In 2004, Binder Construction Limited ("Binder"), as
general contractor, entered into a construction contract (the
"Bonded Contract") with Vermilion & District Housing
Foundation ("Vermilion") for the construction of an
addition to and the modernization of an existing senior's lodge
(the "Project"). Binder's scope of work included the
supply and installation of resilient sheet flooring
("RSF") for the Project.
Binder obtained a performance bond (the "Performance
Bond") issued by The Guarantee Company of North America
("GCNA"). The Performance Bond named Binder as principal,
Vermilion as obligee, and GCNA as surety.
Following completion of the Project, problems were encountered
with the RSF which had been installed. In 2006, an inspection of
the RSF determined that excessive moisture from either groundwater
or a high water table and hydrostatic pressure appeared to have
forced moisture through the floor slab which was then trapped under
the RSF, causing the adhesive to break down and the RSF to bubble
and ripple.
After Binder and GCNA failed to provide Vermilion with any
solution, in 2009 Vermilion installed weeping tile and replaced the
defective RSF. In having that work carried out, Vermilion incurred
substantial costs. Vermilion also suffered a loss of income as
residents had to vacate the premises while the flooring was
replaced.
Vermilion sued Binder, GCNA and others, advancing a number of
claims including breach of the Bonded Contract and seeking recovery
against GCNA pursuant to the Performance Bond. Vermilion sought to
recover the costs incurred to install the weeping tile and to
replace the RSF and recovery for its loss of income, however, the
total amounts claimed were less than the penal sum of the
Performance Bond.
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II. HELD: Binder was
held liable for 65% of Vermilion's damages for its negligence
and breach of the Bonded Contract and GCNA was held liable under
the Performance Bond for the amounts awarded against Binder,
including loss of income.
The Court held the work of Binder was deficient, it breached its
obligations under the Bonded Contract, and was negligent. The Court
apportioned Vermilion's damages between Binder (65%) and the
architect (35%). After some reductions in quantum, the Court
awarded damages against Binder and the architect for the costs of
the weeping tile, the cost of replacing the RSF, and the loss of
income claimed. The Court held that GCNA's liability was
co-extensive with that of Binder under the Performance Bond,
including for the loss of income awarded.
On the liability of GCNA, the Court reiterated that when
interpreting a performance bond, the Court must consider "the
terms of the underlying contractual relationship and the degree to
which the obligations outlined therein are incorporated into the
bond by reference: APM Construction Services Inc v
Caribou Island Electric Ltd, 2013 NSCA 62 at para 62,
330 NSR (2d) 182."
The Court noted there was conflicting case law on whether a
surety could be liable for costs beyond the "bricks and
mortar", such as liquidated damages or collateral money
obligations found in bonded contracts:
[296] In Whitby Landmark
Development Inc v Mollenhauer Construction Ltd
(2003), 178 OAC 49, [2003] OJ No 4000 (CA), the Ontario
Court of Appeal held that a surety is obliged to fulfill all of the
defaulting contractor's contractual obligations, including
collateral financial obligations such as profit sharing.
[297] However, in
Lac La Ronge Indian Band v Dallas Contracting
Ltd, 2004 SKCA 109, [2004] SJ No 531, the
Saskatchewan Court of Appeal rejected the reasoning in
Whitby Landmark Development Inc,
holding that a surety's obligation is limited to completing the
actual physical construction in the event of the contractor's
default and does not extend to a financial guarantee of the payment
of liquidated damages.
[298] In MGN
Constructors Inc v AXA Pacific Insurance Co,
2013 ABQB 216, 21 CCLI (5th) 10, Graesser J., in obiter favoured
the reasoning in Whitby Landmark Development
Inc and opined that a surety could not arrange for
completion of the contract in accordance with its terms and
conditions unless it was responsible for any acceleration cost to
meet the original schedule and any delay damages the owner was
entitled to if the schedule was not met.
The Court then looked at the Performance Bond which set out four
options open to GCNA in the event of a valid claim. The Court found
GCNA was notified in a timely fashion of Binder's default, but
noted neither Binder nor GCNA responded to the notice of default by
Vermilion. The Court held that in failing to pursue options 1, 2,
or 3, "GCNA elected, by default, to follow option 4; that is,
to pay Vermilion the lesser of the Bond Amount or Vermilion's
costs of completion, less the balance of the contract
price."
The Court held it would have been within the reasonable
contemplation of both Vermilion and GCNA that if it was necessary
to remedy defects in Binder's work, then that remedial work
might result in some loss of income to Vermilion: "...such
losses would fall within the 'cost to complete' the work as
set out in option 4 of the Performance Bond. Such costs fall within
the indemnity obligations of Binder pursuant to the..." terms
of the Bonded Contract.
The Court creatively sidestepped any difficulties posed by the
schism found in the Whitby Landmark Development
Inc and Lac la Ronge Indian
Band decisions by distinguishing both:
[316] Whitby Landmark Development Inc
concerned a provision requiring the contractor to pay the owner
savings realized in carrying out the contract. Lac la Ronge
Indian Band involved a provision entitling the Band to deduct
liquidated damages for delay in completion of a sewage lagoon from
the amount otherwise payable to the contractor. As Vermilion's
loss of income in this case was directly related to the completion
of the work, and was contemplated as such in the Construction
Contract, I find this situation to be distinguishable from those in
both Whitby Landmark Development Inc and Lac la Ronge
Indian Band. Therefore, it is not necessary to comment further
on the legal issues addressed in those cases.
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