only litigation approved by three-quarters of the owners is in the best interests of the strata corporation. He reasoned that by attempting to circumvent s. 171(2), the appellants acted for their own gain (at paras. 75-76), which failed to meet the standard of care of "a reasonably prudent person in comparable circumstances", as required by s. 31. He found the contracts to pay legal expenses were "unreasonable and unfair to the strata corporation", satisfying s. 33(3) of the Act. His order that the appellants compensate the strata corporation for the expenditures followed, under s. 33(3)(b).

[15] The chambers judge rejected the appellants' defence that because they had acted on the advice of their lawyers and a property manager, they met the statutory fiduciary duty and duty of care. He noted (at para. 70) that the appellants were

…warned time and again by their opponents that they were acting in a conflict of interest and contrary to the provisions of the SPA, yet they never heeded those warnings nor did they seek independent legal advice as to their potential liability as Strata Council members.

Chronology of Material Events

[16] The parties were investors in strata hotel units in "Le Soleil", a boutique strata title hotel located on Hornby Street in Vancouver. The developer and hotel operator, American Corporate Suites Ltd. ("ACS"), leased investors' strata units to be used as hotel rooms. To operate the hotel, ACS entered into two leases for $10 each (the "Leases"), one of the lobby area and other common property and one of the parking lot common property. The Leases were essential to operating the hotel.

[17] After ACS encountered financial difficulty, the Le Soleil Owners Group ("LSOG"), originally comprising 93 (including the appellants) of a total of 127 owners, was formed. LSOG embarked on a strategy to take over the operation of the hotel. LSOG incorporated a company called LSOG Inc., which, on behalf of LSOG and purportedly binding the strata corporation, entered into a Management Agreement with Executive Inn Ltd. The Management Agreement required LSOG to deliver possession of the common areas that were subject to the Leases, and management of the hotel, to Executive. If LSOG failed to deliver possession, they could be liable to Executive for liquidated damages. (The chambers judge appears to have accepted (at para. 28) that Executive's potential claim was $600,000, but it is unclear what evidence he relied on. In any event, this amount was not central to the respondents' argument on appeal.)

[18] ACS went into receivership. LSOG, through Executive, sought to buy the hotel assets — in particular, the Leases. However, Executive was outbid by Sunbelt Hotel Management Services Ltd.

[19] LSOG then developed a scheme to challenge the validity of the Leases. LSOG knew that it could not obtain the required three-quarters majority to commence litigation in the name of the strata corporation. It was advised by its lawyers that the strata council could give notice terminating the Leases, and when the tenant sued the strata corporation for wrongful termination, the strata corporation could defend the action without requiring approval by a three-quarters resolution.

[20] At the annual general meeting of the strata corporation held May 13, 2002, LSOG took control of the strata council by electing its members to all but one of the strata council seats. The LSOG majority approved an operating budget for the strata corporation which included an increase in the budget for legal fees from $360 to $93,772. The stated purpose for the legal expenses was to obtain legal advice concerning the validity of the Leases.

[21] The following day, the LSOG-dominated strata council passed a resolution retaining its law firm to investigate the Leases on behalf of the strata corporation.

[22] In June 2002, owners opposing LSOG brought an application for an injunction to restrain LSOG's law firm from acting for the strata corporation. On June 25, 2002, Tysoe J. granted the injunction, finding the law firm to be in a conflict of interest.

[23] On July 8, 2002, the strata council authorized the chair to terminate the Leases.

[24] On July 11, 2002, Betty Ang, an owner and a member of LSOG and the strata council, represented by a second law firm (which had also previously acted for LSOG), commenced proceedings by filing a petition to challenge the enforceability of the Leases. She named the strata corporation as a respondent in the action. One of the respondents, Mr. Tan, deposed that the Betty Ang petition was brought on behalf of all 93 LSOG members. The strata council retained a third law firm to act for the strata corporation, and instructed the lawyer from that firm to support Betty Ang's petition.

[25] In October 2002, Lowry J. (as he then was) ruled that the lawyer appointed to act for the strata corporation could not speak on behalf of the strata corporation in the Betty Ang petition.

[26] In November 2002, Lowry J. dismissed the Betty Ang petition on the basis that only the strata corporation could challenge the Leases in an action properly constituted and approved pursuant to s. 171 of the Act. (Note that this Court considered the Ang decision (Ang v. Spectra Management Services Ltd. et al., 2002 BCSC 1544) in Hamilton v. Ball, 2006 BCCA 243.)

[27] The strata council paid the first and third law firms $190,398.99 in legal fees in respect of this litigation.

[28] At the annual general meeting of the strata corporation held February 27, 2003, a resolution to approve litigation by the strata corporation to challenge the validity of the Leases failed to obtain the necessary three-quarters majority. However, a further $100,000 was included in the operating budget for legal fees, and passed by a majority.

[29] By June 2004, LSOG no longer comprised a majority of owners, but its members retained control of the strata council.

[30] No annual general meeting of the strata corporation was held in 2004.

[31] In August 2004, the strata council spent $38,000 to retain a fourth law firm to commence an action in the name of the strata corporation to challenge the Leases. This time, the strata council made no attempt to obtain a resolution of three-quarters of the owners to approve commencing litigation in the name of the strata corporation, and did not pass a strata council resolution authorizing the action or approving the expenditure.

[32] The respondents commenced these proceedings on October 29, 2004.

[33] On January 17, 2005, Groberman J. granted an injunction prohibiting the expenditure of strata corporation funds on unauthorized litigation until after the 2005 annual general meeting, to be held January 21, 2005. Nonetheless, before the annual general meeting was held, the strata council passed a resolution instructing the property manager to issue a cheque for $50,000 to a fifth law firm to proceed with the unauthorized litigation. The property manager refused to issue the cheque, because of the injunction.

[34] At the 2005 annual general meeting, a new strata council was elected which instructed counsel to discontinue the unauthorized litigation.

The Conflicts of Interest and Objections by Other Owners

[35] The respondents characterize the essential conflict of interest arising out of the above events as the use by LSOG of the funds of the strata corporation to carry out LSOG's strategy to take over the operation of the hotel by challenging the validity of the Leases, contrary to the stated objections of the other owners and without the required authorization of three-quarters of the owners. The evidence amply supports this characterization, as found by the chambers judge.

[36] At the annual general meeting held May 13, 2002, the increased budget for legal fees was passed by a majority, as a "common expense" that "usually occur[s] either once a year or more often than once a year" (Act, s. 92(a)). An owner objected, on the basis that the increase should be the subject of three-quarters majority resolution, required for expenditures that usually occur less often than once a year (Act, s. 92(b), 97) (chambers judge's reasons for judgment, para. 41).

[37] The LSOG supporters of the increased legal fees stated they were to "assist the strata corporation in dealing with matters they felt the strata council should be dealing with in regards to resolution of the 'control' of common property concerns." The evidence shows, and the chambers judge found (at para. 41), that the LSOG strata council members did not disclose that they intended to use the funds for legal proceedings to terminate the Leases and to challenge them in the Betty Ang petition, knowing that they could not obtain the required three-quarters majority approval for litigation.

[38] At the strata council meeting on May 14, 2002, the strata council resolved to retain the first law firm to advise "with respect to the enforceability of the" Leases. The LSOG strata council members did not disclose that the first law firm had previously advised them on that question, and they were planning legal proceedings (to terminate the Leases and bring the Betty Ang petition) based on that advice. Counsel for non-LSOG owners had written to the first and second law firms warning that they were acting in a conflict of interest in accepting a retainer and acting for the strata corporation or the strata council, because they had been acting for the LSOG owners (chambers judge's reasons for judgment, paras. 27, 28). The first law firm was subsequently restrained from acting for the strata corporation in relation to the Leases, because of its conflict of interest, by the injunction granted by Tysoe J. on June 25, 2002.

[39] Before the strata council meeting on July 8, 2002, counsel for the owner of one of the commercial strata lots, who was the only non-LSOG member of the strata council, warned the strata council of its conflict of interest in taking steps to terminate the Leases and retaining counsel for the strata corporation. At that meeting, the LSOG members of the strata council did not disclose that they were about to bring the Betty Ang petition to challenge the Leases, or that they were going to appoint and instruct counsel for both Betty Ang and the strata corporation, in its position as a respondent to the petition (chambers judge's reasons for judgment, para. 60).

[40] The LSOG members of the Strata Council also did not disclose the Management Agreement with Executive, under which the LSOG members faced personal claims if the hotel premises and management were not delivered to Executive (chambers judge's reasons for judgment, para. 28).

[41] At the annual general meeting of the strata corporation in February 2003, non-LSOG owners objected to the inclusion in the budget of another $100,000 for legal fees, without a three-quarters majority. Some of the budgeted funds were used to pay the legal fees of the law firm representing the strata corporation in the Betty Ang petition.

[42] The strata council delayed holding an annual general meeting in 2004. Under s. 104 of the Act, when an annual general meeting is not held, the prior year's budget is renewed automatically. Thus, the budget approved in February 2003, including $100,000 for legal fees, was renewed for 2004. These funds were used to commence an action in the name of the strata corporation in August 2004 that was not authorized by the required three-quarters majority.

[43] At a December 13, 2004 meeting of the strata council, the chair proposed that the operating budget for the 2004-2005 year include legal fees of $150,000. A non-LSOG member of the strata council objected, stating that such legal fees had to be approved as a special levy by a three-quarters majority. The LSOG members of the strata council voted to suspend the non-LSOG member for swearing an affidavit in support of the respondents in these proceedings.

[44] The notice of the annual general meeting to be held on January 21, 2005 included the $150,000 of legal fees in the operating budget to be approved. The notice included a letter from the chair of the strata council making it plain that the object of the legal fees was to support litigation to challenge the Leases.

[45] The strata council proceeded to attempt to retain counsel to proceed with litigation in the name of the strata corporation to challenge the Leases, despite the injunction granted by Groberman J., and despite never having obtained the required three-quarters majority.

[46] As noted by the chambers judge (at paras. 70, 77, and 80), the LSOG-controlled strata council was warned numerous times by non-LSOG owners and their counsel of the conflicts of interest between LSOG and the strata corporation. The minutes of the strata council and strata corporation meetings describe in detail the objections taken by non-LSOG owners, and the disregard for those objections by the strata council. The minutes also record the refusal of the strata council to pursue LSOG owners for arrears of strata fees, while they resolved that arrears should be collected from non-LSOG owners.

Breaches of ss. 31 and 32 of the Act

[47] The appellants argue that they were not in a conflict of interest with the strata corporation in seeking to set aside the Leases, as the Leases were detrimental to the management of the property and business of the strata corporation. They maintain that they were acting in the best interests of the strata corporation in seeking to challenge the Leases. They say they had no "direct or indirect interest" in the contracts retaining the various law firms; their only interest was their interest in common with all of the owners in their common property. As for their liability to Executive under the Management Agreement, they say that it has not yet been determined that the liability actually exists.

