May 4, 2018 by Dirk Laudan and Lindsey von Bloedau
The recent Supreme Court of Canada decision in Valard Construction Ltd. v. Bird Construction Co. could represent an important change in the law. It appears to have broadened the responsibility of owners and general contractors to disclose labour and material payment (L&M) bonds to unpaid subcontractors. Owners and general contractors benefiting from L&M bonds will have to consider carefully whether, and how, to communicate the existence of L&M payment bonds to subcontractors.
Construction lien legislation in several Canadian provinces, including Ontario and B.C., requires the owner to disclose the existence of L&M bonds, when asked. It seems the court has extended this requirement, at least in L&M bonds that use “trustee” language, and parties involved in construction projects will have be careful of these newly-recognized obligations. Looking at the applicable legislation no longer gives a complete picture of what those obligations are. The issue will become increasingly important in Ontario, and any other province that adopts the Ontario model for construction lien reform, since bonding is now mandatory in Ontario for almost all government construction work.
Valard Construction Ltd. v. Bird Construction Co. arose out of construction on an oil sands project in Alberta. The GC subcontracted certain electrical work to Langford Electric Ltd. As required by its subcontract, Langford provided the GC with an L&M bond. The bond named the GC as the obligee of the bond, and trustee for the benefit of claimants. One of Langford’s sub-subcontractors was Valard.
The L&M bond was in the standard CCDC 222-2002 form. Under the bond, the general contractor as trustee held claimants’ rights for them. This was intended to allow claimants rights under the bond, even though they are not parties to the bond. A claimant was required to give notice of its claim on the bond within 120 days of its last work on the project.
Valard had a valid claim for unpaid work against Langford, but it was not collectable. Valard was not aware of the existence of the L&M bond until approximately seven months after its work on the project concluded, so it could not give valid notice of its claim within the bond’s 120-day time limit. The general contractor had not proactively informed Valard that the bond existed, and because Valard was unable to give notice of its bond claim in time, it lost its right to do so. Valard then sued the general contractor for breach of trust on the basis that the general contractor was legally a trustee, and had failed in its duty as such by not informing Valard of the bond.
The Court’s majority decision was based on the trustee’s duty to disclose the existence of the trust to possible beneficiaries, who would be unreasonably disadvantaged by a failure to disclose. The infrequent use of L&M bonds in private oil sands construction projects meant that the claimant would not necessarily have guessed it existed. It seems that this was an additional reason for proactive disclosure. That said, the Court did recognize that the obligee could not have known the identities of all potential claimants at the time that the bond was obtained. Taking that into account, the Court found that the general contractor could have satisfied its duty by posting a notice of the bond in the site trailer. Doing so would have provided notice of the bond’s existence to a significant portion of potential claimants, and it would have cost the general contractor almost nothing to do so. The majority of the Court rejected the argument that the “trustee” language was just a way to give claimants a legal right to make a claim, or that the bond exists only for the benefit of the obligee.
As result of this decision, obligees of L&M bonds should seriously consider whether they have a duty to inform potential claimants of the existence of the bond. In situations when a potential beneficiary could be significantly disadvantaged, or in circumstances where L&M bonds are not common, this duty might be even more pronounced.
Dirk Laudan is a partner at the law firm of Borden Ladner Gervais LLP (BLG), practicing in the areas of construction, insurance and commercial litigation and arbitration. Lindsey von Bloedau is an associate lawyer at BLG, and practicing in the area of construction litigation.