Canada: The Duty To Notify Subcontractors Of Labour And Material Bonds

Last Updated: March 23 2018
Article by Seema Lal

On February 28, 2018, the Supreme Court of Canada released its decision in Valard Construction Ltd. v. Bird Construction Co., 2018 SCC 8.

Facts and Issues

Bird, as a general contractor, hired a subcontractor, Langford Electric Ltd., to complete certain electrical work on an oil sands project.  The contract between Bird and Langford required Langford to obtain a Labour and Material Payment Bond ("L&M bond" or "bond") naming Bird as obligee, Langford as principal, and the Guarantee Company of North America (the issuer of the bond) as surety.  Langford entered into a contract with Valard to provide certain directional drilling work on the project.  Bird required Valard's attendance at daily "toolbox meetings," which were held in Bird's on-site trailer where Bird kept a bulletin board displaying various notices.  It was agreed that neither the bond nor the notice of the bond was posted on the bulletin board (or anywhere else on the project site).  It was also agreed that neither Bird nor anyone on its behalf notified Valard of the existence of the bond during the time Valard worked on the project and/or during the ensuing 120-day notice period provided for in the bond.

After completing its work on the project, Valard issued invoices to Langford, which Langford failed to pay.  As a result, Valard was granted default judgment against Langford for $660,000.17.  By this point, Langford was insolvent and, as a result, Valard did not recover any amount under the default judgment.

In April, 2010, seven months after the 120-day notice period in the bond had expired, Valard made an enquiry of Bird as to whether an L&M bond had been obtained for the project.  Bird replied affirmatively, and directed Valard to the Guarantee Company.  Valard immediately filed a claim with the Guarantee Company for the full amount of the bond.

The Guarantee Company denied Valard's claim, citing Valard's failure to give timely notice.  Valard commenced a claim against Bird for breach of trust, alleging that it had breached its duty as a trustee "to fully inform the bond beneficiaries of the existence of the bond and its terms and of their right of action provided by the bond" (para. 9).

Supreme Court of Canada Ruling

On November 7, 2017, the Supreme Court of Canada heard the appeal from the Alberta Court of Appeal decision and, on February 18, 2018, rendered its ruling in which the majority found that Bird, as a trustee, had a duty to disclose the existence of the L&M bond to Valard, as a beneficiary of the bond.  As Bird had taken no steps to disclose the bond to Valard, it had breached the fiduciary duty it owed to Valard and was liable to compensate Valard for the losses caused by the breach (which the Court directed be remitted to the trial judge for adjudication).

The SCC made it clear that it was not suggesting that a trustee has a duty, in every circumstance, to disclose the existence of a trust to beneficiaries under the trust.  The SCC went on to set out specific circumstances in which such an obligation would arise, including a situation where "the enforcement of the trust requires that the beneficiary receive notice of the trust's existence, and the beneficiary would not otherwise have such knowledge" (para. 19).  The SCC confirmed that, in circumstances where the interest of the beneficiary is so remote that vesting is most unlikely, or the opportunity for the power of discretion to be exercised is equally unlikely, it would be rare to find that the beneficiary could be said to have suffered unreasonable disadvantage if uninformed of the trust's existence.

The SCC found that Valard had, in fact, been unreasonably disadvantaged by Bird's failure to inform it of the existence of the bond, given that Valard's interest had vested 90 days after its final day of work on the project and Valard required knowledge of the existence of the bond in order to enforce it within the expiry of the 120-day notice period.  The Court found that the fact that labour and material payment bonds were uncommon on private oil sands construction projects foreclosed any suggestion that the onus should have been on Valard to make enquiries about the existence of a bond.  Section 33 of the Alberta Builders Lien Act (which provides that a lienholder is entitled to request a copy of the contract in place between an owner and a contractor or a contractor and a subcontractor) was found not to be sufficient to absolve a trustee of its fiduciary duty to disclose the existence of a trust contained within a bond in these circumstances.

In discussing what action on Bird's part would have discharged its duty to disclose the existence of the bond, the Court stated:

Like all duties imposed on 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.  And the specific demands of that standard, so far as they arise from the duty to disclose the existence of a trust, are informed by the facts and circumstances of which the trustee ought reasonably to have known at the material time. (para. 26)

In the circumstances, the SCC stated that Bird could have satisfied its duty to inform beneficiaries of the trust by simply posting a notice of the bond in its on-site trailer (where daily toolbox meetings were held with at least some of the potential beneficiaries, such as Valard).  The Court made it clear that taking such a step would not always be necessary to protect against a claim for breach of trust by a disappointed beneficiary of a bond, and the question will ultimately come down to what the trustee should reasonably have done in the circumstances of each case to notify beneficiaries such as Valard of the existence of a bond.  In this case, Bird had done nothing, and had simply filed the bond off-site, had not posted it, and had not told anyone about it.  The Court commented that there may be some circumstances where the industry practice is such that the use of L&M bonds is quite common, and it may well be that very little, or even nothing, may be required on the part of a trustee to notify potential beneficiaries of the trust's existence.  However, in the circumstances of this case, given that the evidence was that L&M bonds were uncommon in similar projects, Bird was obligated to do something to discharge its duty to Valard (the reasoning being that there would have been no basis for Valard to expect that an L&M bond would be required).

Commentary

This decision makes it clear that an obligee under an L&M bond owes a duty of care and has obligations to potential claimants.  A new obligation has been created.  In some ways, the SCC ruling is surprising, given that the findings effectively result in a general contractor who requires the issuance of an L&M bond on a project to assume obligations and liability to individuals or entities with whom the general contractor has no contractual relationship and could include individuals and entities of which the general contractor/obligee has no knowledge (i.e., in many cases, general contractors may not be privy to or aware of sub-subcontractors retained by its subcontractors).

Clearly, this decision invites additional risk and exposure to general contractors who seek to have L&M bonds in place on their projects.  Arguably, the new obligations of the general contractor as obligee can be easily met by posting a copy of the bond in the site trailer or office or some other conspicuous place at the project site (which, perhaps, is a step contractors who require the issuance of L&M bonds should consider taking).  The SCC suggested that posting Notice of the existence of the L&M bond would have been sufficient to satisfy Bird's obligations in the circumstances of that particular case.  As such, if contractors are concerned about posting a copy of the actual L&M bond on site, posting some form of notice of the existence of the L&M bond (perhaps with some particulars about the name of the surety, the amount available under the bond and the notice period provided for in the bond) would suffice to protect against any future claims by potential beneficiaries under the bond.

One of the unanswered questions in the SCC ruling is whether the posting of either notice of the L&M bond or the actual L&M bond on the site would provide protection for the contractor from claims against suppliers and/or providers of services (who might otherwise be beneficiaries under the bond) who do not attend at the project site.i

Some commentators have suggested that this ruling could lead to the end of the limited protection offered by L&M bonds, as contractors may be less interested in paying for bonds if obtaining such bonds actually increases risk and exposure to the contractor.ii

Footnotes

i Mondaq Case Summary:  Valard Construction Ltd. v. Bird Construction Co., March 2, 2018, Article by Field LLP

ii Mondaq Case Summary:  supra

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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