Labour and material (L&M) payment bonds are a common feature of construction projects. They provide a surety for a contractor’s contractual payment obligations to its labour and material subcontractors. But an upcoming Supreme Court of Canada case may hand contractors new obligations to tell their subcontractors such a bond exists.
To start, here’s how an L&M payment bond works: A surety agrees to pay qualified subcontractors if a contractor defaults in payment. The subcontractor’s claim to the surety must be made with the specified formality, including within the time and monetary limits of the bond.
The existence of an L&M payment bond is usually well known to subcontractors through the tender process, the contractor’s form of subcontract, or through direct communication by the contractor.
In British Columbia, if a subcontractor doesn’t know if a bond exists, or what its terms are, it may seek to acquire a copy of the bond by exercising its rights under the Builders Lien Act.
But what if the subcontractor doesn’t ask or is not told about the existence of an L&M payment bond? Does anyone have to tell the subcontractor?
In the 2016 case, Valard Construction Ltd. v. Bird Construction Company, a majority of the Alberta Court of Appeal held that, in law, no one is under an obligation to tell potential claimants about the bond. But this may not be the final word because in March, 2017, the Supreme Court of Canada granted leave to appeal.
To briefly summarize, Bird Construction was the general contractor on an Alberta oil sands project. Bird hired Langford Electric as a subcontractor; Langford then hired Valard Construction as its subcontractor. As required by Bird, Langford obtained a particular kind of L&M payment bond—a CCDC 222-2002 form.
Eventually, Langford defaulted in payment to Valard, which obtained a $660,000 default judgment against Langford. Valard then asked Bird if there was a bond, but by then its claim was already out of time under the bond’s terms. Valard then sued Bird, claiming Bird was obliged to tell Valard the bond existed so it could have made a timely claim.
Importantly, the form of bond was a “trustee form,” which is used to permit claimants to sue as beneficiaries of a trust even though they are not party to the bond. This is necessary in jurisdictions, including Alberta, that don’t have statutory provisions permitting potential claimants to sue the surety directly, as is the case in B.C. The bond explicitly stated that as the named trustee, Bird was not obliged to take any act, action or proceeding against the surety on behalf of the claimants.
The majority of the Alberta Court of Appeal held that the bond created “a limited trust” which did not impose any positive obligations on Bird. They also held that Bird was not in a fiduciary relationship with Valard because Valard could have compelled Bird under Alberta’s Builders Lien Act to provide information about the bond.
But the dissenting judge took a different view. He held that notwithstanding the bond’s explicit wording, Bird had fiduciary duties to take reasonable steps to tell potential claimants about the bond. This, he felt, would serve the bond’s commercial purpose of permitting unpaid claimants to make claims under the bond.
He suggested Bird could have posted a copy of the bond at the site office the contractors regularly attended; or directly identified or notified Langford’s subcontractors about the bond; or required Langford to do so. Since Bird had taken no steps at all, in the judge’s view it failed to discharge its obligations and would have been liable to Valard for the amount Valard could have recovered under the bond.
A Supreme Court of Canada decision upholding the dissenting judge’s view that trustees under “trustee form” bonds have fiduciary duties to potential claimants will affect the law in Alberta and other “trustee form” bond provinces. It may also affect the law in B.C.
In any case, reviewing the bonding practices on your construction projects may be critical to avoid the risks of default by others.