In the recent BC Supreme Court decision Orchiston v. Formosa, 2014 BCSC 1080, the BC Supreme Court has ruled on the interpretation to be given to section 191 of the Community Charter and, in particular, has considered defences available to local government elected officials who may be found to have authorized the expenditure of money without lawful authority.
The background of the case was a loan made by the municipality to a development corporation known as the Powell River Waterfront Development Corporation (the “Corporation”) of which the City was the sole shareholder. The City had sought and obtained legal advice that such a shareholder loan to the Corporation would be lawful. The respondents were elected to Powell River Council after the shareholders loan had been made but relying upon the earlier opinion, the City granted a further loan approved by Council in the amount of $12,000.00.
These loans were eventually repaid by the Corporation shortly after the municipality entered into a partnering agreement with the Corporation under section 21 of the Community Charter. In the absence of a partnering agreement at the time the loans were made, the loans had been an unauthorized form of assistance to a corporation, even though they were done at market interest rates. In the Orchiston case, the court confirmed that under the Community Charter the lending of money to a “business” such as the Corporation constituted assistance which could only be done if there was a partnering agreement in place.
The parties agreed that the resolutions that had been adopted by the municipal council to make the loan had been done relying in good faith on the advice of city staff and the municipal solicitor. The parties further agreed that there was no evidence that the city staff or the municipal solicitor had been dishonest, grossly negligent or had engaged in malicious or willful misconduct.
However, the petitioners sought to have the court declare that the Council members were personally liable for the loans paid before a partnering agreement had been signed.
Section 191(1) of the Community Charter reads as follows:
“191(1) A council member who votes for a bylaw or resolution authorizing the expenditure, investment or other use of money contrary to this Act or the Local Government Act is personally liable to the municipality for the amount.”
The court ruled, firstly, that the councillors were not liable as there was no outstanding liability under section 191(1) of the Local Government Act, given that the outstanding loan amounts had in fact been repaid by the Corporation.
The court interpreted section 191(1) as providing a municipality with “a measure of security in the event that municipal councillors spend public money in a manner not authorized by statute or that money is not covered. It is, in effect, a form of indemnity; the councillors are personally liable for the amounts improperly paid while the funds remain outstanding but, upon repayment or recovery, the councillors’ liability ceases.”
The court found that “to hold that councillors are liable to the City for the amount of unauthorized expenditures where the funds have been recovered would be to transform section 191(1) into a penalty provision under which councillors would, in effect, be fined for unwittingly voting in favour of an unauthorized expenditure that results in no financial loss or damages to the City”.
The court ruled that while it was open to the province to create such fines, this would require a much clearer intent with much more specific and express language than was actually used in section 191(1).
The court also went on to consider whether, even if section 191(1) were to apply, council members could take advantage of a defence of good faith in the circumstances. Section 191(2) of the Community Charter provides an express exception to section 191(1) and states:
“As an exception, subsection (1) does not apply if the council member relied on information provided by a municipal officer or employee and the officer or employee was guilt of dishonesty, gross negligence or malicious or willful misconduct in relation to the provision of the information.”
As stated above, there was no allegation that the advice provided to the municipality had been dishonest, grossly negligent, malicious or constituted willful misconduct. Accordingly, the petitioners alleged that the plain wording of section 191(1) combined with the limited exclusion from liability specified in section 191(2) exposed councillors to personal liability in other circumstances where they had authorized an unlawful expenditure.
The petitioners pointed out that there are many examples contained in section 100 to 108 of the Community Charter where good faith is specifically stated to provide a defence to the consequences of a contravention of statutory rules, such as the rules related to conflict of interest, the use of insider information or acceptance of gifts. The petitioners argued that section 191(2) provided a specific and quite narrow defence in order to reinforce the accountability of public officials for proper use of taxpayer monies.
The court found that while section 191(2) did provide for an exception to personal liability in some circumstances, the inclusion of that exception did not operate to exclude an exception or defence based on good faith or honest belief. Accordingly, the court disagreed that accountability objectives of section 191 required that municipal councillors be liable for actions taken in good faith and in reliance on honest but mistaken advice. The court ruled that such an interpretation would have “the potential to weaken our municipal government structure by serving as a significant disincentive to individuals who are considering serving their communities by running for municipal office”.
Finally, the court found that even if the interpretation of section 191 advanced by the petitioners was correct, the court nevertheless had a discretion to deny declaratory relief and the court would have exercised that discretion in favour of the respondents.
As a result of this decision, despite the wording of section 191(1) of the Community Charter, a defence of good faith and honest belief will now be available to elected officials who may authorize an expenditure of money that is in fact unlawful. This is good news for elected officials. This defence is available regardless of whether the advice provided by staff was incorrect because of simple negligence, gross negligence or willful or malicious conduct on the part of the staff. This will provide a significant measure of protection for elected officials against personal liability which will relieve them of a significant risk exposure that would exist without the availability of this defence.