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Supreme Court Of Canada Grants Leave To Appeal In Bond Notification Case

On March 9, 2017, the Supreme Court of Canada granted leave to appeal from the decision of the Alberta Court of Appeal in Valard Construction Ltd. v. Bird Construction Co., 2016 CarswellAlta 1584, 57 C.L.R. (4th) 171.

This appeal will be of significance in determining the rights of contractors and subcontractors to receive, and the obligation of owners and contractors to give, notice of the existence of a payment bond.

The claim arose from a payment bond taken out by a subcontractor on a project on which Bird Construction was the contractor and Valard Construction was a sub-subcontractor. In the payment bond, Bird Construction was shown as the “obligee” and “trustee”. Valard said that it was not aware of the existence of the bond until after the time for filing a claim under the bond expired. Valard sued Bird for its failure to notify it of the existence of the bond.

The trial judge and the majority of the Alberta Court of Appeal held that Bird was not obliged to give notice to the sub-subcontractors of the existence of a payment bond applicable to the project. In a judgment of 183 paragraphs, the dissenting appellate judge held that because the contractor is designated in the bond as a trustee, the contractor owed a fiduciary duty to the sub-subcontractors which included the obligation to notify them of the existence of the bond.

The payment bond was in a CCDC format and provided, in part, as follows:

The Principal [the subcontractor] and the Surety, hereby jointly and severally agree with the Obligee, as Trustee, [Bird] that every Claimant who has not been paid as provided for under the terms of its contract with the Principal, before the expiration of a period of ninety (90) days after the date on which the last of such Claimant’s work or labour was done or performed or materials were furnished by such Claimant, may as a beneficiary of the trust herein provided for, sue on this Bond, prosecute the suit to final judgment for such sum or sums as may be justly due to such Claimant under the terms of its contract with the Principal and have execution thereon. Provided that the Obligee is not obliged to do or take any act, action or proceeding against the Surety on behalf of the Claimants, or any of them, to enforce the provisions of this Bond. If any act, action or proceeding is taken either in the name of the Obligee or by joining the Obligee as a party to such proceeding, then such act, action or proceeding, shall be taken on the understanding and basis that the Claimants, or any of them, who take such act, action or proceeding shall indemnify and save harmless the Obligee against all costs, charges and expenses or liabilities incurred thereon and any loss or damage resulting to the Obligee by reason thereof. Provided still further that, subject to the foregoing terms and conditions, the Claimants, or any of them may use the name of the Obligee to sue on and enforce the provisions of this Bond. (underlining and square bracketed added)

The majority of the Albert Court of Appeal held that the wording of the bond “is intended to create a limited trust, as is necessary to circumvent the third-party beneficiary rule that would otherwise preclude a non-party entity from claiming any rights under the bond….The bond’s wording is explicit that the respondent obligee/trustee is not obliged to do or take any act, action or proceeding against the surety on behalf of the claimants to enforce the provisions of the bond. And, the bond imposes no positive obligations of any other kind upon the respondent. Without more, the obligations of parties to a labour and material payment bond are established by the wording of the bond.”

The majority noted that the question of whether the Obligee under a payment has a duty to notify the beneficiaries had been answered in the negative by a judgment of an Ontario county court judge 45 years previously:  Dominion Bridge Co. v. Marla Construction Co. [1970] 3 O.R. 125.

The majority also noted that the Alberta’s Builders’ Lien Act “provides the method for a potential claimant — a lienholder — to make a demand for information, and imposes consequences upon those who fail to promptly comply with such a demand.”

In the lengthy judgment, the dissenting judgement reviewed the law of fiduciary duties and pointed to the judicial authorities establishing that one of the duties of a trustee is to give notice to beneficiaries of their rights under the trust. The dissenting judge held that Bird could not have it both ways: “A trustee cannot both assert that the bond features a trust and that the trustee has none of the duties of a trustee. A trust cannot function without a trustee. This is a blatant violation of the equitable principle against approbation and reprobation.”

The appeal to the Supreme Court may involve a number of fascinating questions.

Which result is best for the construction industry: should the Obligee have, or not have, a duty to advise the potential beneficiaries of the payment bond?

Which parties are best suited or able to take responsibility for the default by the bonded contractor or subcontractor?

These questions seem to involve industry and public policy considerations. Should only the parties to this dispute be heard? Should the CCDC – whose payment bond is involved –or contractor associations and surety bond associations, also be heard?

What is the proper role of the courts as opposed to the legislature in dealing with this issue? As the Alberta Court of Appeal noted, section 33(5) of the Alberta Builders’ Lien Act enables subcontractors, once they are lienholders, to apply to court to obtain information from owners, contractors and subcontractors about any “contract, agreement”. But section 33(5) does not refer to payment bonds and section 33(1) of the Alberta Act provides for the subcontractor or sub-subcontractor to obtain a copy of the construction contract, but (unlike the Ontario and Saskatchewan Act) does not contain a right to obtain the details of and a copy of a payment bond from the owner, contractor or subcontractor, and section 33(2) imposes no sanctions for the failure to produce such a bond.

Does this omissions indicate that the Alberta legislature intended that the right to this information would be dealt with at common law, or did it intend that the subcontractor would not have a statutory right to this information but only a right to bring an application to obtain the information? Is the latter approach a practical way for subcontractors to obtain this information in the ordinary course of business?

Interestingly, Chapter 10 of recent study of the Ontario Construction Lien Act (Striking the Balance: Expert Review of Ontario’s Construction Lien Act; April 30, 2016) dealt specifically with surety bonds, and with third party rights under those bonds. The Report states the following:

“A contractor’s obligation to obtain a payment bond is provided for in the underlying contract between the owner and the contractor. As a result, subcontractors may not always be aware that a payment bond was issued with respect to the project. This is addressed in the current section 39 of the Act, which provides that a lien claimant or trust claimant is entitled to request a copy of any payment bond issued in respect of the contract.

The Report makes no recommendation relating to the issue presented by the Valard v. Bird case. Does that indicate the view of the authors or those who made submissions to them that this issue is not one suitable for legislative attention, or that, having regard to the specific rights provided in section 39 of the Ontario Act, the present Ontario statute law need not be altered?

Whatever the Supreme Court decides, it seems that the CCDC will have the final word so far as the future use of this specific payment bond. It can alter the bond to expressly state that the Obligee has, or does not have, the obligation to notify potential beneficiaries of the payment bond. Should it do so?

The trial judgment in this case was reviewed by me in an article dated April 15, 2016.

See Heintzman and Goldsmith on Canadian Building Contracts, 5th ed. chapter 15

Building Contracts – Payment Bonds – Fiduciary Duties – Notice of Existence of Bond

Thomas G. Heintzman O.C., Q.C., LLD. (Hon.), FCIArb                         May 25, 2017