Canada: SCC Provides Guidance On Trustees' Duty To Disclose Construction Bonds To Beneficiaries

The Supreme Court of Canada (SCC) ruled in its recent decision, Valard Construction Ltd. v. Bird Construction Co. (Valard Construction), that an "obligee" or trustee under a labour and material payment bond (usually the owner or general contractor) may be required to disclose the bond's existence to its beneficiaries (usually subcontractors).

Prior to this decision, Canadian courts held that an obligee is only required to disclose the existence of a bond in response to a demand for information, such as demands made under applicable builders' lien legislation. From now on, owners and general contractors will need to notify potential claimants of the existence of a bond in certain circumstances.

OVERVIEW

Valard Construction arose out of a claim by a utility sub-subcontractor (Valard) for directional drilling work done and materials provided to an oil sands worksite located near Fort McMurray, Alberta. The electrical subcontractor that engaged Valard became insolvent and some of Valard's invoices went unpaid. Valard later learned of a bond obtained by the electrical subcontractor, which named the general contractor as obligee and the electrical subcontractor as principal, and sought to claim under the bond.

The bond at issue was a standard form CCDC 222-2002 labour and material payment bond, which provides that a beneficiary who has not received payment within 90 days of the last day on which it provided work and/or materials may sue the surety on the bond for the unpaid sum. The beneficiary is required to provide notice to the surety, principal and obligee of its claim within 120 days of the last date that the work and/or materials were provided to the project in order to claim under the bond.

Valard did not learn of the bond until seven months after the 120-day notice period had expired. As a result, the surety denied Valard's claim. Valard then commenced a claim against the general contractor for the amount it would have claimed under the bond.

SCC Decision

The majority of the SCC found that the general contractor was liable to Valard for the sum that it could have obtained under the terms of the bond, had it been aware of its rights.

According to the SCC, obligees are required to inform potential beneficiaries of the existence of a bond where the beneficiary would, objectively, suffer an unreasonable disadvantage by not being informed of the bond. Whether a beneficiary would suffer an unreasonable disadvantage is determined based on the circumstances in which the bond was entered into, including its terms, the nature of the industry and the beneficiary's entitlement under the bond.

In Valard Construction, the majority of the SCC held that the general contractor was required to inform Valard of the bond's existence because labour and material payment bonds are unusual in private oil sands projects, Valard was unaware of the existence of the bond, and its entitlement was time-limited, such that it was unable to claim on the bond due to the expiry of the notice period before it learned of the bond. 

IMPLICATIONS

Owners and General Contractors (Obligees)

For obligees, Valard Construction creates a new administrative burden and legal risk. The test of whether a beneficiary would "suffer unreasonable disadvantage" due to lack of notice of the bond is unclear. Barring long-standing and well-known requirements for bonds on the type of construction at issue, it appears likely that notice of a bond will be required, or at least prudent.

The next question is "what is sufficient notice?". The SCC noted that the general contractor could have satisfied its duty by simply posting a notice of the bond at its on-site trailer where workers were required to attend site meetings on a regular basis. This would have ensured that a "significant portion" of the potential beneficiaries would have had notice of the bond.

This seems simple enough, but it is not hard to imagine scenarios where such posting does not in fact notify subcontractors and suppliers. For example, suppliers who simply drop off materials at the job site may never enter the trailer. Alternatively, there may be multiple job sites. If a notice is visible only to front-line employees of a subcontractor, is that sufficient to inform the subcontractor's management of the existence of the bond? Would an email suffice, or a clause in standard terms which all subcontractors are required to acknowledge? These and other questions will remain to be addressed over time as the extent of this new obligation is defined by parties and courts.

In the meantime, owners and contractors may wish to:

  1. Review contractual documentation or contact subcontractors for current projects and identify any bonds naming them as obligees
  2. Prepare notice procedures for current and future projects such that reasonable steps are taken to indicate the existence of a bond to as many potential bond beneficiaries as commercially practicable
  3. Consider revising their contract documentation to include a requirement for all parties who obtain bonds either to identify potential bond beneficiaries or to notify potential bond beneficiaries of the existence of the bond on the obligee's behalf.

Subcontractors and Suppliers (Beneficiaries)

For subcontractors, suppliers and other potential bond beneficiaries, the decision in Valard Construction provides a potential avenue for recovery where the notice period under a labour and material payment bond has expired without notice of the bond to the beneficiary. Beneficiaries who have been denied recovery under a bond may wish to seek legal advice regarding a potential claim against the obligee of the bond given this decision, depending on the facts of their case.

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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