The Business Judgment Rule: Protecting Board Decisions

When an Association is faced with a lawsuit over an unpopular Board action or decision, the Board can typically rely on the Business Judgment Rule to protect their decision from scrutiny by the Court.

When the Board acts within the scope of its authority in good faith and with regard to the best interests of the community, its decisions will usually be protected by the Court.

A board can take steps to ensure that its decisions will fall within the Business Judgment Rule. They include the following:

A. The Board should always be aware of, and comply with, the requirements in the governing documents.

B. The Board should always stay informed and ask questions of its hired professionals. It should consider alternative courses of action. Decisions made in good faith are usually upheld; it is the arbitrary decisions that are subject to scrutiny and may not survive a challenge.

C. Rely on the advice of the experts that the Board hires. As volunteers, you may not have expertise or training in all aspects of the association. You are encouraged to rely on the opinions of experts and hired professionals. This includes calling our office for an opinion. It is always prudent to consult your attorney, and remember, we don’t charge you for the phone call. The Board is not required to accept all advice given by professionals; however, if the Board decides to disregard the advice, the specific reasons for doing so should be carefully documented.

D. Avoid conflicts of interest. They can be legal upon disclosure and consent; however, it is advisable to avoid them.

E. When faced with a decision that the Board knows may result in litigation, it is important to look at the situation from an outside objective observer’s position. Sometimes this perspective can help the Board see potential problems and errors in judgment before they occur.

F. It is important for the Board to properly document the decisions it makes and the basis for how it arrived at the decision. Proper documentation can be the Board’s best defense in a lawsuit and it can boost the Board’s credibility.

G. The Board should make sure that all due process requirements are met. These include giving proper notice where it is required and to make sure timing requirements are met. An example of this is when a homeowner requests permission to put up a fence. Typically the association has a set number of days to respond to the request. These timelines must be followed to ensure the Board’s decision on whether to allow the fence will be upheld if called into question in Court. In addition, if the Board is going to deny a request of this nature, the reasons for the denial should be documented.

Through careful consideration and documentation of all board decisions, the Board can protect their decisions from scrutiny by the court.

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