In Todd Brothers Contracting Ltd. v. Wessuc Inc1, the Ontario Superior Court of Justice was faced with a request for relief from forfeiture in relation to the not-unusual scenario of a labour and material payment bond claim delivered outside of the bond's notice period. As a result, the Court was required to consider the extent to which relief from forfeiture under the Courts of Justice Act – and more interestingly, the Insurance Act – might apply in the surety bonding context. Below, we review the takeaways from Todd Brothers in respect of this issue.
Factual Background
The Regional Municipality of Durham ("Durham") retained Todd Brothers Contracting Limited ("Todd Brothers") to remove sludge from a water treatment lagoon. The Guarantee Company of North America ("GCNA") – now Intact Financial Corporation – was the surety for a Labour and Material bond (the "L&M Bond") obtained by Todd Brothers as principal, with Durham as the obligee and trustee for the claimants (it is unclear from the court's judgment whether "claimants" under the bond were limited to those subcontractors with whom Todd Brothers had a contract, or whether the definition extended to second-tier subtrades).
Todd Brothers subcontracted directly with Wessuc Inc. ("Wessuc") for the removal, handling, and disposal of sewage (the "Subcontract"); as such, Wessuc qualified as a "claimant" under the L&M Bond. Prior to the start of work, Wessuc sought to modify the methodology of its work such that, rather than dewatering the wastewater and then hauling the solids to a landfill, Wessuc would take the wastewater and spray it over farmlands as fertilizer. In that regard, Wessuc represented that it had, or would have, agreements with a sufficient number of farmers, with sufficient acreage of fields, to fully dispose of all or almost all of the wastewater; if it ran out of fields, it would truck the solids to, and pay the dump fees at, one of the two available landfills, all at Wessuc's cost.
Ultimately, Wessuc delivered an invoice for approximately $458,000 on September 6, 2018, after Wessuc had exhausted all available farmland, but its scope of work was not complete. Between September 6 to 25, 2018, Wessuc performed minimal work, and did not bring alternative dewatering equipment on site. During this period, Todd Brothers delivered notices to Wessuc and stated that Todd Brothers would complete the work if Wessuc did not do so. On or about September 29, 2018, Wessuc demobilized. Todd Brothers paid Wessuc's invoice for the $458,000, although it is unclear when this occurred.
Consequently, a dispute arose between Wessuc and Todd Brothers regarding the cost of work, as well as whether Wessuc had abandoned the Subcontract. Wessuc sued Todd Brothers for breach of contract, breach of trust, and unjust enrichment, seeking alleged amounts owing under the Subcontract, and similarly delivered a companion claim under the L&M Bond. Notably, the L&M Bond claim was delivered on February 12, 2019, which was at least 137 days after Wessuc's date of last supply.
GCNA denied Wessuc's claim under the L&M Bond on the basis that Wessuc had failed to provide timely and adequate notice, thus resulting in a failure to satisfy the bond's preconditions for a claim. As a result, Wessuc also commenced litigation against GCNA as well.
The Superior Court's Decision
The Court considered five main issues and canvassed the parties' respective positions and evidence in detail, finding in favour of Todd Brothers on all five issues. While our commentary below focusses on the fifth and final issue (being Wessuc's L&M Bond claim), we review the Court's findings on all five issues in brief.
1. Was there a Subcontract between the parties? If so, what were its terms?
The Court concluded that there was a contract between the parties, and that it was a stipulated price subcontract.
2. Did Wessuc abandon the project, or did Todd Brothers terminate the Subcontract?
The Court found that Wessuc had abandoned the project due to its lack of activity on the jobsite between September 6 to 26, 2018. As a result, Todd Brothers was permitted to terminate the Subcontract, and to take over the work.
3. What are the damages that flow from that abandonment or termination?
Relying on the definition of substantial performance under the Construction Act, the Court found that the work left to perform far exceeded $25,000, and that in the absence of an express provision to the contrary, "a contractor on a fixed price contract is not entitled to payment until substantial completion"2. Wessuc was far from achieving substantial completion. Through its counterclaim, Todd Brothers was awarded $53,000 for the costs incurred after Wessuc had abandoned the contract.
4. Does quantum meruit apply?
The Court concluded that quantum meruit did not apply, as Wessuc was already paid for the work it had completed (as noted above).
5. Did Wessuc deliver a valid bond claim, and if not, should it be granted relief from forfeiture?
Fundamentally, given that Wessuc's claim against Todd Brothers was entirely unsuccessful, it therefore could not sustain claim on the L&M Bond because liability under that bond is predicated upon the principal being in breach of its payment obligations under the bonded subcontract(s). Consequently, Wessuc could not sustain a cause of action against GCNA.
Notwithstanding that the foregoing was dispositive of this issue, the Court also considered – assuming for the sake of argument that its claim against Todd Brothers had been valid – whether Wessuc could seek relief from forfeiture for its claim against GCNA.3 In considering relief from forfeiture, the Court examined both the Courts of Justice Act's and – more interestingly – the Insurance Act's provisions on relief from forfeiture.
