A recent B.C. Court of Appeal case sheds insight into good First Nation governance and the fiduciary obligations of Chiefs and Councillors. The decision is of practical importance to Band Councils and suggests that Band Councils cannot place themselves in a position where their personal interests conflict with those of the Band without express authority to do so.
The B.C. Court of Appeal, in Louie v Louie, 2015 BCCA 247 overturned a previous decision of a trial judge in a case involving whether Band Councillors could retroactively award themselves an honorarium. The Court of Appeal found that Council members of Lower Kootenay Indian Band breached their fiduciary duty by giving themselves a $5000 retroactive honorarium after successfully negotiating a $125,000 deal for the Band.
Background and Procedural History
In 2009, after the Lower Kootenay Indian Band successfully negotiated a $125,000 settlement from the Province, five Council members held a private meeting and decided to pay themselves $5,000 each as an honorarium for services rendered. This one-time payment was meant to retroactively address the low honorarium the Councillors were receiving, which was $360 per month.
Two years later, a Band member found out about the payments and brought a law suit against the Council members (on behalf of himself and the Band) alleging that the Council members breached their fiduciary duty by paying themselves $25,000 from Band funds. The Band member also alleged that the Council members acted in bad faith by keeping it a secret and that they failed to follow the financial procedures under the Indian Act.
The Council members denied the allegations. They argued that the decision to pay themselves was made within the scope of the Band Council’s duties and taken in accordance with the customs and procedures of the Band. It is important to note that the Band did not have any financial administration or expenditure by-laws to deal with Band finances and there was no evidence that the payments were authorized (i.e. no minutes from the meeting, no Band Council resolutions or any form of notice).
At trial, the trial judge found that the Council members did not breach their fiduciary duty and made several findings:
- in the absence of a constitution or a by-law dealing with the administration of Band finances, the Council members acted in accordance with the customs and practices of prior Band Councils (i.e. it was not irregular for compensation issues to be decided in private).
- the payments were reflected in the Band’s financial statement and, as such, the Council members were not trying to conceal the payments.
- there was no evidence that the Band Council could not make decisions regarding pay increases, so the Band was bound by the Band Council’s decision because they did not act in bad faith.
- the Council members did not sign their own cheques, the payments were small, and the payments were related to Band Council services.
- it was not shown that the Council members’ decision was “to the detriment of the Band.”
Decision of the B.C. Court of Appeal
The B.C. Court of Appeal overturned the decision of the trial judge and found that the Council members breached their fiduciary duty. They were each ordered to re-pay $5,000 to the Band. The Court of Appeal further held that the Band member could pursue a claim for punitive damages at a later date.
In arriving at this conclusion, the Court of Appeal reviewed the two most fundamental obligations of fiduciaries (the “no conflict” rule and the “no profit” rule). Under these rules, a Council member:
- cannot place themselves in a position where his or her personal interests and their duty to the Band conflict; and
- cannot profit from their position as a fiduciary and must account for any benefit or gain obtained.
The Court of Appeal observed that there are exceptions to when fiduciaries entrusted with funds (whether it be trustees, directors or Council members) can determine their own remuneration. For example, trust clauses, by-laws or rules can authorize such a decision and “are generally required to be strictly complied with and often require publication of the bylaw or resolution to the members of the group (here, the Band)…”
The Court of Appeal reasoned that in the absence of by-laws or rules authorizing the payment of the Council members’ honorarium, s. 2(3) of the Indian Act must be complied with. Under this provision, a band can exercise its power only with the consent of a majority of electors of the Band and the Councillors of the Band present at a meeting of the Council. In this case, there was no evidence that consent was obtained.
The Court of Appeal notes the different approaches courts have taken with respect to the “no conflict” rule. Some courts have found that the subjective motivations of the fiduciary, the absence of actual harm, and whether the fiduciary profited are irrelevant factors. The “flexible” view is that so long as a fiduciary acts in the best interest of the beneficiary, they will not necessarily be ordered to give back any gain, even if there is a conflict of interest. The reasoning is that a fiduciary does not need to be penalized if they did not actually compromise the beneficiary. The Court of Appeal concluded that even if the more “flexible” approach applies, the Council members acted to the detriment of the Band and the payments benefitted nobody but themselves.
The Court of Appeal concluded on this issue by holding that the Council members personally benefitted without express authority to do so:
The conclusion seems to me inescapable that this was a breach of fiduciary duty, even in the context of a relatively informal and custom-based governance structure. In my view, such a structure should not deprive members of the Band of the protection of the fiduciary principle.
The evolution of case law around the fiduciary obligations of Band Councils is of practical importance. Council members are often acting in a myriad of fiduciary roles (e.g. as elected officials, trustees, and directors and officers of First Nation owned corporations). In addition to wearing many hats, Band Councils often deal with extremely difficult issues that have significant social and economic impacts. Not only are they tasked with maintaining the well-being of their citizens, they are also attempting to build or re-build their governments and economic institutions. To do this effectively, the ruling of the B.C. Court of Appeal highlights the need for Band Councils to familiarize themselves with the duties that accompany being a fiduciary— not only to avoid potential legal liabilities, but also to maintain effective governance practices.
First Nation governments should begin to think about what good governance means for their communities and how can this be achieved within their communities. The foundation of good governance must include accountability and transparency. There are several tools that First Nation governments can use to achieve this. For example, Band Councils can consider passing financial administration and expenditure by-laws under s. 83 of the Indian Act or the First Nations Fiscal Management Act (“FMA”). Under the FMA, First Nations will have access to several institutions that work with the First Nation governments to help build internal capacity and strengthen governance. In addition, First Nations may also want to think about implementing their own financial constitutions, rather than being mandated by federal legislation.
Beyond implementing financial administration policies and by-laws, there are other methods Band Councils can use to improve accountability and transparency. One key practice that Councils should be using is keeping track of how decisions are made (for example, ensuring minutes at Band Council meetings are taken or copies of Band Council resolutions are kept).
Another issue more Councils are facing is the implication of Band Councils taking on more corporate responsibilities. Where a Council member is contemplating being a director and officer in a corporation, the Council member should be familiar with the additional fiduciary duties that may be imposed, and the potential conflicts of interest that may arise as a result of wearing more than one hat.
While these are some suggestions, there is no “one size fits all” approach to good Band Council governance. The process for re-building effective First Nation governance begins, however, with being aware of the obligations that flow from being a fiduciary, which is context specific. The Louie v. Louie decision is a step forward in better understanding those fiduciary obligations.