Canada: Looking Out For Your Neighbours – Supreme Court Of Canada Requires Notice To Subcontractors About Labour And Material Bonds

Last Updated: March 19 2018
Article by Khurrum Awan, Wuraola Dasylva and Jonathan Martin

Introduction

In its recent decision in Valard Construction Ltd. v Bird Construction Co.,[1] the Supreme Court of Canada imposed an obligation on project owners and general contractors, who are designated as trustees under labour and material ("L&M") bonds, to provide reasonable notice of the existence of the bonds  to subcontractors for whose benefit these bonds are usually secured. The scope of the reasonable notice required was noted to depend on the specific circumstances of the case. It is likely that further judicial guidance will be required to delineate the content of the reasonable notice required in specific circumstances.

Background

Suncor Energy Inc. hired Bird Construction Ltd. ("Bird") as general contractor for an Alberta oilsands construction project. Bird subcontracted with Langford Electric Ltd. ("Langford") for certain electrical work. The subcontract required Langford to obtain an L&M bond naming Langford as principal, Bird as trustee for any subcontractors who had not been paid by Langford and all of Langford's subcontractors as beneficiaries.

The bond provided that any subcontractor who had not been paid by Langford for more than 90 days after last providing labour or materials could file a claim with the surety provider for payment under the terms of the bond. However, the bond required that written notice of any such claim be provided to the surety provider within 120 days of the last date on which labour or materials were provided.

After a number of invoices went unpaid, Valard secured judgment against Langford for approximately $660,000. However, Langford became insolvent; and, as a result, Valard secured only the statutory holdback and trust funds under the Builders' Lien Act. Valard later became aware of the existence of the L&M bond after the claim period had expired. Valard sued Bird for failing to provide timely notice of the existence of the L&M bond, its terms and the right of subcontractors to file a claim for unpaid invoices with the surety provider.

The issues before the Supreme Court of Canada included:

  1. Whether project owners and general contractors, designated as trustees under L&M bonds, owe a duty to disclose the existence of the bond to subcontractors who are the intended beneficiaries of the bond?
  2. If such a duty is owed, what steps must project owners and/or general contractors take to satisfy their duty to disclose the existence of the bond to subcontractors?

Rulings of the Alberta Court of Queen's Bench and the Alberta Court of Appeal

The trial judge dismissed Valard's action and held that Bird was under no obligation to notify Valard of the existence of the L&M bond.[2] The bond was found to exist only for Bird's protection and did not require Bird to protect the interests of subcontractors.

The Alberta Court of Appeal reached a similar conclusion.[3] Bird had no legal obligation to notify subcontractors about the existence of L&M bonds unless a clear request for information about the existence of any bond was made.

Duty to Disclose the Existence of L&M Bonds

The Supreme Court found that an L&M Bond creates a trust, which entitles subcontractors, the intended beneficiaries of the trust, to claim against the bond for unpaid invoices. The trust also creates a fiduciary relationship between the trustee – the project owner or the general contractor – and the subcontractor. The fiduciary relationship requires the project owner or general contractor to act with honesty, reasonable skill and prudence in managing the trust for the benefit of subcontractors.

The Court concluded that where subcontractors would be unreasonably disadvantaged by lack of disclosure about the bond's existence, the project owner's or general contractor's fiduciary obligations required the trustee to disclose the bond's existence to subcontractors. This duty was noted to be consistent with the purpose of L&M bonds, which was to protect owners and general contractors from the risk of work stoppages, liens and litigation due to unpaid invoices.[4] For that purpose to be realized, beneficiary subcontractors had to be capable of enforcing the L&M bond. Otherwise, project owners and subcontractors would be susceptible to the very risks L&M bonds are intended to avoid.

Valard was found to have been unreasonably disadvantaged by Bird's failure to inform it of the existence of the L&M bond. Valard required notice of the bond in order to enforce it. The expiry of the 120-day notice period before Valard learned of the bond effectively prevented it from enforcing the trust by making a claim against the surety provider for unpaid invoices. Bird owed a duty to disclose the existence of the bond to Valard.

