Construction Bonds. Vanessa S. Werden

Transcription

1 Construction Bonds Vanessa S. Werden

2 What is a bond? A bond is a special form of contract whereby one party guarantees the performance by another party of certain obligations. A bond is a contract, and as such, is interpreted according to the rules of contract law. KEY DISTINCTIONS: Must be in writing and must be the original to be enforceable. A bond may also be referred to as a contract of suretyship. Who are the parties to the contract? the principal, the surety and the obligee

3 Who makes the promise? the surety What does the surety promise? that the principal will perform its obligations Who does the surety make the promise to? the obligee because the obligations are owed to the obligee

4 Three types of bonds are normally used on construction projects: 1. Bid bonds 2. Performance bonds 3. Payment bonds In the context of construction projects, the principal is usually the contractor and the obligee is the project owner. The purpose of a bond is to provide some protection to the obligee, due to the risks inherent in the industry. If the principal fails to perform, the obligee can look to the surety to compensate for the loss or damage caused by the principal.

5 Roles & Responsibilities Surety The surety guarantees the performance of another party. Example 1: The surety guarantees the performance of a contractor for the benefit of the owner of a project. Examples 2: The surety guarantees the performance of a subcontractor for the benefit of a contractor. Principal The principal pays the surety a fee/premium, and in exchange, the surety accepts the obligations to guarantee the performance of the principal.

6 How is a bond created? Two separate agreements are made when a bond is issued: 1. Principal & Obligee The principal enters into a contract with the obligee. For example, a contractor enters into a contract with an owner to renovate a building by June Principal & Surety The principal pays a premium to the surety, and in exchange, the surety guarantees performance by the principal. For example, a bonding company issues a bond for the contractor s obligations as set out in its contract with the owner.

7 Indemnities & Other Surety Recourses Where a surety has paid out money to satisfy the principal s obligations, it is subrogated to the rights of the obligee. Subrogation allows the party who pays for a loss suffered by another party to assume the rights of that other party for the purpose of recovering that loss from a third party. The contractor fails to perform its obligations under its contract with the owner. As a result, the owner suffers a loss and calls on the bond. The surety pays out to the owner on the bond. The surety then has a right of subrogation and can sue the contractor to recover the amount paid out.

8 Bid Bonds Invitations for a bid usually require that the bid be accompanied by a bid bond in the amount of 10% of the amount of the bid. A bid bond is a guarantee by a surety, for the benefit of a project owner, that if the owner accepts a bid by the contractor in question, and the contractor fails to enter into the contract, the surety will pay the penalty specified in the bond.

9 Performance Bonds In the construction industry, a performance bond is a bond under which the surety guarantees a contractor s performance of a construction contract. On large construction projects, the prime contractor often requires its major subcontractors to provide performance bonds. If a subcontractor provides the bond, the prime contractor is the obligee and the subcontractor is the principal.

10 Performance Bonds (continued ) Performance bonds can have any face value, but they are usually issued in an amount equal to 50% of the value of the construction contract. This is the face value of the bond, and is the maximum potential liability of the surety in almost all cases. The construction contract is incorporated by reference into the bond.

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12 Once the surety has been put on notice that its principal is in default, it generally has six options: 1. It can have the principal remedy the default by performing its obligations. 2. It can complete the contract itself in accordance with its terms and conditions. 3. It can solicit bids for completion of the work and pay the obligee the difference between the accepted bid and the remainder owing to the principal under the original contract, up to the face value of the bond. 4. It can pay the obligee the amount of the bond. 5. It can assert a defence and refuse to do anything. 6. If there is a genuine dispute between the obligee and the principal, it can take a wait and see approach to determine whether the principal is in default.

13 Defences under a Performance Bond The surety s obligations and the obligee s right to demand payment are triggered only when the principal defaults on its obligations. When a claim is made by the obligee, the surety is entitled to raise defences. For example, if the principal is able to raise a defence that the main contract is unenforceable, based on misrepresentation, frustration or lack of consideration, the surety can avail itself of that defence as well.

14 Payment Bonds A payment bond is a guarantee of the performance of a payment obligation. A party to a contract may require a payment bond when there is a concern that the other party may default on a payment obligation. For example, owners and general contractors sometimes require a labour and material payment bond to protect against liens by unpaid subcontractors, suppliers, and others working below them in the contractual chain.

15 DELAY CLAIMS

16 What is a delay claim? Some of the most complex construction disputes involve delay claims. A delay claim is a claim to recover increased or unanticipated costs that result from an event that disrupted the schedule and pushed construction beyond the planned completion date.

17 What does the contractor need to prove? A successful delay claim requires proof that: (a) an event has caused disruption to a critical path activity on the project schedule, (b) the disruption delayed the scheduled progress of work, and (c) damages resulted from the delay, such that the claimant is entitled to monetary compensation and/or an extension of the schedule to complete the work.

