Management Contracts and the Fiduciary Duty

Published on: January 11, 2001

In the negotiation of management contracts, boards are often are troubled by fairly standard clauses requiring the association to indemnify and defend the management company. Though to be sure there are appropriate limitations to such a clause, boards should understand that the concept of indemnification flows not only from an insistence by the manager that the association stand behind them when they properly perform their designated tasks, but from basic legal principles. As recently noted by a Federal District Court in Illinois analyzing the principal-agent relationship, while the agent (the manager) has a fiduciary duty (a duty of loyalty) to the principal, the principal (the association) has a corresponding duty to indemnify the agent for a loss that results from the agent’s good faith attempt to execute their duties. Thus, even without an express provision in a management contract, associations are deemed to be required to indemnify their manager.

Of course there are limits. The manager must, logically, be acting in the furtherance of the association’s interests, within the scope of its authority and by lawful means. Provided these are strictures are observed, the law assumes that the association will indemnify its manager. Thus, associations should not consider reasonably drafted indemnity clauses in management contracts unusual or unreasonable. Rather, they are an appropriate recognition of the nature of the relationship between the manager and the association