[48] The appellants characterize the scope of their actions, and of s. 32 of the Act, too narrowly. There can be no other conclusion drawn from the evidence than that the appellants embarked on a course of action to take control of the hotel, for their own benefit, and used funds of the strata corporation for that purpose. It is true that they did not receive any share of the funds directly, but they acted in their capacity as members of the strata council to expend the funds for legal advice that was intended for their personal benefit, and they benefited directly by sharing the cost of that advice with the other owners.

[49] As the chambers judge found (at para. 74), whether setting aside the Leases would have benefited the strata corporation as a whole is not an issue that the court need decide. The appellants did not disclose the true use for the legal fees, and their actions overrode the legal rights of the non-LSOG owners, who represented more than 25 per cent of the owners, to prevent the strata corporation, under s. 171 of the Act, from becoming involved in the litigation instigated by the LSOG-controlled strata council.

[50] The appellants did not disclose their conflict of interest as required by s. 32, did not abstain from voting, and did not leave the council meeting when the resolutions approving the retainers of the law firms and the expenditures of strata corporation funds on legal fees were discussed and voted on. In particular, they did not disclose:

(a) at the May 13, 2002 annual general meeting, that they intended to use the legal fees to bring legal proceedings to challenge the Leases;

(b) at the May 14, 2002 strata council meeting, that they had previously retained the first law firm to advise with respect to the validity of the Leases, and they were planning to terminate the leases and bring the Betty Ang petition;

(c) at the July 8, 2002 strata council meeting, that they were about to bring the Betty Ang petition, and that they were going to appoint and instruct counsel for both Betty Ang and the strata corporation;

(d) their potential liability for damages under the Executive Management Agreement.

[51] I agree with the chambers judge that in acting as they did, the appellants failed to comply with s. 32, and failed to carry out both their statutory fiduciary duty, under s. 31(a), and their statutory duty of care, under s. 31(b).

[52] In Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461, 2004 SCC 68, Major and Deschamps JJ., for the Court, discussed the content of the statutory duties found in s. 122(1) of the Canada Business Corporations Act, R.S.C. 1985, c. C-44, which are identical in wording to s. 31 of the Act, except for the reference to the "strata corporation", instead of "corporation", in s. 31(a).

[53] The Supreme Court described (at para. 35), the statutory fiduciary duty, "to act honestly and in good faith with a view to the best interests of the corporation":

The statutory fiduciary duty requires directors and officers to act honestly and in good faith vis-á-vis the corporation. They must respect the trust and confidence that have been reposed in them to manage the assets of the corporation in pursuit of the realization of the objects of the corporation. They must avoid conflicts of interest with the corporation. They must avoid abusing their position to gain personal benefit. They must maintain the confidentiality of information they acquire by virtue of their position. Directors and officers must serve the corporation selflessly, honestly, and loyally: see K. P. McGuinness, The Law and Practice of Canadian Business Corporations (1999) at p. 715.

[Underlining added.]

[54] The Supreme Court acknowledged (at para. 39) that the statutory fiduciary duty does not require that directors and officers in all cases avoid personal gain as a direct result of their honest and good faith management of the corporation. As argued by the appellants in this case, "[i]n many cases, the interest of directors and officers will innocently and genuinely coincide with those of the corporation". The central focus of the statutory fiduciary duty is the "subjective motivation" of the director or officer (para. 63). Evidence of "fraud or dishonesty" (para. 40) or of "a personal interest or improper purpose" (para. 41) is relevant to the determination of whether the statutory fiduciary duty has been breached.

[55] In this case, there is evidence of all of the factors demonstrating breach of the statutory fiduciary duty. The appellants' subjective motivation was to pursue their goal of taking over the operation of the hotel through legal challenges to the Leases. In carrying out their personal objectives, they did not avoid conflicts of interest or abusing their position as members of the strata council, and acted dishonestly, in their personal interest, for an improper purpose.

[56] The statutory duty of care, to exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances, imposes an objective standard that takes into account the context in which a given decision was made (Peoples Department Stores Inc. at paras. 62-63). The Supreme Court explained (at para. 67):

Directors and officers will not be held to be in breach of the duty of care under s. 122(1)(b) of the CBCA if they act prudently and on a reasonably informed basis. The decisions they make must be reasonable business decisions in light of all the circumstances about which the directors and officers knew or ought to have known. In determining whether directors have acted in a manner that breached the duty of care, it is worth repeating that perfection is not demanded. Courts are ill-suited and should be reluctant to second-guess the application of business expertise to the considerations that are involved in corporate decision making, but they are capable, on the facts of any case, of determining whether an appropriate degree of prudence and diligence was brought to bear in reaching what is claimed to be a reasonable business decision at the time it was made.

[Underlining added.]

[57] The chambers judge held that the appellants breached their statutory duty of care by failing to disclose their conflicts of interest (para. 69). I would characterize that failure as a breach of their statutory fiduciary duty.

[58] The appellants breached their statutory duty of care by expending excessive amounts of the strata corporation's funds, while they and the other LSOG owners were not paying their strata fees, on litigation that had not been authorized by the required majority of owners. In deciding to pursue the litigation in the face of repeated objections of other owners, court orders restraining their counsel and finally, the strata council, from proceeding with the litigation, and their failure to achieve their ends, they demonstrated that they lacked reasonable prudence and diligence in carrying out their duties.

Remedy for Breaches of ss. 31 and 32 – s. 33

[59] Section 33 provides remedies for breaches of ss. 31 and 32. A strata corporation or an owner may apply for an order under s. 33(3) "[i]f a council member who has an interest in a contract or transaction fails to comply with section 32.…" Under s. 33(3), the court may make an order, if it "finds that the contract or transaction was unreasonable or unfair to the strata corporation at the time it was entered into…." Under s. 33(3)(b), "if the council member has not acted honestly and in good faith, [the court may] require the council member to compensate the strata corporation or any other person for a loss arising from the contract or transaction…."

[60] The chambers judge found that the contracts retaining the law firms were "unreasonable and unfair" to the strata corporation because they were entered into by circumventing the requirements for resolutions of a three-quarters majority to approve the litigation and the expenditure of non-recurring items from the operating budget (at para. 65). He also noted (at para. 66) that "considerable sums" were spent with no benefit to LSOG or the strata corporation. I agree that the legal retainers were, in the circumstances, "unreasonable and unfair" to the strata corporation.

Good Faith Reliance on Lawyers' Advice

[61] The appellants take the position that they cannot be found to have breached their statutory fiduciary duty because they relied on the advice of their lawyers in taking the steps they did to challenge the Leases.

[62] There is no doubt, from the evidence, that the appellants had legal advice throughout these events. One need only have reference to the legal fees paid by the strata corporation to confirm this fact. There is no evidence, however, that the appellants ever received legal advice concerning their statutory duties to the strata council and the strata corporation, and the consequences of not adhering to those duties. If they did receive such advice, they did not follow it.

[63] The chambers judge rejected the appellants' argument that they acted in good faith on the basis of the legal advice they received. He said (at para. 70):

The Respondent Strata Council Members were not counselled against the strategy they pursued by the lawyers they engaged and were encouraged to pursue it by advice they received. However, the Respondent Strata Council Members were warned time and again by their opponents that they were acting in a conflict of interest and contrary to the provisions of the SPA, yet they never heeded those warnings nor did they seek independent legal advice as to their potential liability as Strata Council members.

[64] The evidence is overwhelming that the appellants were "warned time and again by their opponents of their conflict of interest". In addition to the warnings by their opponents, the very lawyers who were advising them were found by two judges to be acting in a conflict of interest. It would strain logic and credulity to accept that a strata council member who proceeds to act in his or her own interest, in the face of repeated warnings, can reasonably claim that he or she acted in good faith by relying on the legal advice of the very lawyers found to be in a conflict of interest.

[65] The Supreme Court of Canada has considered, in the corporate context, the question of when a director or officer may rely on legal advice to demonstrate "good faith" in exercising his or her statutory fiduciary duty.

[66] In Blair v. Consolidated Enfield Corp., [1995] 4 S.C.R. 5, the facts were that Mr. Blair, a shareholder, president, and director of Consolidated Enfield Corp. ("Enfield") acted as chair of a shareholders' meeting at which the board of directors was to be elected. Mr. Blair was on the slate proposed for election by management, but another shareholder, Canadian Express Limited, nominated a candidate from the floor. Canadian Express held sufficient proxies to elect its candidate, and Mr. Blair was not elected. Mr. Blair consulted with Enfield's corporate lawyers, six of whom deliberated for an hour and-a-half while the meeting was held in abeyance. The lawyers concluded that the proxies could not be used to elect the candidate proposed from the floor of the meeting. Mr. Blair read a statement prepared by the lawyers to the meeting, declaring that the alternate candidate had received no votes, and that the management slate, including Mr. Blair, had been elected.

[67] Canadian Express brought an application for an order declaring that Mr. Blair was wrong in declaring the proxies invalid. The court granted the declaration sought. Mr. Blair then sought indemnification for his legal costs in defending that application. The relevant statutory provisions and corporate by-laws provided for indemnification of directors and officers against all "costs, charges, and expenses…reasonably incurred…in respect of any civil…proceeding to which he or she is made a party by reason of being or having been a director of such corporation…if (a) he or she acted honestly and in good faith with a view to the best interests of the corporation." [Underlining added.]

[68] The appeal in the Supreme Court of Canada focused on the "good faith" requirement (at para. 39). Writing for the Court, Iacobucci J. analyzed the factors relevant in "acting honestly and in good faith with a view to the best interests of the corporation" (at para. 42).

[69] Justice Iacobucci noted (at paras. 46-48) that the chair of a shareholders' meeting will be permitted to be interested in the matters before him or her, but will be in a conflict of interest where he or she uses the position of chair to further his or her own agenda. He noted that, in that case, there was no "evidence of a 'design' or 'plan' for the proxies to be invalidated", or "to deviously sidestep the entitlement of shareholders".

[70] Those findings distinguish the Enfield case from this one, where the evidence was, and the trial judge found, that the appellants were carrying out a plan or design to sidestep the entitlement of the other owners.

[71] In Enfield, Iacobucci J. then considered the reliance on legal advice of corporate counsel. He said (at para. 58):

At the outset, I note my agreement with the position of the Court of Appeal that mere de facto reliance on legal advice will not guarantee indemnification. However, reliance that is reasonable and in good faith will establish that a director or officer acted "honestly and in good faith with a view to the best interests of the corporation".