18 Notice the critical contract term One of the leading decisions on notice is Corpex Inc. v. Canada, [1982] 2 S.C.R. 643, in which the court treated the contractor s failure to comply with the contractual notice requirement in the contract as a bar to recovery. The Supreme Court of Canada held: In order to preserve his rights, he had to notify the owner. With such notice his claim might have been more sure of success once the failure of the consulting engineers to provide him with all the information they had on the nature of the soil had been established. Without such notice, however, his claim, in my opinion cannot succeed, whether such a claim is based on a reasonable assumption on the basis of the information he was given or on the fault of the consulting engineers.

19 Corpex Continued Court held that the contractor could not rely on the terms of the contract providing for additional compensation without complying with the clause in the contract requiring that written notice be given. The contractor could not seek compensation in court after having failed to comply with the contract provisions designed to protect the rights and obligations of each party.

20 Technicore Underground Inc. v. Toronto (City), 2011 ONSC 7205, aff d 2012 ONCA 597 Issue: whether the contractor s claim should be barred if notice was given outside of the contractual notice period. Contract required written notice of any circumstance that might lead to a claim within 30 days after completion of the work affected. Parties had regularly communicated about problems associated with delays throughout the project, but formal notice of a claim for delay was not sent to the owner before the expiry of the 30 day period stipulated by the contract.

21 Technicore Continued Court of Appeal confirmed that the notice provision in the contract was a condition precedent to a claim for delay. Court of Appeal also confirmed that there was no onus on the owner to lead evidence of prejudice resulting from the contractor s non-compliance with the notice provision.

22 What is the effect of the case law on delay? Corpex and Technicore may be said to be cases of gross non-compliance with contract terms. In Centura Building Systems Ltd. v.cressey Whistler Project Corp., 2002 BCSC 1220, however, the British Columbia Supreme Court refused to grant a motion to dismiss a delay claim for technical non-compliance with the contract s notice provisions, because [t]he weight of authority favours the defendants view that it is the substance rather than the form of the notice that is important.

23 Centura Continued In other words, the court in Centura held that technical non-compliance with notice provisions was insufficient on its own to bar the contractor s delay claim. Centura opens the door for a contractor to assert a delay claim if it provides the owner with constructive notice, even where the contractor fails to comply with the technical requirements of the contract.

24 Documents are key! Project documents will be used to determine what actually happened and whether the claiming party is entitled to any compensation. Key documents include: contract documents the contract will usually include a notice provision that requires the claimant to provide notice to the owner in writing that the claimant will assert a claim for delay within a specified period of time; project schedules contract schedules, project schedules, updated and revised schedules that incorporate milestone dates and the impacts of changes to critical path activities and an asbuilt schedule are critical tools for determining which events contributed to delay;

25 time-lapse videos and photographs may assist with the resolution of disputes over what actually occurred on site, the duration of activities, the impact of an accident or how long a crane stood idle; meeting minutes may record problems that arose and the steps taken to remedy those issues; and notice letter(s) may provide the best record of when contract compliant notice was provided by the claimant. The key documents in each case will depend in part on the particular project and delay event(s) in issue.

26 In each case, whether sufficient notice of a delay claim is given will depend on the particular contract terms at issue and the facts of the case. Make sure contract terms are clear and unambiguous, keep contemporaneous records of events, and update project schedules regularly. Generally, claimants who have understood and complied with notice provisions and have maintained a complete project file will be in the best position to succeed on a delay claim.

27 Mitigation of Claims Pre-Construction A contractor can do a lot prior to construction to increase the chances for profitability, reduce the likelihood of claims and, in the event of a claim, to better position itself for recovery. This is particularly true with respect to the development of a sound bid and cost control budget.

28 Preparation of Schedules The preparation of long-term and short-term schedules, the proper application of contractual language in scheduling clauses, and the administration of the schedule over the life of the project are also important. A critical path schedule that includes engineering, procurement, approval deadlines and construction milestones, prepared with subcontractor input, provides the contractor's plan to carry out the work, and forms the basis for executing the project.

29 A carefully prepared, comprehensive critical path schedule : 1) becomes the baseline for what the parties foresee at the beginning of a project; 2) provides a basis for progress measurement and applications for payment; 3) is a tool for analyzing impacts to the contract, developing alternate plans and demonstrating entitlement to delay, disruption, out-of-sequence work and acceleration.

30 In the absence of a properly developed and updated schedule to reflect the progress of construction and the solutions that were implemented to solve unexpected problems, the resolution of disputes usually becomes much more challenging.

31 Did the owner approve the schedule? By approving the schedule, the owner obligated to meet schedule dates and milestones established by the schedule that are the owner's responsibility. General rule: if the owner approves or does not reject or raise objections to the contractor's schedule for owner performance, the owner will be bound by the schedule.

32 Resource Management The efficient use of both personnel and equipment should correspond with the asplanned schedule and schedule updates.

33 Change Orders & Time Extensions In the context of contractual notice requirements, it is typically the contractor's responsibility to demonstrate that additional time is due. Therefore, when a change directive, change order or extra work order is initiated, the contractor should determine whether or not a time extension is required. The anticipated time impact of a change can be established by incorporating the scope and time associated with the changed work into the schedule network and activities.