Q. We have a small condo board and community. Do you think it’s necessary and legal to make our board members sign a confidentiality agreement even if it’s not required by our bylaws?”
—Confidential in Clifton
A. “The short answer is yes,” says J. David Ramsey, a shareholder attorney at the law firm of Becker & Poliakoff, LLP, located in Morristown.
“Boards are deliberative bodies that may establish their own rules for the members of the board, provided those rules are not inconsistent with the terms of the governing documents. This does not mean that the bylaws must specifically authorize a requirement for the execution of a confidentiality agreement, it means only that there is no prohibition on such an agreement. In the well-known Twin Rivers case, one of the issues was whether the board could require each board member to sign a confidentiality agreement that contains a liquidated damages provision.
"Liquidated damages" means that there would be a stipulated sum of money due the association for violation of the agreement, whether or not the association actually suffered any damages. The appellate court reviewing this issue concluded that the board could not require that each board member accept a liquidated damages provision. It did not, however, question whether the board could require such an agreement.
“In conjunction with such agreements a common questions is: Where a board member refuses to sign such an agreement and it is not required by the governing documents, what may the association do? The answer in most situations is that the board cannot refuse to allow the board member to serve.
“Usually, an elected board member may be removed only by a vote of the owners, not by the board itself. As a result, the only sanction the board may impose is to deny the recalcitrant board member access to confidential information. The purpose of the confidentiality agreement is, of course, to confirm that the board member understands his or her duty to the association to not release the contents of confidential materials to those who are not on the board.
“A board member who refuses to acknowledge a confidentiality obligation may be restricted from receiving such information. While that board member may still participate in all matters that do not require review or discussion of confidential information, he or she may be denied that information when the board member declines to sign a confidentiality agreement.”