[72] The Supreme Court found (at para. 58) that in the circumstances, Mr. Blair had acted reasonably and in good faith in relying on the advice of corporate counsel. He reasonably believed that as chair of the meeting, it was his duty, acting in the corporation's best interests, to follow the advice of the corporation's counsel to ensure the proxies were properly voted (at para. 62-63). The lawyers who gave the advice were from the corporation's law firm, and there was no evidence that the lawyers were influenced by any partiality to Mr. Blair (at para. 70). Justice Iacobucci concluded (at para. 70):

…it should be remembered that Blair, a layperson, could not have been expected to be suspicious about advice that, prima facie, appeared legitimate and came from Enfield's own corporate counsel. I would affirm the Court of Appeal's finding that the advice given by Osler [the law firm] and followed by Blair would, to a layperson in Blair's circumstances (and with his business experience), have been "ostensibly credible" (p. 801). He thereby acted in accordance with the duties he owed.

[73] The appellants cannot make the same claim to good faith reliance on the advice of their lawyers. It may be accepted that, as laypersons, they would not necessarily have been suspicious about the substance of the advice, which was how to carry out their plan to take legal proceedings to set aside the Leases while avoiding the necessary three-quarters majority approval. But as members of a strata council, which is charged with the responsibility to manage and supervise the affairs of the strata corporation in the best interests of the strata corporation, they cannot be excused from ignoring all of the contrary arguments, advice, and court orders that demonstrated that they and their lawyers were acting in a conflict of interest between that plan, which was for their own personal gain, and those of the strata corporation, in which more than 25 per cent of the owners not only disagreed with, but actively opposed, the plan. In the face of the opposition to the actions of the appellants as members of the strata council, it was not reasonable for them to proceed as they did, and then claim that their lawyers told them to do it. A member of a strata council must be held to the statutory duty to act in good faith in the interests of the strata corporation. Where their lawyers are found to be in a conflict of interest, the members of the strata council cannot reasonably claim that they acted "honestly and in good faith" in relying on the advice of those same lawyers to defend the claim against them that they acted in a conflict of interest.

[74] In summary, the chambers judge made no error in concluding that the appellants were in a conflict of interest with the strata corporation which they did not disclose, contrary to s. 32 of the Act; the contract retaining the lawyers was "unreasonable or unfair" to the strata corporation; and the appellants did not act "honestly and in good faith" as required by s. 33(3)(b). These findings fully support the order that the appellants compensate the strata corporation for the loss arising from the contracts with the lawyers, i.e., the legal fees expended on the illegal, and futile, litigation.

Other Issues

[75] There are two other issues raised by the appellants. They claim that the chambers judge erred in proceeding to hear the petition and not referring the matter to the trial list. They also claim the chambers judge erred in awarding special costs against them.

Hearing of the Petition

[76] In his reasons for judgment (at para. 1), the chambers judge stated that: "The petitioners apply for relief under Rule 18A…", and found the case suitable for determination under that rule (at para. 57):

I am satisfied the extensive record filed in support of this application provides, in every excruciating detail, a proper basis for finding all the facts necessary to determine the matter under Rule 18A. I therefore reject the Respondent Strata Council Members' counsel's submission that the case is unsuitable for resolution under Rule 18A.

[77] It is common ground that there was no Rule 18A application. The respondents brought their application by petition, under s. 33 of the Strata Property Act. Under Rule 1(13) of the Supreme Court Rules, where an enactment authorizes an application to a court, it must be made by originating application under Rule 10. Rule 10 provides that an "application…may be made by originating application where (a) an application is authorized to be made to the court." Rule 10(3) requires an "originating application" be a petition in Form 3. Rule 52(11) provides that an application may be referred to the trial list.

[78] The test for whether a petition will be heard or referred to the trial list is the same as the test for summary judgment under Rule 18: essentially it is whether there is a triable issue: see Memphis Rogues Ltd. v. Skalbania (1982), 38 B.C.L.R. 193 (C.A.); Douglas Lake Cattle Co. v. Smith (1991), 54 B.C.L.R. (2d) 52 (C.A.).

[79] At the hearing of the petition, the appellants (respondents to the petition) argued the matter on the merits and sought dismissal of the petition. As an alternative, they argued that it should be referred to the trial list. The chambers judge was not referred to the test of whether there is a triable issue. On appeal, the appellants rely on that test and say that the trial judge erred in not referring this matter to the trial list.

[80] Counsel for the respondents agreed that there were triable issues, and that as a matter of law and procedure the chambers judge erred by applying the wrong test. As a practical matter, however, counsel argues that if the petition had been referred to the trial list, the outcome would have been the same. The respondents would have brought an application for judgment under Rule 18A, and the chambers judge would have had to determine whether he could decide it, as he did, on the documents, and the affidavit evidence and cross-examination of Mr. Tan. Counsel referred the Court to Imbrook Properties Limited v. Bordignon Construction Ltd. (1984), 51 B.C.L.R. 66 at 72-73 (C.A.), where the Court dealt with a procedural problem concerning a declaration of invalidity of a mechanics' lien claim. After analyzing the applicable rules, the Court said:

As the consideration of affidavit evidence and the result would undoubtedly be the same in the case at bar had the summary trial procedure been adopted, and as this is merely a procedural matter, I would dismiss the appeal…

[81] The chambers judge reviewed the "excruciating detail" of the evidence, and concluded that this case was suitable for determination by the summary trial procedure under Rule 18A. I agree with the respondents that if the matter had been referred to the trial list, the outcome would have been the same.

[82] I would not accede to this ground of appeal.

Special Costs

[83] The chambers judge awarded the respondents special costs of the petition. He found (at para. 80) that the appellants "subverted the interests of the Strata Corporation to their own interests as LSOG members" and persisted in pursuing their strategy in the face of the mounting evidence that it "was replete with conflicts", including the orders prohibiting the law firms from acting for the strata corporation. He concluded: "In light of this, I find the Respondent Strata Council Members acted in a reprehensible manner deserving of rebuke by the court through an award of special costs". Special costs were subsequently assessed, by consent, at $150,000.

[84] The appellants say that the chambers judge erred in awarding special costs for reprehensible conduct prior to the litigation. They also argue that the award of $150,000 is "prejudicial and unfair", considering the order to pay $190,338.99 to the strata corporation.

[85] There appear to be conflicting authorities on whether special costs may only be awarded for reprehensible conduct during the litigation.

[86] The test of "reprehensible conduct" for an award of special costs was stated by Lambert J.A. in Stiles v. British Columbia (Workers' Compensation Board) (1989), 38 B.C.L.R. (2d) 307 at 311 (C.A.):

The principle which guides the decision to award solicitor-and-client costs in a contested matter where there is no fund in issue and where the parties have not agreed on solicitor-and-client costs in advance, is that solicitor-and-client costs should not be awarded unless there is some form of reprehensible conduct, either in the circumstances giving rise to the cause of action, or in the proceedings, which makes such costs desirable as a form of chastisement. The words "scandalous" and "outrageous" have also been used.

[Underlining added.]

(At the time Stiles was decided, the rules referred to solicitor-and-client, not special, costs.)

[87] This paragraph of Lambert J.A.'s reasons in Stiles was quoted with approval by Cumming J.A. in Young v. Young (1990), 50 B.C.L.R. (2d) 1 at 64 (C.A.). In the Supreme Court of Canada, (Young v. Young, [1993] 4 S.C.R. 3 at para. 66), McLachlin J. (as she then was) approved the statement by the Court of Appeal of the principles applicable to an award of solicitor-and-client costs, but did not quote or comment on the reference to "circumstances giving rise to the cause of action, or in the proceedings." Mr. Justice Lambert's words were adopted by Esson C.J.S.C. (as he then was) in Leung v. Leung (1993), 77 B.C.L.R. (2d) 314 at para. 4 (S.C.) and re-iterated by Lambert J.A. in Garcia v. Crestbrook Forest Industries (1994), 9 B.C.L.R. (3d) 242 at para. 12 (C.A.). In Sun Life Assurance Company of Canada v. Ritchie (2000), 76 B.C.L.R. (3d) 93, 2000 BCCA 231 at para. 54, Lambert J.A. again revisited the issue of special costs, and provided further guidance on the question of the timing of the conduct:

Special costs are usually awarded only in relation to misconduct in the course of the litigation itself. However, there may arise circumstances where special costs may be awarded because of the reprehensible conduct giving rise to the litigation, particularly where the fruits of the litigation do not provide any appropriate compensation in relation to the reprehensible conduct.

[88] The appellants cite Nygard International Ltd. v. Robinson (1990), 46 B.C.L.R. (2d) 103 at para. 13 (C.A.), where McDonald J.A. stated that the "general rule" is that solicitor-and-client costs are given only with respect to or in situations of misbehaviour in the conduct of the litigation. Similar comments were made by Brenner J. (as he then was) in Foundation Co. of Canada v. United Growers Ltd. (1996), 25 C.L.R. (2d) 1 at 204 at para. 32 (S.C.), and Romilly J. in Eusanio v. Janolino, [1997] B.C.J. No. 2066 at paras. 7 and 9 (S.C.), both of whom noted that reprehensible conduct prior to the proceedings can be dealt with through punitive damages.

[89] The respondents point out that in Nygard, the Court said only that "as a general rule" special costs are awarded for conduct in the litigation, and note that Stiles and the decisions adopting Lambert J.A.'s words were decided after Nygard.

[90] The authorities do not establish any rigid rule that would prohibit an award of special costs where pre-litigation conduct is "reprehensible" and warrants rebuke. As Lambert J.A. noted in Sun Life Assurance, however, "special costs are usually awarded only in relation to misconduct during the course of the litigation itself."

[91] In this case, as the respondents note in their factum, in addition to the appellants' misconduct prior to the litigation, they continued to conduct themselves in a reprehensible manner after the respondents filed their petition in these proceedings. They sought approval for budgeted legal fees of $150,000 to continue proceedings to set aside the Leases; authorized payment of a retainer to a lawyer to conduct such proceedings, contrary to the injunction order issued by Groberman J.; and relied on the affidavit of Mr. Tan, which was found, on cross-examination, to contain some false information.

[92] The chambers judge had before him all of the evidence of the appellants' conduct before and during the litigation. He was entitled to take all of that conduct into account in determining that the appellants acted in a reprehensible manner.

[93] The amount of costs awarded, $150,000, is high in relation to the compensation awarded, but as the respondents point out, the conduct of the appellants during these proceedings contributed to their length, and had the matter been referred to the trial list, as the appellants sought, the costs would have been even higher. I would not accede to the appellants' argument that the award of special costs is prejudicial or unfair in all of the circumstances.