As readers will recognize, section 98 of the Courts of Justice Act provides a Court with a general discretion to grant relief against penalties and forfeitures on such terms that are considered just by the Court. By contrast, section 129 of the Insurance Act provides that where there has been imperfect compliance with a statutory or contractual condition as to the proof of loss to be given by the insured, and that results in a forfeiture or avoidance of the insurance, the Court may relieve against the forfeiture on such terms as it considers just.4
Given that, according to the Court, s. 98 of the Courts of Justice was not applicable in this case5, the Court did not review this provision in further detail.
By contrast, relief from forfeiture under the Insurance Act is restricted to instances of imperfect compliance with the terms of a policy (whether that be a statutory or contractual condition), and an insured's breach will only constitute non-compliance in instances where the breach is "substantial" and prejudices the insurer.6 In all other instances, the breach will be considered imperfect compliance, where relief against forfeiture may be available at the discretion of the Court.
Here, the Court recognized that in order to avail itself of relief from forfeiture, Wessuc (as the "insured") would have to show that (1) their conduct was reasonable, (2) the breach was not grave, and (3) there was a disparity between the value of the property forfeited and the damage caused by the breach.7
On the first factor, Wessuc delivered notice of its claim on February 12, 2019, which exceeded the 120-day requirement. Furthermore, even if the notice had been given on time, it was found to be inadequate insofar as Wessuc did not deliver any information as part of its notice, and instead only delivered the information necessary for GCNA to start its investigation in December of 2020. The information in question contained numerous errors, as well as information that was disputed by Wessuc itself in this litigation.8 The Court concluded that although there was no evidence of GCNA having suffered prejudice, Wessuc's conduct was unreasonable.
On the second point, Wessuc's notice was not substantially accurate due to various errors (including the fact that the notice sought roughly half of the amount ultimately claimed in the litigation), and there was no explanation for the delay in providing accurate records, such that the breach was sufficiently grave that Wessuc had come to court with unclean hands.9
On the third factor, the Court observed that it could not determine the disparity between the value of the property forfeited and the damage caused by the breach; in any event, though, Wessuc had not forfeited any rights or benefits because Todd Brothers were never in default of their obligations and therefore GCNA would never have to respond to Wessuc's claim under the L&M Bond.
Accordingly, Wessuc would not have been entitled to relief from forfeiture.
Commentary
Most obviously, Wessuc is yet another reminder of the perils of failing to comply with notice provisions, whether that be in surety bonds or in contracts more generally, both in terms of timing and sufficiency of notice. Best practice remains to provide notice well before any deadline(s), and to provide fulsome disclosure and substantiation.
More interesting, though, is the fact that Wessuc represents another instance of a court either implicitly or explicitly interpreting a surety bond as a contract of insurance for the purpose of the Insurance Act's relief from forfeiture provisions. As readers will know, this is not a novel proposition insofar as it was adopted in 1989 by the Supreme Court of Canada in Elance Steel v Falk Brothers10, in which context the Court upheld the lower courts' conclusion on this point. On the one hand, this approach is unintuitive insofar as surety bonds are fundamentally distinct from insurance policies in a number of ways, including the following (for example):
- the tripartite nature of the surety bond relationship, as compared to the bipartite nature of the insurer-insured relationship;
- A surety bond creates an obligation on the surety that is collateral to, or derivative of, the underlying contract the performance of which it guarantees, whereas this is not the case in respect of an insurance policy, which provides indemnification against the occurrence of specified risk(s);
- In a similar vein, the surety's obligation to the obligee is coextensive with, or less than, the obligation of the principal. No such distinction exists in respect of an insurance policy, because there is no principal under an insurance policy; and
- In relation to a surety bond, the loss is ultimately the principal's loss insofar as the surety will look to the principal for recovery pursuant to an indemnity agreement, as well as its rights at common law (assuming the principal and other indemnitors are not insolvent).
As readers will appreciate, all of the foregoing is not novel, and the two forms of agreement have been repeatedly distinguished at common law by Canadian courts.11
On the other hand, however, it appears that for statutory (regulatory) purposes, the insurance statutes of some provinces (as well as the federal Insurance Companies Act) treat a surety bond as a "contract of insurance". Although this point was not addressed in any detail by the Court in Wessuc – and indeed, the Court seems to have assumed that Ontario's Insurance Act applied – the Manitoba Court of Queen's Bench (as it then was) in Wesco Distribution Canada GP Inc. v. Fenchurch General Insurance Company12 concluded that the Manitoba Insurance Act's equivalent provisions applied on the bases that (1) surety bonds fit within the definition of "insurance" under that legislation, and (2) that legislation's Insurance Company Classes of Insurance Regulation specifically identified surety bonds as a class of insurance.
The second rationale arguably applies in Ontario, notwithstanding that the equivalent regulation was repealed such that surety bonds (or "surety insurance" or "guarantee insurance") do not explicitly appear as a specific class of insurance in the Insurance Act itself. Rather, s. 43(1.2) of Ontario's Insurance Act requires that the Financial Services Regulatory Authority of Ontario publish a list of the classes of insurance for the purposes of the Insurance Act; the publication in question includes "surety insurance" (see here for example), such that it appears that the second rationale applies in Ontario.