Disclosure of L&M Bonds in the Construction Industry

Two judges dissented from the majority's conclusion that projects owners and subcontractors are under a duty to disclose the existence of L&M Bonds to subcontractors. The dissent was based on the view that "the understanding and practice in the construction industry in Canada has been that the trustee of [an L&M bond] is not required to take steps to notify potential claimants of the existence of the bond," and that "claimants are expected to enquire as to the [bond's] existence."

The majority of the Court was skeptical that non-disclosure of L&M bonds was, in fact, the ordinary practice in Canada. In any event, in industrial contexts where L&M Bonds were uncommon, such as private oilsands projects, subcontractors could not be expected to be aware of the existence of L&M Bonds.

Content of the Duty to Disclose L&M Bonds

The Supreme Court also outlined the criteria for assessing whether trustee project owners or general contractors had met their duty to disclose the existence of L&M bonds. A trustee project owner or general contractor had to take the steps that an honest, prudent and reasonably skillful trustee would have taken to notify potential beneficiary subcontractors of the existence of the trust. Accordingly, the steps required to meet the duty of disclosure are "highly sensitive to the context in which the particular trust relationship arises." Where a project owner or contractor could reasonably assume that subcontractors would be reasonably aware of an L&M bond, or where practical constraints made notification entirely unfeasible, "few, if any, steps may be required by a trustee."

In the circumstances of the case, the Supreme Court found that an honest and reasonably skillful and prudent trustee would have known that L&M Bonds were uncommon in private oilsands projects. On the other hand, Bird would not have known, at the time the bond was secured, of all potential beneficiaries since Valard had not yet subcontracted with Landford. Accordingly, Bird did not have to ensure that all potential beneficiaries were aware of the bond but did have to take reasonable steps towards that end.

Bird could have satisfied its duty to inform beneficiaries of the trust by posting a notice of the bond in its on-site trailer where a number of subcontractors, including Valard, attended daily meetings. Such a posting would have notified a significant portion of subcontractor of the bond's existence. Instead, as the Court noted, Bird did nothing. It filed the bond offsite, did not post it and told no one about it.

Liability for Failure to Disclose Existence of L&M Bond

Valard was entitled to compensation for the sum it could have obtained by claiming against the bond had it been notified by Bird of the bond's existence. The matter was returned to the trial court to assess the sum of money that would have been available under the bond had Valard been able to submit a timely claim. That was the amount in which Bird was liable to Valard.

Key Takeaways

Until further guidance is available from the courts, and as a proactive litigation avoidance and litigation management strategy, designated trustees under L&M bonds will be well served to take proactive steps to notify potential beneficiaries of the existence of L&M bonds and any other information that may be critical to the submission of a valid claim.

Proactive steps that trustee owners or general contractors could take include:

  1. requiring that any RFP, contract or subcontract include notice of any existing or pending L&M bond, and how further information can be secured about the bond – with satisfactory proof of such notice to be provided to the trustee; and
  2. posting notice of any existing or pending L&M bond in common work areas, along with information about how further information about the bond can be secured.

Subcontractors should act diligently in inquiring of entities above them in the construction pyramid about the existence of L&M bonds and their key terms. Although the decision in Valard Construction Ltd. v Bird Construction Co provides additional security for labour and materials supplied by subcontractors, in some circumstances the trustee may be required to take minimal steps, or no steps at all, to notify subcontractors of the existence of L&M Bonds. In such cases, subcontractors cannot rely on the courts to rescue them from their failure to diligently secure information about their rights.

Footnotes

[1] Valard Construction Ltd. v Bird Construction Co., 2018 SCC 8 [Valard].

[2] Valard Construction Ltd. v Bird Construction Co., 2015 ABQB 141.

[3] Valard Construction Ltd. v Bird Construction Co., 2016 ABCA 249.

[4] Johns-Manville Canada Inc. v John Carlo Ltd., [1983] 1 SCR 513.

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
Khurrum Awan
Wuraola Dasylva
Jonathan Martin
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