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Brook Stanley
8 years ago
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2 Bonds Bonds are similar to, but not identical to, insurance policies Intended to protect innocent parties against the default of another party If there is a default of a contractor, usually because of financial problems Obtaining a judgment may be a hollow victory if cannot collect 10 0

party If there is a default of a contractor, usually because of

3 Three most common forms of bond: 1. The Bid Bond 2. The Performance Bond 3. The Labour and Material Payment Bond 10 1

4 The Performance Bond Guarantees the performance of the work under the contract between the Owner and the Contractor Protects the owner, primarily Can also protect t the general contractor t if subs are required to post a performance bond as well On default, the Owner may claim on the bond 10 2

primarily Can also protect t the general contractor t if subs are

5 The structure of a performance bond: Surety Obligee (Bonding Company) (Owner) Principal (General Contractor) * Similar il to an insurance policy, but there are differences (e.g. three parties to the contract, no duty of utmost good faith) 10 3

to an insurance policy, but there are differences (e.g.

6 Default is the key trigger Must be an actual default under the construction contract Not always clear that a default under the contract has occurred e.g. where there is a dispute between the owner and the contractor as to the requirements under the contract Default must be declared by the obligee/owner Notice must be clear and unequivocal Avoid wording like may be in default or contractor has been given X days to remedy the default Not enough to copy the Bonding Company on default letters Must state that you are calling on the Bonding Company to perform its obligations under the Bond 10 4

obligee/owner Notice must be clear and unequivocal Avoid wording like may be in default or contractor has been given X days to remedy the default

7 On default by contractor, the Bonding Company has several options: Remedy any default; Take over the completion of the project (rare not their business); or Most commonly, will have the owner re-tender the work, and reimburse the owner for the difference, up to the amount of the bond. 10 5

their business); or Most commonly, will have the owner re-tender the

8 CTION If the Bonding Company fails to act, the Owner is under an obligation to mitigate the loss, and may be required to carry out the work or re-tender, then claim for indemnity under the bond If the Bonding Company chooses not to act, on notice, it will do so at tits peril ilifitiif it is later determined dthere was a default Often, especially where there has been an ongoing dispute between the owner and the contractor, t the Bonding Company will be hesitant to step in, as they might not be able to collect on the indemnity if the contractor turns out to be right, i.e. there has not been a default under the contract 10 6

dthere was a default Often, especially where there has been an ongoing dispute between the owner and the contractor, t the Bonding Company will be hesitant

9 Where the Bonding Company responds to the claim, it effectively steps into the shoes of the defaulting contractor But not completely only liable for the damages payable under the bond Not 100% clear in Canada due to some conflicting case law, but the bond probably does not cover things like liquidated damages claims for delay, or consequential damages associated with business interruption or economic loss Because the Bonding Company cannot control when the default is declared, they are limited to the cost of the bricks and mortar, generally 10 7

cover things like liquidated damages claims for delay, or consequential damages associated with business interruption or economic loss

10 Common Defences There has been no default by the contractor The obligee/owner must have performed all of its obligations owed to the contractor under the contract The obligee/owner has not given timely notice of the default, so that the Bonding Company s right to remedy the default or exercise its other options has been prejudiced Change in Scope if the scope of the contract is changed significantly without the prior consent of the Bonding Company Limitation Period defences (discussed below) 10 8

Company s right to remedy the default or exercise its other options has been prejudiced Change in Scope if the scope of the

11 Labour and Materials Payment Bonds The Bonding Company guarantees the payment of the defaulting general contractor s indebtedness towards the innocent subcontractor or supplier of materials If the general contractor defaults on payments to the subcontractors or suppliers, they can claim under the bond The Bonding Company has all defences available to the contractor i.e. the sub-contractor s work was deficient, caused delays, the supplies were defective, etc. 10 9

payments to the subcontractors or suppliers, they can claim under the bond The Bonding Company has all defences

12 Common Structure of a Payment Bond Surety Obligee (Bonding Company) (Sub or Supplier *) Principal (General Contractor) * Except with provincial i government bonds, the bond is typically limited to those who have a direct contract with the general contractor 11 0

Except with provincial i government bonds, the bond is typically

13 As with the Performance Bond, the claiming party must prove a default by the Principal in order to make a claim on a L&M bond As with any bond or insurance policy, must be read carefully. Usually will only cover parties who are in direct contractual relationship with the defaulting party; but on some projects, especially government jobs, could be broader Entitlement under bond does not require that the claimant exhaust other remedies first, so can bring a claim under the bond in conjunction with a lien claim and a debt action 11 1

Usually will only cover parties who are in direct contractual relationship with the defaulting party; but on some projects,