Summary and Conclusion

[94] The chambers judge made no error in concluding that the appellants had a conflict of interest with the strata corporation that they failed to disclose, contrary to s. 32 of the Act, in that they had an interest in contracts, the legal retainers, that were "unreasonable and unfair" to the strata corporation, for the purpose of s. 33(3) of the Act. Nor did he err in concluding that the appellants did not act "honestly and in good faith", in breach of ss. 31 and 33(3) of the Act, and could not rely on the advice of their lawyers to establish that they acted in good faith. These conclusions provided the conditions for ordering that the appellants compensate the strata corporation for the legal fees paid under the impugned contract.

[95] The chambers judge did not apply the correct test in determining whether the matter should have been referred to the trial list, but if he had referred the matter to trial, the outcome would have been the same.

[96] The chambers judge did not err in awarding special costs to the respondents.

[97] I would dismiss the appeal.

“The Honourable Madam Justice Levine”

I AGREE:

“The Honourable Mr. Justice Low”

Reasons for Judgment of the Honourable Madam Justice Prowse:

INTRODUCTION

[98] I have had the privilege of reading, in draft form, the reasons for judgment of Madam Justice Levine. With respect, my first preference would have been to allow the appeal and remit the entire matter to the trial list pursuant to Rule 52(11)(d) of the Rules of Court on the basis that the chambers judge erred in proceeding as if this were a summary trial commenced under Rule 18A of the Rules of Court. There are important issues of fact and law raised in the petition and on appeal which affect not only these parties, but others who could not be joined in these proceedings unless, and until, the matter was referred to the trial list.

[99] Since my colleagues disagree with this resolution of the appeal, however, and since I am persuaded that the chambers judge erred in his analysis of the appellants’ defence that they acted honestly and in good faith in reasonable reliance on their lawyers’ advice, I have concluded that it is preferable that I address these issues. I do so because, in my view, this appeal raises an important issue with respect to the relationship between strata council members and their legal counsel, and the extent to which strata council members may rely on the advice of their legal counsel in carrying out strata corporation business.

[100] In my view, it is not an answer to the appellants’ good faith defence under s. 33(3)(b) of the Act that the opposing lawyers and members of the opposing faction of strata owners were repeatedly telling them that they were in a conflict of interest and should not proceed as they were proceeding. Nor is it an answer to this defence that Mr. Justice Tysoe found, on an application for an interim injunction to prevent the lawyers they had retained from acting, that the lawyers were in a conflict of interest. Generally speaking, strata council members should be able to rely on the legal advice provided by lawyers retained by the strata corporation and should be able to assume that counsel so retained will properly advise the council with respect to the legal issues confronting them. In this case, that advice should have included advice as to the legal role of strata council members and their duties to the strata corporation. Nowhere in the evidence is there any indication that these lawyers provided such advice. On the contrary, the advice provided actively encouraged the appellants to conflate the interests of the majority of strata owners with the interests of the strata corporation.

[101] I will elaborate on these observations later in these reasons.

[102] As a matter of convenience, I will set forth the nature of the appeal, the issues and the background in my own words.

[103] For the purpose of this analysis, it is important to note that the appellants are some, but not all, of the members of the strata councils elected at Annual General Meetings of the strata corporation on May 13, 2002 and/or February 27, 2003. They were members of the Le Soleil Owners Group ("LSOG") prior to being elected to council and they formed the majority on the strata council at all relevant times.

NATURE OF APPEAL

[104] This is an appeal from the order of a chambers judge, made August 24, 2005, providing as follows:

1. The Strata Councils of The Owners, Strata Plan LMS 3837 (the "Strata Corporation") elected on May 13, 2002 and February 27, 2003 have acted in a manner which is significantly unfair to the Petitioners by using monies from the operating fund of the Strata Corporation to pay nonrecurring expenses in the form of legal fees to the law firms [names omitted] and other law firms in respect of legal proceedings contrary to the wishes and interest of the Petitioners without obtaining a 3/4 resolution of the members of the Strata Corporation at an Annual General Meeting or Special General Meeting as required by the Strata Property Act.

2. The Respondents Khoon Wah Alfred Tan, Lam Siat Khevn, Peck Kiat Chee, Lye Eam Tan, Tuck Fai Tham, Tan Hui Chuan, Ah Kow Foo and Toon Jin Lam pay the Strata Corporation $190,398.99 on a joint and several basis pursuant to Section 33(3)(b) of the Strata Property Act.

...

4. The Respondents [as named in 2, above] pay the Petitioners their special costs of this proceeding on a joint and several basis.

(In my view, para. 1 of the order is entirely misconceived. It was apparently intended to track the wording of s. 33(1) of the Act, which provides that where the court finds that a contract or transaction "was unreasonable or unfair to the strata corporation", not to individual strata owners, the court may grant the form of relief contained in para. 2 of the order.)

[105] The special costs of the proceeding were subsequently settled at $150,000.

ISSUES ON APPEAL

[106] The appellants submit that the chambers judge erred:

(1) in determining that the appellants were in breach of s. 32 of the Act and thus were accountable for their actions under s. 33(3)(b) of the Act;

(2) in determining that the appellants did not act honestly and in good faith in reliance on the legal advice of lawyers they retained to act on behalf of the strata corporation;

(3) in treating the Petition before him as if it were an application pursuant to Rule 18A of the Rules of Court and in refusing to exercise his discretion under Rule 52(11) to refer the matter to the trial list; and

(4) in ordering the appellants to pay special costs.

[107] Since it is not disputed that the chambers judge erred in treating the petition as if it were an application pursuant to Rule 18A, I do not propose to say anything further about the third ground of appeal.

GENERAL BACKGROUND

[108] This proceeding arises out of an ongoing and acrimonious dispute between two factions of strata lot owners in Le Soleil Hotel in Vancouver. The problems originated when the developer and initial operator of the hotel, American Corporate Suites ("ACS"), ran into financial difficulty. At that point, 93 owner/investors in the hotel, representing 73 percent of all owners ("LSOG"), joined together with a view to taking over the operation of the hotel in order to protect their investments. In that regard, ACS owed members of LSOG substantial monies reflected in two court orders of January 9, 2001, and April 19, 2001, in which ACS was found to be indebted to the named owners in the amounts of $239,052.49 (plus interest) and $348,973.97 (plus interest, less certain amounts payable to certain owners under the January 9^th order).

[109] LSOG’s plan included petitioning ACS into bankruptcy and taking control of two leases over common property, whereby the strata corporation had leased the lobby and parking areas of the hotel to ACS for $10, and had accepted responsibility for maintaining those common areas for 20 years. These two leases, which required the strata owners to maintain the parking lot and lobby of the hotel, were essential to running the hotel. At all relevant times, LSOG’s position was that these leases were highly improvident from the strata corporation’s point of view and that they were entered into in breach of ACS’s fiduciary duty to the strata corporation.

[110] In pursuit of their plan, LSOG Inc. was incorporated and entered into an agreement with Executive Inn Inc. ("Executive") on February 2, 2002 to manage the hotel (the "management agreement"). This agreement was entered into in the expectation that LSOG Inc. and, ultimately, the strata corporation, would regain control over the leases. The only signators to the agreement were Mr. Chee for LSOG and Mr. Sayani for Executive, but LSOG and Executive appear to have contemplated that the strata corporation would sign the agreement at some future date. (At the time the agreement was entered into, there were only two members of the strata council, which was largely inactive).

[111] Ultimately, LSOG was instrumental in forcing ACS into bankruptcy. Following the bankruptcy, Executive, on behalf of LSOG, bid on the leases which were assets in the bankruptcy. Their bid did not succeed and the leases were sold to Sunbelt Hotel Management Services Ltd. ("Sunbelt"), which arranged for an affiliated company, Le Soleil Hotel and Suites Ltd. ("LHS"), to manage the hotel. Sunbelt was controlled by a strata owner (Mr. Somani) who actively opposed LSOG throughout the transactions giving rise to this appeal.

[112] After this unexpected turn of events, LSOG continued to pursue gaining control over these leases, both through negotiations between Executive and Sunbelt, and through legal action to have the leases vacated, with the result that they would revert to the strata corporation.

[113] The appellants dealt with several law firms during the course of their efforts to regain control over the leases. Because those law firms may become involved in further litigation in relation to these matters as defendants; because their version of these events may be only partially revealed in the thousands of documents filed in these proceedings; and because that partial version of the events is damning as far as some of their interests are concerned, I will refer to the law firms by letters in the order in which they were retained by LSOG and/or by the strata corporation. I emphasize that the conclusions drawn by the chambers judge, and by this Court on appeal, are based solely on the record, which may be incomplete.

[114] The appellants’ actions in pursuing their strategy to regain control over the leases resulted in legal fees of over $190,000, which were paid by the strata corporation. These amounts are in addition to fees which LSOG, or individual members of LSOG, had expended prior to the retainers entered into by the strata corporation which are impugned in these proceedings.

[115] I will go into further detail with respect to the nature of the appellants’ dealings with each of the law firms later in these reasons. In the meantime, I will summarize the relevant events.

[116] The appellants, who formed a majority (seven out of eight) on the strata councils of May 13, 2002 and February 27, 2003, voted at those meetings to include amounts sufficient to cover the legal fees required to pursue their legal strategy in the operating budget. This was done on the basis of legal advice they obtained, and followed, from the lawyers who would eventually receive these monies in payment of fees. The lawyers advised the appellants that a 3/4 majority resolution of the strata owners was not necessary in order to set aside these funds for legal fees (although a 3/4 majority vote would have been required pursuant to s. 171 of the Act to commence an action on behalf of the strata corporation). It is common ground that LSOG, including the appellants, could not have succeeded in setting aside these monies for fees, or in pursuing its strategy to set aside the leases, if a 3/4 majority vote were required. It is also common ground that the lawyers advised them with a view to enabling them to take control of the leases by legal means without the necessity of seeking a 3/4 vote. Twenty-seven percent of the owners, including one member of strata council (Dr. Louie), were strongly opposed to their strategy and to the expenditure of legal fees in that regard.

[117] In brief, the two warring owner factions had two distinct perspectives on the events as they unfolded. The appellants’ perspective was that it was in LSOG’s best interests, and, to the extent that LSOG represented a significant majority of the owners, it was in the best interests of the strata corporation, that every effort be made to regain control of the leases in order to protect the owners’ substantial investments in the hotel development. The perspective of the 27 percent minority owners was that the appellants were acting solely in LSOG’s best interests, in complete and calculated disregard of the interests of the minority, in pursuing an ill-advised and, ultimately, costly plan to regain control of the leases.

[118] In the result, the perspective of the minority was that adopted by the chambers judge in a strongly worded judgment which was highly critical of the actions of the appellants, and of the lawyers retained by them on behalf of the strata corporation, throughout the various proceedings culminating in this action and appeal.

