On Feb. 15th, 2018 the Supreme Court of Canada affirmed a landmark decision in the case Bird Construction Co. v. Valard Construction Ltd. The decision has significant implications for the construction and surety industry regarding the obligations of an Obligee under a Labour and Material Payment Bond to notify potential claimants under the Bond of its existence. The following summary provides background information about the case.
Bird Construction Company, a general contractor on a project in Alberta, entered in a subcontract with Langford Electric Ltd. Langford provided Bird with a CCDC 222-2002 Labour and Material Payment Bond (Trustee Form), naming Bird as Obligee. Bird, as Obligee, is therefore identified as a trustee. Langford in turn, entered into a sub-sub contract with Valard Construction Ltd. Nearly a full year after Valard’s last day of work, Langford entered receivership. Neither Bird nor Langford had notified Valard that Langford had posted a Payment bond to Bird. After Valard completed its work for Langford, Langford failed to pay Valard’s invoices and Valard did not notify Bird of its payment dispute with Langford until after the deadline for filing a claim under the Payment Bond posted from Langford to Bird had passed. When advised of the non-payment, Bird informed Valard about the Payment Bond. Valard submitted a claim to the surety, but the surety denied the claim because the 120 day deadline for making a claim had long passed. Valard commenced an action against the surety, added Bird as a defendant, and then pursued the action only against Bird and alleged they were only made aware of the Payment Bond after the 120 day period to make a claim under the bond and that Bird as Obligee under the Payment Bond had the trustee’s fiduciary obligation to notify Valard of the existence of the Payment Bond. In 2015 the trial judge ruled in favour of Bird and that ruling was upheld by the Appeal Court of Alberta in 2016.
In its final decision on February 15, 2018 the Supreme Court overturned the earlier decision by the Appeal Court of Alberta and ruled that an Obligee as Trustee under this CCDC Labour & Material Payment bond has a fiduciary duty to notify all beneficiaries of the Payment Bond’s existence.
For Trisura’s Brokers, the following are some helpful points for you to consider when speaking with any of your contractor clients.
What this judgment could mean to contractors?
- Contractor as a Principal under a Payment Bond – When a contractor is contractually required to post a Payment Bond, they are considered to be the Principal under the Bond, as was Langford in the Valard case. Given the fiduciary duty rests with the Obligee, we anticipate Obligees under Payment Bonds will contractually download to the Principal the obligation to notify potential claimants of the Payment Bond’s existence. In such instances, Principals under Payment Bonds can notify potential claimants of the Payment Bond’s existence through their subcontracts and purchase orders and include a copy of the Payment Bond in such documents.
- Contractor as an Obligee under a Payment Bond – Conversely, when for example a general contractor requires its subcontractors and suppliers to post bonds (where the general contractor is the Obligee and the subcontractor is the Principal), the general contractor can avoid this onerous notification process by downloading the requirement contractually to its subcontractors and suppliers.
What can contractors do to ensure their trades are notified?
When and how potential claimants are notified of the existence of the Payment Bond will depend on the unique circumstances of each project. For example, in the Valard case, one of the important facts that the Supreme Court relied heavily upon was that this particular project, an oilsands project, was a type of project which historically was not bonded in Canada.
However, there are several general concepts which will apply to most situations and which contractors should be encouraged to apply:
- If there is a jobsite trailer or other meeting location which is frequented by potential claimants, a copy of the Payment Bond should be prominently posted at this location.
- If the contractor is notified of any payment dispute between parties that could be the subject matter of a claim against the Payment Bond, the contractor should immediately provide a copy of the Payment Bond to the party alleging non-payment.
- If the contractor is made aware of any lien, it should provide the lien claimant with a copy of the Payment Bond.
- The contractor should identify in its subcontracts the existence of any Payment Bonds and should encourage its subcontractors to have similar provisions in its subcontracts and purchase orders.
- The contractor should never discourage a potential claimant from making a claim on a Payment Bond by attempting to have the disputing parties “work it out” prior to a claim being made.
Trisura believes that the proper use of Payment Bonds and the application of this Valard decision will result in more construction companies being able to make timely claims. This corresponds well to the continued push for “prompt payment” and other similar legislation that will only enhance the ability of everyone in the construction pyramid being paid what they are owed, when they are owed it.