February 21, 2018
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?
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.
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