DISCUSSION

1. The Chambers Decision

[119] The reasons for judgment of the chambers judge are summarized at paras. 13 to 15 of Madam Justice Levine’s reasons. I will refer to them further during the course of my analysis. Suffice it to say that the chambers judge found that the appellants were in numerous conflicts of interest in relation to the retainers of the various law firms throughout these proceedings; that they should have recused themselves from attending at the council meetings or voting with respect to these retainers; that it was not a defence that they relied on the advice of their lawyers in the circumstances; and that they breached their duties to act honestly and in good faith with a view to the best interests of the strata corporation, and to exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances. In short, the chambers judge found that the appellants were in breach of ss. 171, 31 and 32 of the Act and that they were accountable to the strata corporation under s. 33(3)(b). He further found that their conduct leading up to and throughout the proceedings constituted reprehensible conduct deserving of an order of special costs against them.

2. The Appellants’ Strategy

[120] In order to place the appellants’ actions in perspective, it is important to set out their strategy for obtaining control over the leases. This strategy was developed by a lawyer at law firm "A" (I will use letters to refer interchangeably to the lawyer, or lawyers, who advised the appellants, and to the law firm itself). LSOG was referred to A by a lawyer at law firm "B". B had been acting for LSOG in its earlier efforts (prior to the involvement of the strata corporation) to gain control over the leases, and in relation to its agreement with Executive to take over management of the hotel on behalf of LSOG once control over the leases was obtained. B referred LSOG to A on the basis that A was an experienced and reputable lawyer (and law firm) knowledgeable in the intricacies of strata law. I note at this point that the LSOG members were almost all offshore investors who had become investors in the hotel as a result of an advertisement placed in a Singapore newspaper.

[121] A’s first involvement in these events appears to have been as a result of B referring Executive to A for legal advice in relation to these leases. When B referred LSOG to A, A returned Executive’s retainer and began acting for LSOG. This was in March 2002, before LSOG was significantly involved in the strata council. There is no issue taken with the fact that A was initially consulted by Executive. What is clear, however, is that in March 2002 A was retained by LSOG and that LSOG made it clear to A that its goal was to obtain control over the leases and that it knew it would face opposition in pursuing that goal from the minority strata owners.

[122] After consultations between A and B regarding the background of this matter, and following numerous interchanges between A and B and representatives of LSOG, A developed the strategy which LSOG, including the appellants, followed thereafter with a single-minded determination that eventually resulted in these proceedings. The strategy is set forth in a lengthy memorandum from A to LSOG dated April 11, 2002, and which provides, in part, as follows:

Based on the information available to me as of this date and assuming that the annual general meeting of the Strata Corporation will be held in the within [sic] the next 6 weeks, I think the most expeditious and economical steps and procedures which would enable the Strata Corporation to challenge the validity of the Lobby Lease are as follows:

1. ensure that all of the members of LSOG is [sic] entitled to vote at the annual general meeting. This may require payment of maintenance payments due and payable prior to the date of the meeting; [This advice was subsequently qualified by later advice that failure to pay arrears of fees could not preclude an owner from voting.]

2. have each member of the LSOG grant a proxy to persons who will attend the annual general meeting in person. There should be at least 2 representatives;

3. identify 7 owners who are members of the LSOG who are prepared to be elected to the strata council….

4. at the annual general meeting to amend any budget presented to provide for legal fees. As previously noted such an amendment may be made at the meeting and a budget is approved by a majority vote;

5. during the portion of the meeting which deals with new business, have an owner introduce a motion directing the strata council to advise the holder of the Lobby Lease that the Lobby Lease is unenforceable and the strata council expects that holder of the Lobby Lease will vacate the portions of the common property leased under the Lobby Lease ("Premises") within 15 days and to direct the strata council to take all steps necessary to regain physical possession of the premise; and

6. The strata council could then instruct legal council [sic] to send the necessary notice to the holder of the Lobby Lease.

As I noted in my email of April 3, 2002 it would be reasonable to expect that the holder of the Lobby Lease will commence a lawsuit or seek a court order enabling it to continue in occupation of the Premises and that the Lobby Lease is a valid and binding contract. The Strata Corporation would not need a resolution approved by a 3/4 vote to defend such a law suit or to oppose the court application.

[Emphasis added.]

[123] It is fair to say that LSOG, including the appellants, made concerted and ongoing attempts to follow this advice, which accorded with their goals. They were actively assisted in this regard by A and B, who personally attended the subsequent (May 13, 2002) Annual General Meeting and made the motions necessary to pass the resolution increasing the budget for legal fees from $360 to $93,700, as well as the resolution to seek legal advice regarding the enforceability of the leases and the steps available to the strata corporation to have the leases declared void. At that meeting, LSOG also succeeded in electing seven members to the eight member strata council. (There is evidence that these council members resigned from LSOG upon being elected to council, but that is far from clear, and, in any event, they continued to represent the views of LSOG while serving as council members.) The eighth member, Dr. Louie, was not a member of LSOG and, as operator of the restaurant associated with the hotel, he saw himself as having interests quite different from those of LSOG.

[124] On May 14, 2002, the council met for the first time at A’s offices. On that date, but prior to the meeting, A and B received a letter from counsel then acting for LHS, an owner of one unit in the hotel, advising that since A and B had acted for LSOG in the past, it was inappropriate for them to act for the strata corporation, knowing that the interests of LSOG were at odds with the interests of other strata owners. This was the first of many letters and other communications directed to counsel acting for the strata corporation stating that both counsel, and council members, were in a conflict of interest in pursuing the interests of LSOG without regard to the opposing interests of other owners.

[125] A denied throughout that she was in a conflict situation and, at the May 14, 2002 meeting, A was retained by the strata corporation to act on its behalf to pursue the strategy which A had recommended to LSOG as of March and April 2002 when she was representing LSOG. It seems clear from later events that her position in regard to the conflict issue was that she had not obtained any confidential information from LSOG while she was acting for it which could be used against it, and/or that LSOG had waived any possible conflict of interest. At no time does A appear to have seriously considered that she may be in a conflict because, having represented LSOG in the past, she had identified with their interests and was promoting their interests as if they coincided with those of the strata corporation, despite strong opposition from the minority members. Given A’s adamant position that she was not in a conflict of interest, it is not surprising that she does not appear to have advised the appellants that they, too, may be a conflict of interest in treating their interests as being identical to the interests of the strata corporation, in the face of ongoing and vocal opposition.

[126] On May 30, 2002, counsel for LHS commenced an action naming the strata corporation, Executive and A as defendants, seeking, amongst other things, an injunction restraining A from acting on behalf of the strata corporation. The statement of claim also claims that the appellants were acting in contravention of ss. 31 and 32 of the Act.

[127] In response to that Writ, A sought and received instructions from the appellants to obtain a second opinion as to whether she was in a position of conflict in acting for the strata corporation. She retained C in early June 2002 to provide such an opinion. Based on the information he was provided, C provided his opinion that A was not in a conflict position, although he cautioned her about continuing to act in the circumstances. C was then retained to represent A at the hearing before Tysoe J. which resulted in the 90 day interim injunction, granted June 25, 2002, prohibiting A from acting further for the strata corporation.

[128] The removal of A as counsel for the strata corporation resulted in a temporary delay in pursuing the appellants’ strategy. C filled in as counsel until other counsel could be found to act. Ultimately, on the recommendation of B, the appellants retained D to act for the strata corporation (over the ongoing objections of Dr. Louie). It was around this time that the appellants’ strategy became more convoluted.

[129] Following the injunction precluding A from acting, counsel for LHS wrote to C, members of the strata council, and the strata corporation manager by letters dated July 5, 2002, stating that he understood that the strata council would be meeting on July 8, 2002 and that council proposed to retain new counsel and to issue notices terminating the leases. Counsel for LHS objected to both courses of action. His letter to C provides, in part, as follows:

Moreover, as has been established in the above noted proceedings [resulting in the injunction against A], members of the strata council that are members of LSOG have a direct interest in bringing about the cancellation of the leases and therefore have both a conflict of interest which disqualifies them from participating in any decision with respect to them, and are expressly prohibited from participating in any meeting to consider them by the provisions of Section 32 of the Strata Property Act. Only Dr. Louie is free of such conflict and only Dr. Louie would be entitled to consider and vote on the matter, if proper in the first place.

[130] By the time council met on July 8, 2002, A’s original strategy was foundering. According to that strategy, the strata corporation would give notice to the leaseholders terminating the leases, the leaseholders would commence an action to seek injunctive or other relief against the strata corporation, and the strata corporation would be "forced" to defend that action. Although A and the appellants recognized that s. 171 of the Act precluded them from commencing an action to set aside the leases without a 3/4 majority vote, A had advised that s. 171 did not preclude the strata corporation from defending an action without a 3/4 majority vote. The intent of the strategy under A’s direction, therefore, was to avoid suing to invalidate the leases, but to compel the leaseholders to sue and then to defend.

[131] For the purpose of this appeal, counsel for the appellants no longer takes the position that A’s interpretation of s. 171 of the Act is correct, and it is, therefore, unnecessary for this Court to express an opinion in that regard. What is important on this appeal, however, is not what s. 171 actually means, but what A and, more importantly, the appellants, acting on her advice, believed it meant. This is relevant to the question of whether the appellants were acting honestly and in good faith with respect to the impugned transactions. In that regard, it is not disputed that A's legal opinion, which the appellants accepted, was as set out in para. 122, supra. This advice was proffered by a lawyer and law firm held out to the appellants as "experts" in strata property law, and upon whose advice they relied.

[132] At the council meeting on July 8, 2002, the appellants voted in favour of sending notices terminating the leases and they also voted to retain D as counsel for the strata corporation.

[133] D was formally retained on July 15, 2002. Thereafter, the notices were sent to the leaseholders purporting to terminate their leases. The leaseholders, however, did not respond as expected. Rather than commencing an action to enjoin the strata corporation from interfering with the leases, they did nothing. Thereafter, a new strategy was devised. It is not clear from my reading of the available record who was the author of that strategy, or whether all counsel (except C) were involved. Suffice it to say, that it was a strategy devised by the lawyers, and not by the appellants. Having said that, the appellants were very receptive to the new strategy since it accorded with their goal of recovering and taking control over the leases.

[134] The new strategy continued to rely on A’s interpretation of s. 171, according to which the strata corporation was entitled to defend an action without seeking a 3/4 majority vote. According to the new strategy, Ms. Ang, an LSOG owner resident in Vancouver, would commence a proceeding against the strata corporation under s. 164(1) of the Act to have the leases declared void, and the strata corporation would "defend" by effectively taking the same position as Ms. Ang. Under this strategy, Ms. Ang would be represented by her own counsel, and D would represent the strata corporation.

[135] This strategy eventually came to nought when Mr. Justice Lowry ruled on November 5, 2002, that Ms. Ang had no standing to bring the proceeding. After that decision, no further steps were taken in the proceeding.

