Notice of labour and material payment bonds: Supreme Court says to do something more than nothing (sometimes)

Publication February 2018

Further to our January 2018 update on the Supreme Court of Canada’s hearing of Valard Construction Ltd. v Bird Construction Company, the court has now released its decision, which has the potential to affect all stakeholders in the Canadian construction industry.

Background

To recap, Bird Construction Company hired Langford Electric Ltd. to perform work on an oil sands project in Alberta and required Langford to post a labour and material payment bond (L&M Bond) that named Bird as trustee – a standard term of L&M Bonds. Langford subcontracted a portion of its scope to Valard Construction Ltd., but Valard was not paid by Langford for over $600,000 of its work. Valard pursued Langford for breach of contract and obtained a “dry” judgment for the amount owing, as Langford was insolvent. Valard only became aware after the fact that Langford had been required to post an L&M Bond and immediately made a claim on the bond. The surety denied the claim on the basis that more than 120 days had passed since Valard last worked on the project, meaning the deadline to make a claim against the L&M Bond had expired.

Valard sued Bird for breach of trust alleging Bird, as the named “trustee,” had a positive obligation to notify it of the existence of the L&M Bond before the expiry of the notice period. A majority of judges on the Supreme Court agreed.

New notice obligations

The majority’s decision focusses on two issues: whether the named trustee on an L&M Bond owes a duty to disclose the bond’s existence to potential beneficiaries; and, if so, what is the extent of the duty of disclosure.

On the first issue, the court emphasized that trustees are not required to disclose the existence of a trust in all circumstances. Usually, the beneficiaries of a trust are aware of its existence when the trust is created. In some cases however, social or business realities mean potential beneficiaries of a trust do not know, and cannot know, the trust exists without someone bringing it to their attention. The court held that in such circumstances, the beneficiary “would be unreasonably disadvantaged not to be informed of a trust’s existence” and, accordingly, “The trustee’s fiduciary duty includes an obligation to disclose the existence of the trust.” This is the first time a Canadian common law court has recognized a trustee’s duty to notify unknown beneficiaries.

Valard was not aware of the L&M Bond’s existence and was “unreasonably disadvantaged” by Bird’s failure to notify it of the bond. Specifically, Valard could not exercise its rights as a beneficiary under the bond unless Valard knew the bond existed before the 120-day deadline expired.

The court then turned to consider the second question: if a duty to disclose exists, what must owners and contractors named as trustees on L&M Bonds do to bring the bond’s existence to the attention of potential claimants? The answer: it depends.

Whether and to what extent the trustee of an L&M Bond will be required to bring the bond’s existence to the attention of potential claimants depends on what is “reasonable” in light of the circumstances. Where the trustee of a bond “can reasonably assume” potential claimants under the bond know of the bond’s existence, or where it would be practically impossible to notify potential claimants, “few, if any, steps may be required.” However, where the trustee has reason to believe potential beneficiaries do not know about the bond, and where there are practical ways to bring the existence of the bond to their attention that are not overly onerous, the trustee must do “something more than nothing.”

Here, the court was persuaded by the following key facts to find that Bird failed to discharge its duties as trustee under the bond:

  • There was evidence before the court that L&M Bonds are not common on private construction projects in the oil sands, meaning Bird did not have reason to believe that Valard knew an L&M Bond existed in this case. In fact, Valard’s project manager testified that in his 10 years of experience in the industry, he had never encountered an L&M Bond on a private oil sands project; and
  • Bird required Valard to attend daily “toolbox meetings” in Bird’s site trailer, which had a notice board where information about the project was regularly displayed, yet a copy of the bond was not posted there.

On these facts, the majority found Bird was required to bring the bond’s existence to Valard’s attention and could have easily done so.

Concurring in the result, Justice Côté held somewhat differently. While she rejected a proactive duty on trustees to inform potential claimants of a bond’s existence, she found Bird should have notified Valard of the existence of the bond when Bird became aware, within the 120-day notice period, that Valard was not being paid by Langford. For Justice Côté, it was a critical finding of fact that Valard had sent Bird an e-mail advising Bird that Valard had not been paid and seeking Bird’s guidance. Justice Côté held this was sufficient to trigger Bird’s duty to disclose the existence of the L&M Bond, based on a general trustee obligation to answer requests from potential beneficiaries accurately.

In dissent, Justice Karakatsanis expressed the view that potential beneficiaries should exercise reasonable diligence to protect their own direct interests by asking whether a bond exists. She expressed concern that the obligation imposed on trustees by the majority was potentially onerous and introduces unnecessary uncertainty and may undermine the value of having an L&M Bond.

Recommendations

Going forward, owners and general contractors who are the trustees of L&M Bonds should err on the side of caution and take reasonable steps to give notice of bonds to potential beneficiaries. This notice could include posting a copy of any L&M Bonds at conspicuous locations on job sites, and reviewing the existence of bonds at kick-off or other meetings (and recording the fact of notice in meeting minutes).

In addition, owner and general contractor trustees can facilitate notice to potential beneficiaries by contractually requiring principals taking out L&M Bonds to give notice. For example, a contract could require the party taking out the bond to provide prompt, written notice of the bond’s existence to every potential beneficiary.

Further, if you are the trustee on an L&M Bond and become aware that a subcontractor or supplier on your project is claiming it has not been paid by the contractor or subcontractor who posted the bond, the subcontractor should be immediately notified of the bond’s existence and provided with a copy.  

For subcontractors and suppliers, always ask the owner and each of the (sub)contractors above you in the contractual matrix whether an L&M Bond exists. The common law requires trustees to provide a copy of any L&M Bond upon request, because it is considered a trust instrument. Make the request and make it early. Keep in mind there are short deadlines to make a claim against a bond, and be sure to give notice comfortably before the deadline.

From a surety’s perspective, the court’s decision in Valard may also drive changes to standard forms of L&M Bonds currently available on the market. The trust principles relied on by the court may allow for future forms of bonds to contain terms defining the reasonable steps a trustee must take to comply with its duty to notify potential claimants.


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