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Supreme Court of Canada rules in favour of proactive reporting

By Anthony R. Foderaro

 

The Supreme Court of Canada has recently held that an obligee under a labour and material

payment bond has a duty to inform potential claimants of the existence of that bond. This decision will undoubtedly have wide-reaching effects on the construction industry.

In Valard Construction Ltd. v. Bird Construction Co., Suncor Energy Inc. (Suncor) hired Bird Construction Company (Bird) as a general contractor for an oil sand construction project on one of Suncor’s worksites near Fort McMurray, Alta. Bird subcontracted with Langford Electric Ltd. (Langford) for certain electrical work. As was required under the subcontract, Langford obtained a labour and material payment bond, issued by the Guarantee Company of North America for $659,671, naming Bird as obligee, Langford as principal and the Guarantee Company as surety.

The terms of the bond allowed for a “beneficiary,” – being a provider of labour or materials who has not received payment from Langford within 90 days of the last day upon which it provided labour or materials – to sue the Guarantee Company on the bond for that unpaid amount. The bond designated Bird as a trustee, holding in trust for the beneficiaries their right to claim against and recover from the Guarantee Company. The beneficiary’s right, however, was subject to a condition that it give notice of its claim to Langford, the Guarantee Company and Bird within 120 days of its last provision of work/labour or materials.

In March 2009, Langford hired Valard Construction to perform drilling work on the construction project. Valard began work on March 17, 2009 and finished on May 20, 2009. During Valard’s work, neither the bond, nor notice of it, was posted on the construction site. Further, during the ensuing 120-day notice period, neither Bird nor anyone on its behalf notified Valard of the bond’s existence. Valard was, therefore, unaware of the bond throughout the entire window of time during which it would have benefitted from it.

After Valard completed its work, Langford failed to pay some of its invoices. Accordingly, on March 9, 2010, Valard sued and obtained default judgment against Langford for $660,000. At that time, Langford was insolvent. In April 2010, Valard learned of the bond, but by then the time for making a claim under it had expired. Valard then sued Bird, arguing that it had a duty to inform Valard of the bond’s existence, its terms and the right of action provided thereunder.

Both the trial court and the appellate court dismissed Valard’s claim, holding that Bird had no duty to inform any potential claimant about the existence of the bond. Those decisions held that the purpose of the bond was to protect general contractors and that subcontractors had their own duties to make inquiries about the existence of bonds. Since Valard made no such inquiries, the courts held that Valard was the author of its own misfortune.

The majority of the Supreme Court reversed the lower courts’ decisions and found in favour of Valard. Justice Brown, writing for the majority, held that, under conventional trust law principles, a trustee has a duty to disclose to the beneficiaries the existence of the trust wherever it could be said to be to the unreasonable disadvantage of the beneficiary not to be informed of the trust’s existence. Justice Brown applied this principle to labour and material bonds. In the majority’s view, Valard was unreasonably disadvantaged by Bird’s failure to inform it of the trust’s existence, primarily because Valard required knowledge of it in order to enforce it.

The majority also held that because the oil sands project was not the sort of project in which labour and material bonds were normally used, a duty to disclose arose in that case. The majority did accept, however, that for construction projects in which these bonds were 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.”

The majority then went on to discuss the standard to be met by a trustee with respect to its duty to disclose. In this case, Bird had an on-site trailer in which notices were normally posted and where Valard was required to attend daily meetings. The court held that Bird should have posted a notice of the bond in its trailer. In failing to do so, and in failing to do anything to give notice of the bond, the majority held that Bird committed a breach of trust.

Two of the judges – Justices Coté and Karakatsanis – disagreed with the majority. They held that while Bird was under an obligation to respond to questions concerning a bond’s existence, it had no proactive duty to take steps to inform potential claimants of its existence. Justice Karakatsanis, in particular, looked to the decades-old convention in the construction industry that trustees under a bond were under no obligation to inform beneficiaries of a bond’s existence and that beneficiaries were expected to make their own inquiries in that regard. In Justice Karakatsanis’ view, the approach taken by the majority turned what was a beneficial risk-management tool into a significant liability for general contractors.

As a result of this decision, an obligee under a labour and material payment bond should take all reasonable steps to inform subcontractors and suppliers of the bond. There is no hard and fast rule as to the form of notice, although it is advisable that it be posted in a place where it can be seen by all subcontractors. A court will consider whether the obligee did what an honest, reasonably skilful and prudent obligee would have done to inform any potential beneficiaries of the bond of its existence. In this particular case, the court approved the idea of the Bird posting a notice of the bond in its site trailer.

A lingering question from the court’s ruling is what form of notice is to be given to subcontractors that never attend the construction site. In these circumstances, or in those where labour and material bonds are uncommon, obligees may need to do more to meet their duty to disclose. Further, even if labour and material bonds are common in a particular industry, if an obligee does nothing to notify potential beneficiaries of the bond, it risks being held liable for breach of trust.

This case will also be of particular interest to sureties. Now that an obligee is required to advertise a bond, sureties may see more claims being made under the bonds. Time will tell as to whether this indeed occurs.

Finally, despite the majority’s subcontractor-friendly ruling, subcontractors should continue to be proactive in making inquiries as to whether a labour and material bond exists for a particular project. As stated previously, in some cases, a trustee may be required to take little or no steps to notify subcontractors of the bond. Should the time limit for making a claim under the bond expire in those circumstances, the subcontractor may have no one to blame but itself for missing that window of opportunity. 

Anthony R. Foderaro is an associate of Fillmore Riley LLP who practises primarily in the areas of civil litigation and business/personal immigration law. He may be reached at 204-957-8390 or This email address is being protected from spambots. You need JavaScript enabled to view it..

 

 

 

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