[136] The final strategy to facilitate the appellants’ continued intention to set aside or gain control of the leases was devised by yet another counsel retained by the strata corporation on or about June 2004. This counsel, E, advised the strata council that, as a result of an amendment to s. 171 of the Act, it was now possible for the strata corporation to commence action in relation to the leases without a 3/4 majority vote. Based on this advice, the strata council passed a resolution to commence action to set aside the leases. As with the earlier resolutions seeking to implement the appellants’ strategy, this resolution was strongly opposed by Dr. Louie and other minority strata owners and their counsel.

[137] Ultimately, Dockside and Scholz, the owners of two strata units, commenced the within proceeding by petition on October 29, 2004, naming the strata corporation, E, and various council members as respondents. E settled the claims against him and was not involved in this appeal. In that respect, it is common ground that E’s interpretation of s. 171 was wrong in law and that the amendment to s. 171 did not have the effect of permitting the strata corporation to sue without obtaining a 3/4 majority vote of the owners.

[138] Dockside’s action culminated in the order giving rise to this appeal. The appellants’ strategy came to an end; new members were elected to the strata council and many former members of LSOG changed allegiances; and, as a result of the chambers judge’s decision, the appellants have been held personally liable not only for $190,000 in legal fees paid by the strata corporation, but also for $150,000 in special costs.

[139] From the point of view of the strata corporation, this result is entirely just since it was as a result of the implementation of the appellants’ strategy that these legal fees were incurred over the continuing objections of the minority members of the strata corporation. From the point of view of the appellants, the result is unjust since, even assuming they acted in a conflict position, their strategy, and the steps they took in pursuing it were recommended by experienced lawyers upon whom they reasonably relied.

3. "Honest and Good Faith" Reliance on Counsel

(a) The Relevant Statutory Provisions

[140] The key statutory provisions for the purposes of this analysis are ss. 31, 32 and 33 of the Act.

[141] Section 31 of the Act, headed "Council member’s standard of care", provides:

31 In exercising the powers and performing the duties of the strata corporation, each council member must

(a) act honestly and in good faith with a view to the best interests of the strata corporation, and

(b) exercise the care, diligence and skill of a reasonably prudent person in comparable circumstances.

[142] Section 32, which is headed "Disclosure of conflict of interest", provides:

32 A council member who has a direct or indirect interest in a contract or transaction with the strata corporation must

(a) disclose fully and promptly to the council the nature and extent of the interest,

(b) abstain from voting on the contract or transaction, and

(i) while the contract or transaction is discussed, unless asked by council to be present to provide information, and

(ii) while the council votes on the contract or transaction.

[143] Section 33, headed "Accountability", provides, in part:

33(1) If a council member who has an interest in a contract or transaction fails to comply with section 32, the strata corporation or an owner may apply for an order under subsection (3) of this section to a court having jurisdiction unless, after full disclosure of the nature and extent of the council member’s interest in the contract or transaction, the contract or transaction is ratified by a resolution passed by a ¾ vote at an annual or special general meeting.

...

[144] I note here that the standard of care set forth in s. 31 of the Act is nearly identical to s. 142(1) of the Business Corporations Act, S.B.C. 2002, c. 57, s. 122(1) of the Canada Business Corporations Act, R.S.C. 1985, c. C-44, and s. 134(1) of Ontario’s Business Corporations Act, R.S.O. 1990, c. B.16, all of which provide that a director or officer of a company, when exercising their powers as such, shall act honestly and in good faith with a view to the best interests of the company, and shall exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. A similar provision is found in s. 37(1) of the Ontario Condominium Act, S.O. 1998, c. 19.

[145] Each of those statutes also contains an additional provision, not found in the Act, which precludes a finding of personal liability on the part of a director or officer if the director or officer acted honestly and in good faith on the basis of the report or opinion of a lawyer "or other person whose profession lends credibility to the report or opinion". In the case of the Ontario Condominium Act, the defence applies where a breach has been found of the duty to act honestly and in good faith with a view to the best interests of the condominium corporation, but where the breach arose as a result of the director relying in good faith upon the opinion or report of a lawyer. In the case of the corporate statutes to which I have referred, the defence operates to preclude a finding of breach of the standard of care. In both cases, the result is the same – reasonable reliance in good faith on the report of a lawyer or other named professional will preclude a finding of personal liability on the part of the director or officer.

[146] Counsel did not provide the Court with any authorities on the interaction between ss. 31, 32 and 33 of the Act, or generally with respect to the defence of honest and good faith reliance on the advice of legal counsel. In my view, however, these provisions support an interpretation of the Act more consistent with that contained in the Ontario Condominium Act. In other words, the defence does not operate to preclude a finding of breach of the standard of care, but operates to provide a defence even where the standard of care has been breached.

[147] This interpretation is based, in part, on the fact that the defence contained in s. 33(3)(b) of the Act only comes into operation after the court has determined that the council members are in breach of s. 32 of the Act. I also note that, while s. 31 of the Act frames the duty of care as being one of operating "honestly and in good faith with a view to the best interests of the strata corporation", s. 33(3)(b) frames the defence by stating that the court may grant a remedy for breach of s. 32 "if the council member has not acted honestly and in good faith", omitting the words "with a view to the best interests of the strata corporation". Although it is not necessary to definitively decide the point on this appeal, I am inclined to the view that these additional words were left out of s. 33(3)(b) because a breach of s. 32 was assumed to constitute a breach of the duty of care set out in s. 31. In any event, it is clear that the defence operates where there has been a breach of s. 32 of the Act, if the evidence supports a finding that the council member in breach has acted "honestly and in good faith".

(b) Breaches of s. 32 of the Act

[148] I agree with the chambers judge, and with Madam Justice Levine, that the appellants were in breach of s. 32 of the Act with respect to each of the retainers (contracts or transactions) of A, C, D and E. Before turning to s. 33(3)(b), I will briefly set forth the conflicts involved in each retainer which led to breaches of s. 32.

(1) Retainer of A at the May 14, 2002 strata council meeting – This retainer was to obtain legal advice concerning the enforceability of the leases, and eventually included the retainer of C to give a second opinion with respect to A’s alleged conflict of interest. The principal conflict which the appellants failed to disclose on this occasion was that LSOG had previously retained A to give advice concerning the enforceability of the leases, and the strata corporation was now being asked to pay legal fees which LSOG would otherwise have had to pay if it pursued its strategy on its own. (In my view, the chambers judge erred in finding that the appellants faced a potential $600,000 liability in the event LSOG breached the management agreement with Executive. The only evidence of this is one hearsay email which was inadmissible, and which should have played no role in the chambers judge’s analysis. In that regard, I note that, on appeal, counsel for Dockside placed little reliance on the appellants’ conflict of interest involving the management agreement.)

(2) Retainer of D on July 15, 2002, to "defend" the Betty Ang petition – The appellants failed to disclose that LSOG had hired independent counsel to commence the Betty Ang petition to set aside the leases when they voted to retain D to defend the petition. In the result, LSOG, including the appellants, was effectively instructing both sides in that proceeding (although the strata corporation was paying only D’s fees).

(3) Retainer of E in June 2004 to commence action to set aside the leases – By this time, the minority owners had rejected the appellants’ resolution to continue to pursue an action to set aside the leases. In these circumstances, the appellants were in a conflict when they decided to retain E for that very purpose, based on E’s erroneous advice that a 3/4 majority resolution was not required because of an amendment to s. 171 of the Act. Since Dockside settled with E, however, the legal fees with respect to this retainer are not in issue.

[149] Thus, the appellants’ principal conflict was that, in retaining these lawyers to act on behalf of the strata corporation, they were seeking to pursue and enforce LSOG’s interests in setting aside or gaining control of the leases, without proper regard to the interests of the minority owners who opposed them. As previously stated, the appellants were encouraged in their belief that, because they represented a significant majority of the owners, they were entitled to impose their views of the best interests of the strata corporation on the minority. In other words, the appellants adopted the philosophy of "majority rules". This was so despite their awareness that, in certain instances, the Act provided that only a 3/4 majority could rule.

[150] It is apparent that the appellants completely misconceived their duties and responsibilities to the strata corporation as a whole, including their responsibilities to the minority members. In these circumstances, there can be little doubt that in failing to disclose their conflicts of interest, and in voting to retain these lawyers on behalf of the strata corporation, the appellants were in breach of s. 32 of the Act.

[151] The question remains, however, whether the appellants’ breaches of s. 32 of the Act necessarily lead to the conclusion that they should be held personally accountable under s. 33(3)(b) of the Act for the legal fees and special costs awarded against them by the chambers judge. The answer to this question turns on whether the council members acted honestly and in good faith within the meaning of s. 33(3)(b) of the Act. I now turn to that question.

(c) Application of s. 33(3)(b) of the Act

[152] The precise issue here is whether the chambers judge erred in finding that the appellants did not act honestly and in good faith within the meaning of s. 33(3)(b) of the Act in retaining A, C, and D on behalf of the strata corporation to pursue their strategy of setting aside or gaining control over the leases. (I will not make further reference to the retainer of E since that retainer is no longer in issue.)

[153] The appellants submit that they were acting honestly and in good faith with a view to what they thought was in the best interests of the strata corporation (which they regarded as being synonymous with the interests of the majority) when they entered into these contracts, based on the advice of the lawyers retained by the strata corporation. In the appellants’ view, it was patently obvious that the leases in issue were contrary to the strata corporation’s best interests because the leases had been "sold" by ACS for $10 each for a period of twenty years, on terms which required the strata corporation to maintain the lobby and parking areas during that period at its own expense. LSOG, including the appellants, believed that this was harmful to everyone’s investment in the strata corporation (with the exception of owners related to Sunbelt, which had purchased the leases), whether or not the other owners shared this view.

[154] I accept that reliance on legal advice does not automatically lead to the conclusion that the person relying on such advice was acting honestly and in good faith. There will be instances in which it is, or should be, so apparent to clients that the lawyer representing them is either directly or indirectly encouraging them to act dishonestly, illegally or in bad faith that the clients cannot be heard to say that their reliance on the lawyer’s advice was either honest or in good faith. The question is whether this is such a case.

[155] In analyzing that question, Madam Justice Levine has referred to two authorities: Peoples Department Stores Inc. (Trustee of) v. Wise, [2004] 3 S.C.R. 461, and Blair v. Consolidated Enfield Corp., [1995] 4 S.C.R. 1995. I accept her statement of the general principles set forth in those authorities, but I respectfully disagree with the manner in which she has applied those principles to these facts.

[156] In brief, the principles which may be derived from Peoples and Blair relevant to this defence are as follows:

1. The requirement that a party act in good faith with a view to the best interests of the corporation amounts to a statutory fiduciary duty.

