SCC rules on the duty to provide notice of the existence of labour and material bonds.
In the recent Supreme Court of Canada decision of Valard Construction Ltd. v. Bird Construction Co., 2018 SCC 8, the Court found that a contractor had a duty to provide notice to the sub-subcontractors about the existence of a labour and material bond. The failure to provide the notice was found to be a breach of trust and the contractor was found liable to the sub-subcontractor for what it otherwise would have recovered under the bond.
Bird Construction Co. was hired by Suncor as a general contractor for a private oilsands project near Fort McMurray, Alberta. Bird subcontracted with Langford Electric Ltd. for the electrical work. Landford obtained a labour and material bond naming Bird as Obligee, Langford as Principal and The Guarantee Company as Surety. Bird received a copy of the bond, filed it off site, did not post it and told no one about it. The Court found as a fact that bonds were not common for private oilsands projects.
Langford entered into a sub-subcontract with Valard Construction Ltd. to provide drilling work. Valard was on site until May 2009. During this time, Valard participated in daily toolbox meetings at Bird’s onsite trailer. Langford failed to pay Valard the sum of approximately $660,000. In April 2010 – after the 120-day notice period under the bond had expired - Valard found out that there had been a labour and material bond. Valard made a claim which the Surety denied because of Valard’s failure to give timely notice. Valard then sued Bird for breach of trust for failing to inform the bond beneficiaries of the existence of the bond.
The Court found that Bird, as Obligee, was a trustee and that there was a fiduciary relationship between the trustee and the beneficiaries (i.e. potential claimants). A fiduciary relationship gives rise to certain duties owed by a trustee to a beneficiary (beyond the terms of the bond). Bird, therefore, had a duty to disclose the existence of the bond because otherwise the beneficiaries would be unreasonably disadvantaged not to be informed. In discharging this duty Bird was required to act honestly with reasonable skill and prudence. In determining the steps that Bird should reasonably have taken in order to notify the beneficiaries of the existence of the bond, the Court considered the particular circumstances of the case including the terms of the bond, the identity of the Obligee and the potential claimants, the number of potential claimants and relevant industry practices.
The fact that labour and material bonds were uncommon for the type of project at issue and that Bird knew that they were uncommon was the most significant factor for the Court. The Court found Bird could have satisfied the steps required of it by posting a notice of the bond on its on-site trailer. Instead, Bird did nothing.
The Court acknowledged that where an Obligee can reasonably assume that the beneficiaries knew of the bond’s existence, very little or nothing at all may be required on the part of the Obligee in order to discharge its duty.
Contractors/Obligees under the Bond:
Whether a contractor must take steps to disclose a labour and material bond depends on the specific circumstances of the case, and in particular, whether the use of labour and material payment bonds may be common industry practice. Where a contractor can reasonably assume that the beneficiaries knew of the bond’s existence, then it may not be required to take any steps at all. But when in doubt, seek legal advice.
In Ontario, the recently amended Construction Act has made it mandatory that a contractor provide a labour and material bond to the owner of a public contract. The Act defines a public contract as a contract where the owner is “the Crown, a municipality or a broader public sector organization.” A “broader public section organization” includes a number of publicly funded organizations such as hospitals, school boards and universities. The Courts may, therefore, view public contracts in Ontario as one example of a circumstance where the Obligee could reasonably assume that potential claimants already knew of the existence of the bond and notice of the existence of the bond may not be required.
Subcontractors/ Claimant under the Bond:
Do not assume that the contractor may have to take steps in order to satisfy its duty to disclose the existence of a bond. Rather take advantage of section 39 of the Construction Act, under which subcontractors, sub-subcontractors and others have the right to ask for certain information from the general contractor and the owner including copies of any labour and material bonds. Copies of the bond must be provided within a reasonable time and no later than 21 days. Where an owner, contractor or subcontractor fails to provide a copy of the labour and material bond, that person is liable to the person who made the request for any damages suffered as a result. Where the existence of a bond is discovered after the time to claim under the bond has already expired, seek legal advice with respect to whether you may have a claim against the Obligee for the failure to disclose the existence of the bond in a timely manner.
Note: this decision has not yet been applied in the context of the Ontario Construction Act, R.S.O. 1990, c. C.30.
This article was first published in the Ottawa Construction Association Magazine.