Do Something: General Contractor Liable for Failure to Disclose Existence of Bond

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Do Something: General Contractor Liable for Failing to Disclose the Existence of Labour & Materials Bond in Valard Construction Ltd. v. Bird Construction Co.

February 21, 2018

By John Kulik, QC, Partner at McInnes Cooper

On February 15, 2018, the Supreme Court of Canada decided a trustee’s fiduciary duty includes an obligation to inform beneficiaries of the trust’s existence where not doing so would unreasonably disadvantage the beneficiaries. As a result of the Court’s decision in Valard Construction Ltd. v. Bird Construction Co., wherever a general contractor (or alternatively an owner) has called for a labour and material payment bond (L&M Bond), it will now owe the bond beneficiaries a duty to ensure they are informed of the bond’s existence. Just what a contractor or owner must do to discharge this duty is not yet clear. But the decision raises the question: are the benefits of having an L&M bond worth this new risk?

Do Something More than Nothing. The standard that any trustee must meet is that of honesty, reasonable skill and prudence, but what that requires in the context of a construction bond is unclear. What an owner or general contractor must do to discharge their duties as bond trustees will be heavily dependant on the facts of each situation. But owners and/or general contractors should be aware that doing nothing at all will likely expose them to liability.

But What Can You Do? The potential number of beneficiaries under a bond (i.e. sub-subcontractors and suppliers) could in certain circumstances make it very difficult for owners and/or general contractors to effectively fulfill their duties. For example, suppliers who fall into the class of beneficiaries may never even attend at the job site to see posted notices or receive minutes of meetings etc. Often, the owner or general contractor will have no idea who are the suppliers of subcontractors on a job.

No Good Deed Goes Unpunished. Owners and general contractors must now question whether obtaining labour and material payment bonds are worthwhile. The benefit of such bonds is that they provide subcontractors/suppliers with a source of recovery so they will not abandon projects or file liens if they are not paid. But if this means that owners and general contractors themselves may now be subject to liability (as opposed to the bonding company), then the value of such bonds becomes questionable.

In Valard Construction v. Bird Construction , Bird was the general contractor for a project located on a privately owned oilsands worksite. Bird subcontracted with Langford for certain electrical work. In turn, Langford contracted Valard to provide drilling work. As required under its contract with Bird, Langford obtained a labour and material payment bond naming Bird as the “Obligee” (i.e. the trustee), Langford as the Principal, and the Guarantee Company of North America as the Surety.

The Bond and the Trust. The standard form bond (CCDC 222-2002) allowed for a “beneficiary” (i.e. any provider of labour and/or materials who had not received payment from Langford) to make a claim under the bond. Bird was designated as the bond’s “obligee/trustee”: in particular, Bird held the beneficiaries’ claim rights under the bond in trust. However, each beneficiary was required to provide notice of its claim to the bonding company within 120 days of the date it last provided work/labour or materials on the project.

The Claim. Some of Valard’s invoices went unpaid by Langford. But by the time Valard obtained a default judgment against Langford, Langford had gone bankrupt. Approximately seven months after the 120-day notice period had expired, Valard learned of the bond’s existence. Valard advanced a claim under the bond, which was denied. Valard then sued Bird for breach of trust, alleging Bird had breached its duty as a trustee by failing to inform Valard of the existence of the bond. The claim ultimately reached the Supreme Court of Canada.

The Decision. The Court looked at a large number of factors: the terms of the trust/bond; the identity of the trustee (a general contractor) and of the beneficiaries (sub-subcontractors and suppliers); the size of the class of potential beneficiaries (bond claimants); whether practicalities would make notification entirely impractical; whether the trustee could reasonably assume the beneficiaries knew of the trust’s existence; and standard industry practices. The Court ultimately held that Bird owed Valard a legal duty to inform Valard of the bond’s existence – and breached that duty.

Industry Practice. The Court’s conclusion that L&M Bonds are uncommon on private oilsands construction projects was crucial to the outcome: because of this fact, Valard was not expected to have known, or to have made inquiries, about the existence of the bond. The duty to inform therefore fell to Bird. However, the corollary of this is that Valard could not have relied on the fact that a bond was going to be in place to protect it when Valard contracted with Langford since Valard did not even know the bond existed. In effect, Valard was getting a benefit that it never bargained for.

Reasonable Steps. The Court did not impose a duty upon a trustee to ensure that every potential beneficiary was in fact informed, just that the trustee took reasonable steps towards that end. For example, Bird had an on-site trailer in which it normally posted notices, and at least some of the potential beneficiaries (sub-subs such as Valard) worked on-site and were required to attend daily “toolbox meetings” in Bird’s trailer. Thus, Bird could have satisfied its duty to inform beneficiaries of the trust by posting a notice of the bond at its on-site trailer. Some other method of giving notice might also have sufficed – such as including a reference to the bond in the minutes for the job site meetings. However, in this case, Bird did nothing.

Notice. One of the judges focused on the fact that 82 days after Valard’s last day of work (and thus within the claim notice period under the bond), Langford sent Bird an email advising of a “serious problem” it was having paying Valard’s invoices – and copied Valard on the email. But Bird’s project manager removed Valard from the email chain in his reply, in which he indicated additional funds from the owner would not be forthcoming. The judge decided this constituted notice of Valard’s potential claim under the bond, and the removal of Valard from the email chain amounted to a breach of Bird’s equitable duty to a potential claimant under the bond.

Please contact your McInnes Cooper lawyer or any member of the Construction Law Team @ McInnes Cooper to discuss this topic or any other legal issue.

McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.

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