2. A party is assumed to have acted in good faith. The onus of proof rests on the party seeking to show bad faith.

3. The determination of whether a party has acted in good faith is a subjective inquiry based on the party’s motives. The fact that the advice was in the party’s best interests or that s(he) obtained a benefit from it does not mean that s(he) acted in bad faith in relying on it.

4. Certain statutes have codified the common law principle that reliance on the advice of lawyers and other professionals will be a defence to allegations of bad faith where the reliance is (a) reasonable and (b) in good faith.

5. The reasonableness of reliance may depend on whether the facts suggest that the advice was given hastily or was based on incomplete information. Reliance on legal advice will not be unreasonable because the advice later turns out to be wrong.

6. A party is not obliged to seek further independent legal advice or directions from the court where reliance on counsel is reasonable and in good faith.

[157] The chambers judge found that the appellants’ reliance on legal advice was not a defence under s. 33(3)(b) of the Act. In that regard, he stated (at paras. 70-72):

The Respondent Strata Council Members were not counselled against the strategy they pursued by the lawyers they engaged and were encouraged to pursue it by advice they received. However, the Respondent Strata Council Members were warned time and again by their opponents that they were acting in a conflict of interest and contrary to the provisions of the [Act], yet they never heeded those warnings nor did they seek independent legal advice as to their potential liability as Strata Council members.

The law firm which recommended the LSOG strategy was found in conflict of interest by the court in June 2002, when retained to act for the Strata Corporation. Even then the Respondent Strata Council Members persisted in confusing their own interests as members of the LSOG with those of the Strata Corporation. The LSOG had obtained the initial opinion that the leases were susceptible to challenge from the firm which also provided the LSOG with advice that Strata Corporation funds could be used to pay for litigation challenging the leases without the approval of 3/4 of the owners, by budgeting legal fees as an operating expenditure and having the LSOG’s surrogate Betty Ang sue the Strata Corporation.

Even after the LSOG strategy of supporting the Betty Ang Petition was dashed when Lowry J. ruled that [D] was unauthorized to represent the Strata Corporation to support the Betty Ang Petition, the Respondent Strata Council Members persisted in their strategy by purporting to retain, instruct and pay counsel [E] to initiate, on behalf of the Strata Corporation, the very action they knew was not supported by a resolution of 3/4 of the owners.

[Emphasis added.]

[158] The chambers judge went on to refer to other aspects of LSOG’s strategy (which I have reviewed earlier in these reasons), and concluded (at para. 77):

The Respondent Strata Council Members did not act honestly and in good faith. There is ample evidence they ignored their opponents’ warning of conflict of interest and went to remarkable lengths to resist their opponents’ attempts to hold them to account for a litany of irregular and unauthorized actions as members of the Strata Council.

[Emphasis added.]

[159] As earlier noted, the chambers judge concluded that, as a result of their actions, the appellants must repay the strata corporation $190,398.99 in legal fees. He then went on to deal, briefly, with the issue of special costs. His conclusion on this issue is found at para. 80 of his reasons:

I find on the voluminous evidence before me, that the Respondent Strata Council Members subverted the interests of the Strata Corporation to their own interests as LSOG members. They received repeated express warnings from their opponents that they were in a conflict of interest. There was mounting evidence, such as the injunction against [A] and the order of Lowry J. that [D] was not properly authorized to represent the Strata Corporation, that the strategy they were pursuing was replete with conflicts. Yet they persisted. In light of this, I find the Respondent Strata Council Members acted in a reprehensible manner deserving of rebuke by the court through an award of special costs.

[Emphasis added.]

[160] It is apparent from his reasons that the chambers judge placed considerable weight on the fact that the appellants had been warned by the minority owners and their lawyers that the appellants were in a conflict of interest and should not be retaining counsel to pursue their strategy. He also found the fact that the strata corporation’s lawyers had been found to be in a conflict of interest should have alerted the appellants to their own conflict position. The chambers judge found that by ignoring these warnings, the appellants demonstrated that they were not acting honestly and in good faith in continuing with the strategy designed and recommended by the lawyers they had retained to act for the strata corporation. In effect, the chambers judge found that the appellants should have preferred the legal advice offered by the opposition lawyers to the legal advice offered by their own lawyers. My colleagues appear to share this view.

[161] The primary difficulty I have with this analysis is the emphasis it places on the fact that the appellants’ opponents, whom the appellants viewed as being completely wrongheaded, repeatedly warned them that they and their lawyers were in a conflict of interest and acting contrary to the Act. It is unclear to me on what basis it can be said that the appellants should have relied on the legal advice of their opponents and their counsel, over the advice of their own lawyers, who not only had devised the strategy they were pursuing, but, as noted by the chambers judge, had actively encouraged them to pursue it. This was not a case of the appellants seeking out inexperienced lawyers who may have been ignorant about strata corporation law, or lawyers whom they may have suspected were of dubious ethical repute. On the contrary, they sought legal advice from lawyers who were recommended as among the top strata corporation lawyers in the city. And, as their strategy faltered, those lawyers referred them to other lawyers also known for their expertise in strata corporation law. In my view, the appellants took reasonable steps to ensure that they had top level legal advice in seeking to protect their investments, which they believed had been placed at considerable risk by ACS’s actions in selling the leases.

[162] In my view, it was also reasonable for the appellants to assume that when they went to lawyers to advise them how best to protect their investments and those lawyers advised them to begin by taking a position of strength on the strata council, they could rely on those lawyers to ensure that, as strata council members, they understood their role as members of council, including their duties to the strata corporation as a whole. They were entitled to assume that the legal advice they were being given was knowledgeable, ethical and in accord with the law. They were not obliged to rely on the legal advice offered by their opposition, no matter how many times it was offered. They were entitled to take some comfort from the fact that their lawyers assured them of success in pursuing their strategy and continued to advocate the strategy even in the face of strong opposition. They were entitled to assume that, as the lawyers they retained were acting for the strata corporation, and not for LSOG, or individual owners, these lawyers would act, and would ensure that council acted, in accordance with the best interests of the strata corporation.

[163] In my view, we have come to a very strange pass if the law requires that clients rely on the legal advice of the lawyers on the opposite side of a case rather than the lawyers they have retained to represent them simply because the opposition turns out to be right about the legal issue involved. In that regard, in Blair, the court found that it did not matter that the legal advice Mr. Blair received turned out to be wrong, as long as Mr. Blair honestly and reasonably relied on it.

[164] Should the appellants have realized that they should not rely on the strata corporation’s lawyers, or that they, themselves, were acting in a conflict of interest when injunctive relief was sought against A? In my view, the answer is "no". The conflict of A was not the same as the conflict of the clients. A was found to be in conflict because she had acted for LSOG in the past and was then acting for the strata corporation in circumstances where her duties to the two could conflict. Further, prior to the issuance of the injunction, the appellants had taken the precaution of obtaining a second opinion which concluded that A was not in a conflict of interest. Finally, A had written to the appellants on June 4, 2002, setting out what the lawsuit was all about and assuring them that there was not a problem, either with A continuing to act, or with the impugned actions taken by the strata council. That letter, which was addressed to the strata corporation, to the attention of the president of the strata council advised as follows:

The Writ and Statement of Claim are quite unique. The main relief sought is to nullify the election of the strata council and to nullify the resolutions passed at the annual meeting [of May 13, 2002]. Joined with this is a pleading that alleges that neither [A] nor our firm can act for the Strata Corporation because of a conflict of interest arising from our previously having acted for some of the owners.

…

We have reviewed the Plaintiff’s claims about the conduct of the annual meeting. We have these comments:

(a) The Plaintiff alleges that owners voted who were not entitled to vote at the annual meeting because they were delinquent in paying their strata fees to the Strata Corporation. The Plaintiff alleges that all election results and all resolutions passed are null and void as a result. This is an argument unlikely to succeed. [reasons given]

…

(c) The Plaintiff alleges that proper notice was not given before the meeting in respect to the proposed budget, in respect to the amendment to increase the operating budget by $93,772 or in respect to the resolution to seek legal advice regarding the enforceability of the Lobby Lease and the Parking Lease. Pursuant to s. 45(3) of the Act, a proper notice must include a description of the matters that will be voted on at the meeting, along with the proposed budget and financial statement. The property manager sent a notice that generally complied with these requirements. There was no suggestion at the meeting that proper notice was not given. A vote was taken, apparently unanimously passed, confirming that proper notice had been given. A proposed budget may be amended by a majority vote at the meeting before the budget itself is put to the vote: s. 103(4). …

(d) The Plaintiff alleges that the resolution to increase the operating budget by $93,772 for legal services was not effective because such a resolution required a 75% vote and the vote was short of that. The Plaintiff’s argument is that because the commencement of a court action to declare the leases void would require a 75% vote, so should any resolution that relates to such an action. This is an unlikely argument. Legal opinions are intended to provide information that can be taken into account when special resolutions are put to a vote.

(e) The Plaintiff alleges that a 75% vote was required for the resolution increasing the operating budget for legal services because the budget for the legal services contemplated the commencement of an action to declare the leases void. Given the contentious state of affairs facing the Strata Corporation, it was reasonable to foresee, and provide for, substantial legal expenses. The cost of defending this new action is an example of that.

(f) The Plaintiff alleges that legal expenses are, in law, contingency reserve fund expenses and not operating fund expenses and that the resolution for the legal expenses is void. The Plaintiff alleges that the resolution was passed on the false premise that legal expenses were operating fund expenses. An operating fund expense is one that usually occurs either once a year or more often than once a year: s. 92 of the Act. A contingency reserve fund expense is one that usually occurs less often than once a year or that does not usually occur: s. 92. A disbursement from the contingency reserve fund requires a 75% vote: s. 96 of the Act. There is no apparent precedent for the argument that legal services must be treated as contingency reserve expenses. Legal expenses are billed regularly and are probably aptly treated as operating fund expenses.

…

All in all, we think it unlikely that the Plaintiff will be successful in respect to any of the claims just reviewed.

[Emphasis added.]

[165] The letter then went on to set out the claim with respect to A being in a conflict of interest for having represented LSOG in the past and now representing the strata corporation. In that regard, the letter stated:

…The strategy behind naming [A] and our firm as Defendants is to make it awkward for us to act for you at all in the litigation….

The purpose of the strategy appears to be to make it more difficult and costly for the Strata Corporation to be represented effectively in respect to the matters raised in the statement of claim and generally.

…

The issue is whether we can give the strata council and Strata Corporation reliable advice unaffected by our having previously acted for certain of the owners. We intend to give advice to the Strata Corporation and to the strata council which takes into account only the best interests of the Strata Corporation. We see nothing that prevents our doing so. We think a court would rule against the Plaintiff in respect to the alleged conflict.

[Emphasis added.]

