Conflicts of Interest: How Community Association Leaders Honor Their Duties 

Background and Key Points

As American society becomes more litigious, the individuals who serve on community association boards face increased risks of personal liability for improperly performing their duties. While attorneys and accountants have professional codes that govern their conduct, few state or private regulations exist to help directors and managers of community associations perform their duties properly.

This report will help the board and the manager to perform their duties and avoid conflicts of interest. It highlights areas of community association activity in which actual or potential conflicts of interest may arise, discusses ethical considerations in conflict situations, and includes suggestions for addressing these conflicts.

Key Points

• A conflict of interest is a situation in which an individual's duty to one leads to the disregard of a duty to another.
• An association's manager owes a fiduciary duty to the association--that includes a duty of care, loyalty, and honesty.
• Managers owe a duty of confidentiality to the associations that they represent. The duty of confidentiality continues after the client relationship has ended.
• Managers should not generally accept gifts or other favors from vendors who provide supplies to their clients.
• Members of the association's board owe the association the same duty of loyalty, care, and confidentiality as the manager. Board members may be held personally liable for the violation of these duties.
• Boards must enforce the association's covenants and rules and regulations consistently. Board members should never make exceptions for other board members or for friends.

CHAPTER 1--Recognizing Conflicts of Interest

Board members volunteer their services for any number of reasons, ranging from a desire to participate in decisions affecting their community, to a more personal need for a new challenge. However, many of them accept these positions without a real appreciation of the nature of the responsibility they have undertaken. Board members owe the association both a duty of loyalty and a duty of care; a violation of either of those duties could lead to personal liability for a director. While directors and officers liability insurance, personal liability insurance, and indemnification provisions in many association legal documents offer some protection, it is vital that board members and community managers be able to identify conflicts of interest and deal with them as they arise.

A conflict of interest is a situation in which an individual's duty to one leads to the disregard of a duty to another. U.S. v. Miller, 463 F. 2d 600 (1st Cir. 1972). In other words, a conflict of interest exists when an outside influence affects one's ability to make an unimpeded, independent decision or when an individual owes duties to separate entities with conflicting interests. Whether or not a specific situation constitutes a conflict of interest is a factual question that must be answered on a case-by-case basis.

A conflict of interest does not automatically create personal liability. A manager or a board member may incur personal liability only when he or she fails to recognize and properly address a conflict of interest. In recognizing the existence of a conflict of interest, a manager or director must be able to distinguish between potential and actual conflicts of interest.

A potential conflict of interest occurs when an individual has interests that may conflict at some point. For example, a director who has a financial interest in a landscaping company has a potential conflict of interest if the landscaping company is not seeking the association's business. This potential conflict becomes an actual conflict if the landscaping company and association enter into a business relationship. At that point, the director has two competing interests. It would be in the director's personal financial interest to see that the landscaping company gets the business at the highest price possible. However, it also is the director's duty to the association to consider all landscaping companies and to obtain the best service at the best price.

[This sample contains only a portion of Chapter 1.]