Canada: Part 2: Unpaid Subcontractors Beware

The Supreme Court's Decision in Valard



On September 14, 2016, we published Unpaid Subcontractors Beware, which commented on the Court of Appeal's decision in Valard Construction Ltd v Bird Construction Company, 2016 ABCA 249. In that decision, the Court of Appeal held that the trustee under a labour and material bond (L&M Bond) had no duty to inform subcontractors of the bond's existence.

On February 15, 2018, the Supreme Court of Canada overturned the Alberta Court of Appeal and held that the trustee under an L&M Bond may in fact be obligated to disclose the existence of the bond to potential beneficiaries (Valard Construction Ltd v Bird Construction Co, 2018 SCC 8). This outcome will have a particular effect on managing risk in construction projects and on the construction and surety industries in general. In this blog, we comment on the Supreme Court's decision and its implications.

Factual Background

The respondent, Bird Construction Co. (Bird), was a general contractor that subcontracted with Langford Electric Ltd. (Langford) in connection with an oil sands construction project. As part of the subcontract, Langford was required to obtain an L&M Bond naming Bird as the trustee. The L&M Bond provided security in the event workers or materials were not paid for by Langford. A beneficiary under the bond, being a subcontractor that provided labour or materials for the project without receiving payment, was entitled to claim against the L&M Bond for the unpaid sum.

Langford then entered into a subcontract with Valard Construction Ltd. (Valard) pursuant to which Valard was to provide directional drilling work on the project. Langford did not fully pay Valard for its services, which then made Valard a potential beneficiary under the L&M Bond. The L&M Bond, however, provided that a claimant (in this case Valard) must provide notice of a claim to the surety within 120 days of that claim arising. No one told Valard that the L&M Bond existed until after that 120-day period had lapsed, and because Valard gave notice of its claim after the 120-day period, the surety denied the claim.

The Alberta Court of Queen's Bench held that, as a trustee under this standard form L&M Bond, Bird was not required to notify potential claimants of the existence of the bond. Valard appealed this decision. The Alberta Court of Appeal dismissed Valard's appeal and agreed that a trustee under an L&M Bond has no obligation to notify a beneficiary of the existence of a bond. Rather, the trustee's obligation is only to accurately respond to a beneficiary's inquiry as to whether such a bond exists. Valard appealed this decision to the Supreme Court of Canada.

The Supreme Court Decision

A majority of the Supreme Court disagreed with the Alberta Court of Appeal, and held that a trustee of an L&M Bond in the oil and gas industry has a duty to disclose the existence of the bond. The standard of disclosure that must be met is not perfection, but rather one of honesty, reasonable skill, and prudence. What a trustee must do depends on the facts that the trustee ought to have reasonably known at the material time.

Justice Brown, writing for the majority, held that an honest, reasonably skilled and prudent trustee in the circumstances would have known that L&M Bonds were uncommon in private oil sands construction projects such that notice to the beneficiary (in this case Valard) should have been given. However, the majority limited this duty by finding that the trustee does not have to give notice of an L&M Bond's existence to those beneficiaries whose interest is so remote that vesting is unlikely.

The Supreme Court found that Bird was required to notify Valard because L&M Bonds are uncommon in private oil sands projects and because Valard's interest was not too remote. The Court also observed that, in industries where L&M Bonds are common, the trustee may not be required to notify potential beneficiaries.

Interestingly, there was no industry evidence on the record that L&M Bonds are uncommon in oil sands construction projects and the only evidence was that of a Bird employee who had never encountered such a bond before.

The Court held that Bird did nothing to notify Valard of the existence of the bond and therefore, breached its duty to disclose when applying the standard of honesty, reasonable skill, and prudence. The majority said that Bird could have, for example, posted a notice of the bond on the bulletin board in the project site's trailer office. However, as Bird had not taken any steps to notify Valard of the existence of the L&M Bond, Bird had breached its duty as a trustee under the bond.

Concurring in the result, Justice Côté further noted that Langford sent an e-mail to Bird, copied to Valard, that requested guidance on how to proceed with their dispute over unpaid invoices. He held that, given Bird's knowledge of the disputed invoices, Valard was entitled to expect that if an L&M Bond were available, its existence would be disclosed by Bird.

In dissent, Justice Karakatsanis disagreed with the majority that, as a matter of fact, L&M Bonds are uncommon in oil sands construction projects. She further held that imposing different obligations depending on the industry introduces uncertainty and instability. As such, Justice Karakatsanis found that there is no legal basis to require the trustee to notify potential beneficiaries under a bond.

Implications

L&M Bonds give subcontractors a safety net in the event that a general contractor does not pay them. The Supreme Court decision arguably reinforces this protection by imposing a duty on general contractors as trustees to notify subcontractors of the existence of an L&M Bond—at least in oil sands construction projects. In other industries, a court may find that no such notice may be required, which creates uncertainty as to whether or not the general contractor (as a trustee under the L&M Bond) is supposed to give notice of the bond to subcontractors. A risk-averse contractor may therefore wish to err on the side of caution and disclose the existence of L&M Bonds to all of its subcontractors and suppliers who may become beneficiaries, regardless of the industry in which they operate. Finally, it should be a standard practice for all subcontractors to make written inquiries at the start of any project regarding the existence of any L&M Bond.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Brian P. Reid
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