[166] It is clear from this letter that A was advising the strata council not only that A was acting in the best interests of the strata corporation, but that A would provide advice to the strata council "which takes into account only the best interests of the Strata Corporation." The letter went on to advise that hiring other counsel to represent the strata corporation at that point would be more costly and less efficient than continuing with A. The letter then recommended that the council retain "independent counsel of high reputation [to] review these recommendations and give you independent advice in respect to them." A recommended C or E to provide such advice.

[167] In my view, this letter, with its many references to sections of the Act and an allegation by allegation analysis of the statement of claim, would reasonably have allayed any fears that the action itself may have raised in the minds of the strata council members as to whether they or their lawyers had been acting improperly or in a conflict of interest in the strategy they were pursuing. I cannot see how the appellants’ reliance on this advice, whether legally correct or not, could be translated into a finding of dishonesty or bad faith because the opposition was saying otherwise.

[168] As earlier stated, the second opinion provided by C confirmed A’s advice that A was not acting in a conflict of interest in continuing to act for the strata corporation. C also advised the appellants in mid-July that a suggestion by opposing counsel that he, C, was also in a conflict of interest was "nonsense", but he referred the appellants to other counsel to avoid ensnaring them in any controversy in that regard.

[169] What of the fact that Mr. Justice Tysoe subsequently granted a 90 day interim injunction precluding A from acting further for the strata corporation? In my view, while this operated as notice to the appellants that A was in a conflict of interest in acting for the strata corporation by virtue of having acted in the past for LSOG, it was not a determination that the appellants themselves were in a conflict of interest. That issue was not resolved by Mr. Justice Tysoe. Nor did A or any other counsel suggest to the appellants at that time that they should reconsider their position as members of council or reconsider the strategy for setting aside the leases. Rather, the decision was made that new lawyers would have to be retained by the strata corporation. A and B recommended D as someone with the experience to act on behalf of the strata corporation in pursuing the ongoing strategy to take over the leases and D was retained.

[170] Up to this point, I am unable to agree with the chambers judge that there was any basis for finding that the appellants did not act honestly and in good faith in retaining A and C. The evidence is to the contrary. The appellants were told by reputable counsel that the steps they had taken were legitimate and they were encouraged to continue with the strategy even after A was enjoined from continuing as counsel. The fact that counsel for the opposition continued to raise conflict issues does not detract from the fact that, as far as the appellants were concerned, they were legally justified in continuing to pursue their strategy.

[171] In my view, the question is whether circumstances changed at the time the Ang petition was being considered in July 2002, such that the appellants should not have relied on the advice they were receiving in seeking to set aside the leases. Although the strata corporation did not pay for Ms. Ang’s legal fees (which were paid by LSOG), the appellants concurred in the strategy whereby Ms. Ang would sue the strata corporation which would then be "forced" to defend itself, where the defence was intended to take the form of support for Ms. Ang’s petition. The entirety of this strategy, of course, was to avoid the need for a 3/4 vote to commence such action, based on legal advice that the strata corporation could properly defend such an action without seeking such a vote. At the very least, were the appellants not bound to question the wisdom of this strategy which involved a further outlay of strata corporation funds?

[172] The short answer to this question is that Steve Yap, the president of the strata council, did raise the conflict issue with D at this time. This was raised in response to a communication to Mr. Yap (of unknown origin, but likely from Dr. Ho) which suggested that D should be asked about the issue of conflict of interest, and asserting that it was the other side which had a conflict for interfering in strata corporation matters. In his email to D of July 14, 2002, Mr. Yap stated:

I would like your comments on the issue of "conflict of interest" raised by Somani on the role played by myself and my colleagues, who were formally [sic] involved in the owners’ group allied to Dr. Ho (LSOG).

Please refer to message to me below. [of unknown origin]

However, I believe challenging the legality of the leases remains a paramount objective of this Strata Corporation at this moment.

[173] Nowhere in the documents can I find any indication that D provided a responsive reply to this query, or that he at any time gave the strata council advice on their duties to the strata corporation as a whole, including the minority owners. In terms of D’s apparent failure to respond to the council’s concerns that it was being accused of being in a conflict of interest, D also received an email from Dr. Ho (one of the driving forces behind LSOG), directly raising the conflict issue and setting out her views in that regard. In her email to D dated July 16, 2002, Dr. Ho states:

To save time I wish to direct you to some important issues regarding the Strata Corporation (SC):

1. There is a law suit from Somani’s company wanting to declare that the resolutions passed in May 2002, during the SC AGM, to be void. This is primarily to disqualify the elected council members and the proxies given for voting. This has to be sorted out urgently in order not to cripple the strata council and the counsel for SC. The threat is immediate and I believe [A] has the documents related to this suit. Please get in touch with [A] in order to work on the defence of this action.

2. Somani has raised the issue of ‘conflict of interest’ several times and he will persist with this until he gets all council members disqualified with the exception of Dr. Louie.

My comments on this are:

a. LSOG is only a vehicle to represent owners. The owners are NOT members of LSOG. Whether owners or Directors of LSOG they come from the same common pool of majority of owners (92 owners) with the same objective i.e. to have the leases set aside due to the suspected validity of these leases and the inappropriate manner in which the leases were assigned. All these 92 owners are taking separate action to challenge the leases. So the question of conflict of interest does not occur here.

b. On the issue of ‘conflict of interest’ I’d like to ask "what conflict and conflict with whose interest’? The only conflict here is between the that [sic] of 92 owners and Somani’s company because Somani has obtained the leases under questionable circumstances and means.

c. The only person who is most liable to be subjected to this ‘conflict of interest’ is Somani himself. He is a strata owner, also holder of the leases and he is using the rooms of these 92 owners without authorisation. His involvement with SC matters will immensely conflict with the legal actions now on-going the interest of the majority of the owners. Our discussions of legal processes and strategy cannot be revealed to him as this is tantamount to revealing our plans and strategy to our enemy. In any warfare this is ridiculous and illogical.

d. The action to challenge the leases is in the interest of ALL owners except Somani due to the conflict pointed out above.

…

Unless the above are examined and clarified this issue of conflict of interest cannot be implied upon the council members and owners represented by LSOG. To me, the 92 owners are most free of this allegation and acting fully in the interest of the property, wanting the property to generate profit and the profit be distributed in a healthy way. The bottom line is that the owners want to get rid of this ‘slavery’ (17 years!!) to the holder of the leases which are of questionable validity. Any opposition to this intention should be deem [sic] to be obstructive to the interest of owners and the betterment of the value and image of the property.

…

It is also important to resolve this issue as this will be used again and again by Somani to thwart all actions of the SC.

[Emphasis added.]

[174] From a review of the evidence, it is fair to say that Dr. Ho’s sentiments expressed in this email were shared by LSOG and the appellants.

[175] In my view, these communications to D from Mr. Yap and Dr. Ho called out for a response. As far as one can tell from the documents available, D’s response was consistent with that of the appellants’ previous lawyers, namely, "hold the course".

[176] In all of the circumstances to which I have referred, I conclude that the appellants were entitled to regard the response of D, which was consistent with the actions and advice of his predecessors as amounting to justification for the appellants’ belief that they were acting properly and within their rights and duties as members of the strata council. Any questions they had as a result of the bombardment of allegations of conflict of interest would reasonably have been assuaged by the encouragement they continued to receive from their legal advisors to pursue the latest strategy for achieving their goal of setting aside the leases. If anything, the relentless allegations of conflict of interest served to confirm their view that their opponents, including opponents’ counsel, were simply engaging in strategic warfare designed to prevent them from protecting the owners’ investments in the hotel by setting aside the leases.

[177] It was against this backdrop that the Ang petition was conceived and pursued. When cross-examined on his affidavit about the fact that the strata council both encouraged the Ang petition and then defended against it, Mr. Tan, who was a member of the strata council at the relevant time, said that he did not see a conflict. This is consistent with the appellants’ view that since Ms. Ang and the strata corporation had a common purpose, namely, to set aside the leases, there was no inconsistency in both pursuing and "defending" the action. The fact that the reason for this strategy was to avoid a 3/4 vote of the strata corporation did not appear to cause him any concern. In my view, this is attributable to the fact that the avoidance of a 3/4 vote was in keeping with the legal advice the appellants had received throughout the proceedings. It does not appear that appellants’ counsel ever suggested to them that taking steps to avoid a 3/4 vote on matters of importance to the strata corporation was contrary to the intention of those provisions of the Act which were designed to preserve and protect minority rights. On the contrary, all of the legal advice they received was consistent with their view that their interests as majority owners in the strata corporation coincided with the best interests of the strata corporation.

[178] Thus, in these circumstances, I conclude that it cannot reasonably be said that the appellants were acting dishonestly or in bad faith or, for that matter, without regard to the interests of the strata corporation (which they conflated with the interests of the majority) in pursuing their strategy. At the very point at which I would have said the appellants had to question their lawyers about the ongoing allegations of conflict of interest, they did so. D was made aware of their concern about the conflict issue and there was an abundance of evidence that the appellants were convinced of the rightness of their cause and the legality of the methods their lawyers devised to pursue it.

[179] In the result, I conclude that the chambers judge erred in finding in these circumstances, and with all of the evidence available to him, that the appellants were not acting "honestly and in good faith" within the meaning of s. 33(3)(b) of the Act. I can only conclude that, given the thousands of documents placed before him, in what one judicial colleague has referred to as "dump truck litigation", the chambers judge overlooked relevant documents which gave credence to the appellants’ submissions in that regard. As earlier stated, his conclusion was driven largely by the fact that the appellants had ignored the legal advice proffered by the minority owners and their counsel. I have already expressed my view that this amounted to an error in principle.

[180] In the same vein, I conclude that the chambers judge erred in finding that the appellants acted reprehensibly, either prior to or during the course of these proceedings, so as to attract an award of special costs against them. In essence, the chambers judge tied his finding of reprehensible conduct leading up to and in the course of litigation to his finding that the appellants did not act honestly and in good faith. My conclusion that the appellants were entitled in these circumstances to rely on the advice of their lawyers to establish that they were acting honestly and in good faith precludes a finding that the same conduct could be said to be reprehensible.

[181] There is, however, a basis for finding that other conduct engaged in by these appellants, which was not linked to their breach of s. 32 of the Act, is a basis for denying them costs. In particular, I find the actions of council in allocating further monies to legal fees and authorizing the payment of those fees to yet another lawyer in the face of the order of Mr. Justice Groberman to be sufficiently egregious behaviour in the conduct of this action to justify depriving them of their costs.

CONCLUSION

[182] In the result, I would allow the appeal, and set aside the order of the chambers judge.

“The Honourable Madam Justice Prowse”

Citation:	*Dockside Brewing Co. Ltd. v. Strata Plan LMS 3837,*
	2007 BCCA 183