14 The trigger for a claim under a L&M bond is the failure of the contractor t to pay a sub-contractor t or supplier, usually within 90 days of the last work or supply of materials - so usually a longer period to make a claim than under the Builder s Lien / Mechanics Lien legislation 11 2

days of the last work or supply of materials - so usually a longer

15 Bonds with the Province: ICI Paints, 1992, NSCA Bonds required by the province do not limit claims under the bond to parties in a direct contractual relationship with the general contractor Claim is not dependant on a payment default of the general contractor Even where the owner pays the general contractor, who in turn pays its subcontractors If one of the subcontractors down the chain is not paid, they can claim against the surety company Note previously that subcontractors had no recourse under the Mechanics Lien Act Policy reasons for the bond Province continues to require it to ensure all subcontractors are paid 11 3

contractor, who in turn pays its subcontractors If one of the subcontractors down the chain is not paid, they can claim against the surety company Note

16 APM Construction v. Caribou Island Electric, 2012, NSSC Province of Nova Scotia APM (general contractor) t Bond + Indemnity Caribou Island Electric (subcontractor) CRA Advanced Cabling Systems (supplied subcontractor) 11 4

17 APM Construction v. Caribou Island Electric, 2012, NSSC Province paid APM APM owed Caribou $94,000 for work performed, however: Received a CRA notice to pay for Caribou Received notice of a lien from ACS APM therefore had conflicting claims and did not know who to pay Applied to the court for direction regarding conflicting claims: 11 5

work performed, however: Received a CRA notice to pay for Caribou Received notice of

18 Court ordered: APM to remit funds to CRA in full satisfaction of its amount owing to Caribou By doing so, it had fully complied with the contract and was not in default ACS remained unpaid by Caribou. The Court followed ICI Paints and found that because ACS remained unpaid, it was entitled to payment from the Bonding Company under the bond, even though APM had no contractual obligation to pay ACS HOWEVER: APM had a indemnity with the Bonding Company, Which meant that APM had to pay twice: 11 6

The Court followed ICI Paints and found that because ACS remained unpaid, it was entitled to payment from the Bonding

19 ($86,000 paid back to surety pursuant to indemnity) APM (general contractor) Bond + Indemnity ($94,000 owing to ($86,000 owing to ACS Caribou) from Caribou, pursuant to the payment bond) CRA Advanced Cabling Systems 11 7

20 ICI Paints was decided when subcontractors had no relief under the Mechanics Lien Act against crown property APM argued the decision i should not apply because of the subsequent change to the Builders Lien Act Argument rejected: it was the wording of the bond that dictated the result If the parties intended a different result, they should have changed the wording of the bond when the legislation was amended Perfect Storm of facts: CRA superpriority it prevented APM from paying ACS directly 11 8

of the bond that dictated the result If the parties intended a different result, they should have changed the wording of the

21 Provincial Government Payment Bonds If you are an unpaid subcontractor, you may have recourse against the surety even if no contract with the general contractor If you are the general contractor, you may be left holding the bag if your subcontractor owes CRA Question: as between all of the parties, who is in the best position to assess the financial stability of the subcontractor? 11 9

22 However APM Construction is under appeal Heard in January before a five member panel Considering whether to overturn ICI Paints in light of the amendments to the lien legislation affecting Crown property If so, subcontractors would be prevented from claiming against the Bonding Company General contractors would be protected from financial problems of subcontractors t Will largely only affect provincial government contracts 12 0

23 Notice Periods and Limitation Periods for Bonds: Read the bond carefully to determine the appropriate notice and limitation period, because not all bonds are the same Generally, the bond will require that notice be given to the Bonding Company within 90 days of the claim arising The notice period used to be strictly enforced by the courts, but now the claimant can get relief from forfeiture where there is no prejudice to the Bonding Company BUT Limitation period (time in which you must start the lawsuit) is strictly enforced usually one year from when the claim arose 12 1

24 Conclusion Read the Bond very carefully Comply with all notice periods and limitation periods Do not leave it to the last minute When in doubt, involve the Bonding Company 12 2

25 QUESTIONS Questions 12 3

26 These materials are intended to provide brief informational summaries only of legal developments and topics of general interest. The materials should not be relied upon as a substitute for consultation with a lawyer with respect to the reader s specific circumstances. Each legal or regulatory situation is different and requires review of the relevant facts and applicable law. If you have specific questions related to these materials or their application to you, you are encouraged to consult a member of our firm to discuss your needs for specific legal advice relating to the particular circumstances of your situation. Due to the rapidly changing nature of the law, Stewart McKelvey is not responsible for informing you of future legal developments. 12 4

PERFORMANCE BONDS AND LABOUR AND MATERIAL PAYMENT BONDS: WHAT THE CONSTRUCTION INDUSTRY SHOULD KNOW

PERFORMANCE BONDS AND LABOUR AND MATERIAL PAYMENT BONDS: WHAT THE CONSTRUCTION INDUSTRY SHOULD KNOW Deborah E. Palter, B.A., LL.B., J.D. What is a Bond? A bond is a three party written agreement. The three