Canada: Labour And Material Payment Bonds On The Docket At The Supreme Court: New Obligations May Be Coming For Owners And Contractors

Late last year the Supreme Court of Canada heard a case that, regardless of how it is decided, will likely affect the construction industry across Canada.

Valard Construction Ltd. v Bird Construction Company is about a relatively simple issue: should owners and contractors who require their subcontractors to post labour and material payment bonds (L&M Bonds) be obligated to notify potential claimants that the bond exists?

Trustee obligations

L&M Bonds are widely used in the construction industry to protect owners and contractors from having liens placed on projects or having trades walk off the job due to non-payment. Owners or contractors will require the party they are contracting with to purchase an L&M Bond from its insurance company and post it to the project. The party requesting the bond holds it as a trustee, or "obligee," for the benefit of subcontractors and suppliers further down the construction pyramid. If the party who purchased the L&M Bond, known as the "principal," fails to pay its subcontractors and suppliers, those subcontractors and suppliers can make a claim against the bond for payment from the insurance company who issued it, known as the "surety."

In many provinces, legislation requires the government to post copies of L&M Bonds in conspicuous places on job sites. Owners and contractors on private jobs do not currently have the same obligation. This is potentially problematic because L&M Bonds require strict compliance with timelines for a subcontractor or supplier to successfully make a claim against the bond (typically within 120 days of a trade's last day of work on site). This leads to an all-too-common problem: subcontractors and suppliers often do not find out about an L&M Bond's existence until it is too late, which is exactly what happened to Valard Construction Ltd.

Subcontractor not paid

In the matter before the Supreme Court of Canada, Valard was hired by Langford Electric Ltd. to perform work on an oil sands project in Alberta. Langford had itself been engaged on the project by Bird Construction Company. Valard worked for two months on the project but was not paid by Langford for over $600,000 worth of work. Valard did not lien the project because it feared "rocking the boat" and being blacklisted from bidding on future work in the area. Instead, Valard pursued Langford in court and ultimately obtained a default judgment. However, by the time Valard obtained a judgment, Langford was insolvent.

Shortly thereafter, the project manager for Valard happened to hear that Bird had required its subcontractors on another job to post L&M Bonds. The project manager immediately contacted Bird and asked whether a bond had been obtained by Langford for the present job. Bird provided Valard with a copy of the bond and Valard immediately made a claim; however, it was too late – the 120-day deadline for making a claim had long since passed.

Valard ultimately sued Bird for breach of trust. Valard alleged that Bird, as the trustee, had a positive obligation to notify subcontractors and suppliers that Langford had obtained an L&M Bond. At the very least, Valard argued Bird should have posted a copy of the bond in the site trailer where mandatory "toolbox" meetings were held daily. It would not have been onerous for Bird to do so, and the evidence at trial disclosed that, had a copy of the bond been posted, Valard's project manager would have become aware of its existence within the 120-day timeframe.

New obligations?

The trial judge dismissed Valard's claim and the Alberta Court of Appeal upheld the decision, finding there was no legal basis for imposing upon Bird a "duty to inform" subcontractors and suppliers about the bond's existence. However, there was a strong dissenting opinion from Justice Wakeling of the Court of Appeal, which is likely what piqued the Supreme Court of Canada's interest.

In his dissent, Justice Wakeling applied basic principles of trust law more generally to find the opposite – Bird was a trustee, holding something of benefit to Langford's subcontractors and suppliers, and had a positive duty to at least try to make them aware of the existence of that benefit. Justice Wakeling was persuaded by the fact Bird could have easily brought the bond's existence to the attention of its beneficiaries by posting it in the site trailer or by contractually obligating Langford to provide a copy of the bond to all of its subcontractors and suppliers.

The Supreme Court rarely considers construction matters, but this one appeared to be of particular interest to the seven justices sitting on the case. The court reserved its decision to consider the matter further, and it may be several months before it is released.

In the meantime, there are still important lessons to be learned for parties at all levels of the construction pyramid. For owners and general contractors who require L&M Bonds to be obtained, it would be wise to start posting copies of the bonds at job sites or to otherwise bring them to the attention of subcontractors and suppliers, for example, at kick-off meetings or through meeting minutes that are circulated. For subcontractors and suppliers, the case serves as a reminder that knowledge is power. Parties lower on the construction pyramid should ask if an L&M Bond exists early on in the life of a project, or at the very least at the time of demobilization.

About Norton Rose Fulbright Canada LLP

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