In any event, the first rationale could be seen as applicable based on how the Insurance Act generally defines "insurance":
"insurance" means the undertaking by one person to indemnify another person against loss or liability for loss in respect of a certain risk or peril to which the object of the insurance may be exposed, or to pay a sum of money or other thing of value upon the happening of a certain event, and includes life insurance; [emphasis added]
A surety bond may satisfy the foregoing definition insofar as it is arguably an undertaking to indemnify a person (the obligee in relation to the performance bond, and a claimant in relation to an L&M bond), and arguably contains an undertaking by the surety to pay money or provide other value upon the occurrence of a certain event (the default of the Principal). On the other hand, however, it seems plausible to argue that a surety bond does not satisfy this definition, strictly speaking, insofar as the surety does not provide an unconditional undertaking to indemnify another person or pay a sum of money; rather, the surety provides an undertaking that they will choose from a range of different options, some of which do not constitute indemnification in the strict sense of full compensation or reimbursement (for example, choosing to complete the bonded contract or obtain a completion contractor). As a result, this would not constitute an undertaking to indemnify in the strict sense.
As a result, Wessuc indicates that while it may be plausible to consider surety bonds to be "contracts of insurance" for statutory (regulatory) purposes, it is important not to lose sight of the fact that such bonds are fundamentally distinct from insurance at common law; surety bonds therefore should not be treated similarly or be subject to the same body of case law as policies of insurance, but rather must continue to be understood as their own class of legal instrument.
Ultimately, from the perspective of a surety evaluating a claim under an L&M bond that has been notified beyond the 120-day period, the clearest and most significant practical takeaway from Wessuc is likely the Court's departure from the test for relief from forfeiture set out in 312630 British Columbia Ltd. v. Alta Surety Co. (which required that the surety demonstrate prejudice in order to defend against the application of relief from forfeiture). As a result, it appears that a surety in Ontario need not demonstrate prejudice arising from late notice in order to defend against a claimant seeking relief from forfeiture; rather, the relevant inquiry is a more general one as to whether the claimant's conduct was "reasonable". Accordingly, to the extent the Insurance Act does apply to surety bonds in Ontario, this represents a significant development.
Footnotes
1. Todd Brothers Contracting Ltd. v. Wessuc Inc, 2024 ONSC 4368. ("Wessuc")
2. Wessuc at para 190, citing Fairview Home Improvements Inc. v. Antonopoulos, 2015 ONSC 7668 at paras 22-32.
3. In that regard, the L&M Bond contained standard bond language stipulating that Wessuc could not commence an action unless it gave written notice of its claim (stating with substantial accuracy the amount claimed) within 120 days of its date of last supply (although in relation to holdback amounts, the operative date presumably would have been when it should have been paid that amount in full): Wessuc at para 236.
4. The Court in Wessuc references in para 239 the principles regarding relief from forfeiture in Monk v. Farmers' Mutual Insurance Company (Lindsay), 2019 ONCA 61 at para 79, citing Kozel v. The Personal Insurance Company, 2014 ONCA 130. Surprisingly, the Court did not refer to the Supreme Court of Canada's decision in Elance Steel Fabricating Co. v. Falk Brothers Industries Ltd., [1989] 2 S.C.R. 778, despite the fact that that case also involved a party seeking to rely on the relief from forfeiture provision contained in Saskatchewan's Insurance Act in circumstances where they were late in delivering notice of their claim under an L&M bond.
5. Wessuc at para 240.
6. Wessuc at para 241. The Court also referred to additional case law – but did not consider it in further detail – indicating that the test for relief from forfeiture under insurance legislation will inquire as to four factors: (1) prejudice to the surety; (2) the claimant's knowledge and awareness of the bond; (3) experience and knowledge of the claimant; and (4) the claimant's length of delay in giving notice: 312630 British Columbia Ltd. v. Alta Surety Co. (1995), 1995 CanLII 3442 (BCCA), at paras. 13 – 14. There, the British Columbia Court of Appeal concluded that the first factor – the prejudice to the surety – was "by far the most importance factor".
7. Wessuc at para 242. This three-element test is often referred to as the "Saskatchewan River" or "Liscumb" test, in reference to the applicable case law from the Supreme Court of Canada.
8. Wessuc at para 257.
9. Wessuc at para 259.
10. See also Dashchuk Lumber Ltd. v. Proman Projects Ltd. and Continental Insurance Companies, 1987 CanLII 4670 (SKCA), which was a companion decision to Elance Steel at the Saskatchewan Court of Appeal.
11. See, for example, Lac La Ronge Indian Band v. Dallas Contracting Ltd., , 2004 SKCA 109 at para 71, citing Johns-Manville Canada Inc. v. John Carlo Ltd., [1983] 1 S.C.R. 513 (S.C.C.), at 524-25.
12. Wesco Distribution Canada GP Inc. v. Fenchurch General Insurance Company, 2020 MBQB 166.
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