The Business Judgment Rule
Community Association board members frequently ask, “What is the standard we’re held to when we vote and make decisions?” The standard of conduct in Oregon and Washington is colloquially known as the “Business Judgment Rule.” Application of the Business Judgment Rule comes into play in nearly all board decision making from deciding how far to pursue a collections matter to selecting a contractor for multimillion dollar repairs to raising or lowering monthly assessments.
In Oregon, the standard is contained in Oregon Revised Statutes (ORS) 65.357, the same statute applicable to other corporate boards of directors. In Washington, the virtually identical standard is found in Revised Code of Washington (RCW) 24.03.127.
In both states, the rule mandates that a director act in (1) “good faith”; (2) with care of an “ordinarily prudent person in a like position would exercise under similar circumstances”; and, (3) “in a manner the director reasonably believes to be in the best interests of the corporation.” The point is that in focusing on reasonableness and the care of an ordinarily prudent person, the Business Judgment Rule doesn’t necessarily require a single decision in any set of circumstances. It allows for a range of reasonable decisions.
Not only does the Business Judgment Rule provide a standard by which directors can measure their conduct, it also provides a legal defense to many claims against boards, board members, and/or associations. Under the Business Judgment Rule, a court will typically not second guess board action when the board has acted reasonably and in good faith.
In applying the Business Judgment Rule, it is critical to note that a director is entitled to rely on information, opinions, reports, or statements prepared or presented by legal counsel, accountants, or other professionals or experts. Such professionals may include community managers so long as the director reasonably believes the advice of the manager is within his or her professional competence as a manager.
Boards may also rely on information or recommendations generated by committees so long as the individual board members reasonably believe the committee “merits confidence.”
This reliance can also provide a legal defense, sometimes referred to as the defense of “advice of counsel” when the decisions relate to legal matters. Directors of common interest communities are not expected to know everything. It is reasonable for a board to seek and then follow professional advice in making decisions that affect the community.