Introduction and Background

Recently, in Valard Construction Ltd v Bird Construction Co (Valard), 1 the Supreme Court of Canada (SCC) decided that the trustee of a labour and material bond (the L&M Bond) is required to reasonably disclose the existence of the L&M Bond to the potential claimants.

Typically, owners and general contractors (the Trustee) contractually require that general contractors and major subcontractors, respectively (the Principal), obtain L&M Bonds from a surety (the Surety) to ensure that the Principal's suppliers and subcontractors (the Claimants) are paid if the Principal experiences financial difficulty. In so doing, the L&M Bond provides the Trustee with security that the Claimants will not register liens or undertake work stoppages due to unpaid bills. However, because the Claimants are third parties to the contract between the Trustee and Principal, the industry has structured L&M Bonds on a trust basis to avoid contractual problems relating to the third-party beneficiary rule.

Historically, the construction industry practice, and arguably some case law, supported the position that the burden was on Claimants to make inquiries about L&M Bonds to protect their interests. In Valard, however, Valard sought recovery against Bird for breach of trust because it failed to advise Valard about the existence of the L&M Bond, causing Valard to miss the deadline for claiming against the Surety.

Facts inValard

Suncor Energy Inc. retained Bird Construction Company as its general contractor for an oilsands project near Fort McMurray. In turn, Bird Construction Company contracted with Langford Electric Ltd. (the Subcontract), who further contracted with Valard Construction Ltd.

Pursuant to the Subcontract, Langford was contractually required to obtain and provide Bird with an L&M Bond, which it did through the surety company, Guarantee Company of North America. The L&M Bond obtained by Langford provided that any Claimant had to notify Bird, Langford and the Surety within 120 days of the Claimant's last provision of work. Upon receipt of the L&M Bond, Bird filed it at its office in Edmonton, Alberta.

During the course of construction, Langford became insolvent. As a result, Valard had unpaid invoices for $660,000.17. Valard was unaware of the existence of the L&M Bond, in part because L&M Bonds were uncommon in the oilsands sector. Therefore, Valard missed the 120 day notice period for claiming against the L&M Bond. Subsequently, on another project, Valard became aware that Bird had an L&M Bond and inquired about the status of an L&M Bond for the work performed for Langford. Bird advised that there was an L&M Bond for that work. Valard claimed on the L&M Bond but the Surety dismissed the claim for lack of proper notice. Valard issued a claim against Bird for breach of trust for failing to notify it of the existence of the L&M Bond.

Both the trial judge and a majority of the court of appeal dismissed Valard's claim. Valard appealed to the Supreme Court of Canada

The Supreme Court of Canada's Decision

A majority of the SCC allowed Valard's appeal, reasoning as follows:

In general, whenever "it could be said to be to the unreasonable disadvantage of the beneficiary not to be informed" of the trust's existence, the trustee's fiduciary duty includes an obligation to disclose the existence of the trust. Whether a particular disadvantage is unreasonable must be considered in light of the nature and terms of the trust and the social or business environment in which it operates, and in light of the beneficiary's entitlement thereunder.2

The SCC went on to hold that since Valard was a potential Claimant on the L&M Bond, Valard required knowledge of the trust in order to enforce its claim against the L&M Bond. Further, as the trustee, Bird had an obligation to disclose the existence of the L&M Bond to Valard.

Having found a duty to disclose the existence of the L&M Bond, the SCC assessed what the content of that duty required. In this regard, the SCC held:

Like all duties imposed upon trustees, the standard to be met in respect of this particular duty is not perfection, but rather that of honesty, and reasonable skill and prudence.... It is well established that, where all potential beneficiaries cannot be identified at the time of the trust's creation, the trustee's obligation to disclose the existence of the trust extends not to ensuring that every potential beneficiary knows of the trust, but only to taking reasonable steps to that end.3

The SCC accepted that for construction projects in which L&M Bonds are common, "it may well be that very little, or even nothing, will be required on the part of a trustee to notify potential beneficiaries of the trust's existence."4 However, in Valard, where the Court found that L&M Bonds were uncommon in the specific industry, the SCC held that Bird had to do "more than nothing".5 The Court went on to hold that Bird could have discharged its burden by posting a copy of the L&M Bond in its site trailer, which was frequently visited by the subtrades at the project site.

Lessons Learned in Valard

Based on Valard, owners and general contractors in particular should consider the following principles:

  • the Trustee to an L&M Bond is not required to ensure that every subcontractor and supplier is aware of the existence of the L&M Bond. However, the Trustee must prove that it acted honesty, and with reasonable skill and prudence to ensure that potential Claimants were aware of the L&M Bond;
  • even if L&M Bonds are well-known in the specific industry, a Trustee who "does nothing" is significantly increasing its risk;
  • posting the L&M Bond in a publicly available location on the construction site is a good starting place to ensure that Claimants can become aware of the L&M Bond's existence; but the extent of the steps that a Trustee should take to disclose the existence of the L&M Bond is fact-specific. This is a nebulous and vague test, which creates some uncertainty (and potentially increased costs of construction).

Finally, having held that L&M Bonds create equitable obligations that apply to all trustees, Trustees of L&M Bonds should consider the other fiduciary duties that may arise. For example, because a trustee cannot delegate its office to another person, a Trustee of an L&M Bond could not simply require its contracting Principal to disclose to Claimants the existence of the L&M Bond. Rather, the Trustee must satisfy itself that the disclosure has occurred. In this regard, the equitable duties that apply to trustees are potentially wide-ranging.

Footnotes

1 2018 SCC 8.

2 Valard at para 19.

3 Valard at paras 26 and 27.

4 Valard at para 29. [Emphasis added.]

5 Valard at para 29.

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.