Photo credit: Doane Gregory
In September of 2009 the Band received $125,000 from the Regional District as compensation for the District’s use of a road that crosses one of the Band’s reserves. At an in-camera meeting, the Council decided to pay themselves $5,000 each as a “retroactive honorarium” for their work as members of Council.
At the time, the Councillors were receiving honoraria of $360 per month. This amount was regarded as inadequate but there had not been enough Band funds available to address this. When the $125,000 was received, the Council voted to retroactively address the low honorarium through a one-time payment.
The Band was a section 69 Band, that is, the Band instead of the Minister could “control, manage and expend” its revenue monies under section 69 of the Indian Act. The Band did not have a financial administration bylaw governing the processes and procedures for the expenditure of Band funds and there was no evidence of a Band Council resolution or minutes authorizing the payment or any other form of notice regarding the payment.
A Band member became aware of the payments in 2011 and filed a claim seeking a declaration that each of the Councillors acted in breach of their fiduciary duties, an order that each was liable to return the $5,000 payment to the Band, and punitive damages.
Photo credit: Doane Gregory
The trial judge found that the claim of breach of fiduciary duty had not been proven. He found that Council had acted in accordance with the custom and practice of prior Band Councils. Honorarium and travel expenses had been dealt with in the past at Council level and there had never been advance consultation with members. There was no evidence that such matters were not within the scope of the Band Council’s powers and therefore the Band was bound by the decision, unless the defendants had acted in bad faith.
As the payments were reflected in the Band’s financial statements, the Court found that the defendants had no intention of keeping the payments secret. Further the amounts were small compared to other cases, the payment was related to services provided by the Councillors, and there was no “stench of dishonesty.” Overall a breach of fiduciary duty was not established because the plaintiff could not show that the payment was detrimental to the Band.
COURT OF APPEAL
The Court of Appeal took an entirely different view of these facts. In overturning the decision of the trial judge, the Court of Appeal focused on the “two most fundamental and long standing obligations of fiduciaries – the ‘no conflict’ rule and the ‘no profit’ rule.” The no conflict rule means that a fiduciary must not put himself in a position where there is a conflict or significant possibility of a conflict, between his personal interests and his fiduciary duty. The no profit rule requires a fiduciary to account for any benefit obtained by reason of or use of his fiduciary position – he cannot profit from his position.
The Court explained that there are exceptions under which trustees, corporate directors, band councillors, municipal councillors, and other persons entrusted with the funds of others are permitted to make decisions regarding their own remuneration that would otherwise be regarded as a breach of the ‘no profit’ rule. The exceptions are provisions in trust agreements, or bylaws or rules that specifically authorize such a decision by the fiduciary.
The Court noted that section 83(1) of the Indian Act provides that subject to the Minister’s approval, a band council may make bylaws for various purposes, including “(b) the appropriation and expenditure of moneys of the band to defray expenses,” and “(c) the appointment of officials to conduct the business of the council, prescribing their duties and providing for their remuneration out of any moneys raised…”
In the absence of any bylaw or other rules to govern such payments, the Court looked at section 2(3) of the Indian Act which provides that, unless the context otherwise requires or the Act otherwise provides,
(a) a power conferred on a band shall be deemed not to be exercised unless it is exercised pursuant to the consent of a majority of the electors of the band; and
(b) a power conferred on the council of a band shall be deemed not to be exercised unless it is exercised pursuant to the consent of a majority of the councillors of the band present at a meeting of the council duly convened.
In this case, Council did not receive the consent of the majority of the electors for the payments and the Court said there was no basis for this “very fundamental statutory decision” being ignored. Further, there was no evidence that the Band by its custom or practice, represented that Council members could grant themselves a significant “bonus” from Band revenues.
In addressing the no-conflict rule, the Court found that even under the more flexible approach (i.e., considering whether the trustee was acting in good faith and whether the gain was one that the beneficiary could have benefitted from), there was a breach of fiduciary duty. The removal of $25,000 from Band funds and the payments of $5,000 to each of the defendants were a significant personal benefit to the Councillors and a detriment to the Band.
The Court concluded that Chief and Council will be held to the same high standard to which other fiduciaries are held and ordered that the defendants were each liable to pay back the $5,000 to the Band. If the plaintiff wished to pursue punitive damages, he could return to the lower court for a further hearing.
This case is a reminder of the fundamental obligations that Councillors have as fiduciaries and it has a number of practical implications for Band governance, especially with respect to “Indian moneys” under the Indian Act. In particular, it provides another reason why First Nation governments should consider putting in place financial administration bylaws under section 83 of the Indian Act or financial administration laws under the First Nations Fiscal Management Act. Without such a bylaw or law, this decision tells us that Council will be required to obtain the consent of the majority of the electors for expenditure of Band revenue monies under the Indian Act. This could be a very onerous undertaking. As well as bylaws or laws, Councils should develop financial administration and conflict of interest policies. Implementing bylaws or laws and policies to provide accountability and transparency in financial management is essential to good governance. These are steps that a First Nation government can take to help ensure they are fulfilling their fiduciary duty.
This case summary provides our general comments on the case discussed and should not be relied on as legal advice. If you have any questions about this case or any similar issue, please contact any of our lawyers.