Review of Valard Construction Ltd v Bird Construction Co – Duty to Inform of Bonds
The Supreme Court of Canada recently ruled, in Valard Construction Ltd v Bird Construction Co, that a labour and material payment bond’s obligee (the party that required its contractor to obtain the bond) has, in certain circumstances, a duty to inform potential claimants of the bond’s existence.
BACKGROUND
In Bird, the general contractor (the “GC”) was the obligee of a labour and material payment bond obtained by its sub-contractor (the “Sub”). The Sub became insolvent and failed to pay its sub-sub-contractor (“Sub-Sub”). The Sub-Sub was not aware of the bond. When the Sub-Sub finally learned about the bond, the time for claiming against it had expired.
The Sub-Sub sued the obligee, arguing that the GC had a duty to inform the Sub-Sub of the existence of the bond.
THE SUPREME COURT’S RULING
Where the Duty to Inform Arises
The Supreme Court held that a labour and material payment bond creates a trust relationship under which the obligee is the trustee and potential claimants are beneficiaries. Trustees owe a fiduciary duty to beneficiaries. If a beneficiary is unaware of a trust and is at an “unreasonable disadvantage” as a result, the trustee’s fiduciary duty includes the obligation to inform the beneficiary of the trust. Accordingly, an obligee must inform potential claimants of the existence of a labour and material payment bond if the potential claimants are not otherwise aware of it and would be at an “unreasonable disadvantage” as a result.
In this case, the Supreme Court found that the Sub’s failure to inform the Sub-Sub of the existence of the bond put the Sub-Sub at an unreasonable disadvantage, because the Sub-Sub was unable to make a claim against the bond within the required time. A key part of this analysis is the fact that the project was an oilsands project, where labour and material payment bonds are rarely used. The Supreme Court commented that a duty to inform may not arise on a project or in a region where labour and material payment bonds are common, as potential claimants may not be unreasonably disadvantaged by not being informed about the existence of a bond—potential claimants in such circumstances may be expected to ask the obligee about bonds.
How to Discharge the Duty to Inform
Though it was not directly in issue in this case because the GC had not taken any steps to inform potential claimants of the bond, the Supreme Court held that a court determining whether an obligee has discharged its duty to inform must ask whether the obligee did what an honest, reasonably skilful, and prudent obligee would have done in the circumstances. The Supreme Court commented that in this case, the GC could have discharged its duty by posting a notice of the bond in its trailer on site.
Consequence of Breach of the Duty to Inform
The Supreme Court established a very serious consequence for an obligee who fails to inform a potential beneficiary of the existence of a labour and materials payment bond. If a potential beneficiary misses making a claim against the bond in the required time as a result of the obligee’s failure to inform them of its existence, the obligee must pay the potential beneficiary whatever they would have received under the bond if they had made a claim in the required time.
GUIDANCE FOR OBLIGEES AND POTENTIAL CLAIMANTS
In light of this decision, an obligee under a labour and material payment bond should always take whatever steps are necessary in the circumstances to bring the existence of the bond to the attention of all subcontractors and suppliers who might claim against it. While the duty to inform does not arise in all circumstances, the prudent course of action—at least until there is more case law on this issue—is for obligees to always govern themselves as though they are under a duty to inform.
The prudent course of action for unpaid sub-contractors and suppliers is the converse: potential claimants should always ask about the existence of a bond in time to allow themselves to make a claim against it. It is not safe to assume that obligees will be aware of or strictly comply with this decision, and it is easier to make a claim against a bond than to sue an obligee for breaching its duty to inform.
About the Authors:
Collin is a partner at the Saskatoon office with experience in construction contracts, tendering, construction litigation and dispute resolution, wrongful dismissal and employment issues, security enforcement, and professional discipline.
Caroline is an associate lawyer in the Saskatoon office and practices in all areas of corporate/commercial litigation, with a focus on construction and real estate disputes. She also has significant experience in corporate and securities litigation, including plans of arrangement, Crown royalty disputes, and product liability.
About McKercher LLP:
McKercher LLP is one of Saskatchewan’s oldest, largest law firms with offices in Saskatoon and Regina. Our deep roots and client-first philosophy have made our firm rank in the top 5 in Saskatchewan by Canadian Lawyer magazine (2017). Integrity, experience and capacity provide innovative solutions for our clients’ diverse legal issues and complex business transactions.
This post is for information purposes only and should not be taken as legal opinions on any specific facts or circumstances. Counsel should be consulted concerning your own situation and any specific legal questions you may have.