Conflicts of interest occur when a director, or the director's family, stands to benefit financially from a matter before the board. For example, the board votes to award a roofing contract to a company owned by the director or the director's spouse, brother, son, granddaughter, etc. Such transactions/contracts are voidable.

Potential Liability. Conflicts or potential conflicts of interest, however, do not not necessarily create liability if:

1.  Full Disclosure. The interested director makes full disclosure of the conflict.

2.  No Influence on Vote. The interested director should leave the room so remaining directors can discuss the issue fully and freely, and take vote without the affected director.

3.  Just & Reasonable. Even if the director makes full disclosure and avoids influencing the vote, the transaction must be fair and reasonable as to the association at the time it is authorized, approved or ratified. Corp. Code §7233; Corp. Code §310

Recusal. Interested directors may be counted in determining the presence of a quorum at a meeting of the board or a committee thereof which authorizes, approves or ratifies a contract or transaction. Corp. Code §310(c). However, directors must recuse themselves from discussion and voting on issues in which they have a direct personal or pecuniary interest not common to other members of the board. (Robert's Rules, 10th ed., p. 394.) In 1787, James Madison, drafter of the U.S. Constitution and fourth President of the United States, wrote:

No man is allowed to be a judge in his own cause because his interest would certainly bias his judgment and, not improbably, corrupt his integrity. [Federalist Paper #10]

Burden of Proof. If the interested director makes full disclosures and recuses himself and if a disinterested majority of directors approves the proposal of the interested director, the burden of proof falls to the person challenging the transaction. Harvey v. The Landing HOA.

Problems. Even when a director recuses himself, associations should avoid contracting with companies where a director has a financial interest. Such arrangements are fraught with peril both politically and legally.

1.  Political Problems. At election time, other owners may accuse the board member of reaping secret profits, taking advantage of his or her position on the board, doing shoddy work, etc.

2.  Legal Problems. If the work is defective, the board faces the unpleasant prospect of making legal demands on a neighbor and fellow board member. At the same time, they face political problems with the membership for having given the fellow director the contract in the first place.

RECOMMENDATION: So as to avoid such problems, boards should adopt an ethics policy.