The purpose of a labour and material payment bond is to provide a form of security to labour and material suppliers on a construction project by giving them a right to claim against a surety (typically an insurance company) if they are not paid for their work by the bond’s principal (such as a general contractor or subcontractor). Labour and material payment bonds are an effective means of protecting owners or contractors from the risk of work stoppages, liens and litigation by helping to maintain prompt payment of unpaid subcontractors and material suppliers. However, obligations placed by the Supreme Court of Canada on parties designated as trustees under a Labour and Material Payment Bond in the recent case of Valard Construction Ltd. v. Bird Construction Co., 2018 SCC 8, reveal a significant new source of liability for failing to disclose the existence of a labour and material payment bond where a potential claimant is “unreasonably disadvantaged” by ignorance of the bond’s existence.
Bird Construction Company (“Bird”) was a general contractor for a construction project in the oilsands in Alberta. Bird entered into a subcontract with Langford Electric Ltd. (“Langford”), and required Langford to obtain a labour and material payment bond (the “Bond”) naming Bird as obligee (and trustee) and Langford as Principal under the Bond. Langford, in turn, entered into a further subcontract with Valard Construction Ltd. (“Valard”). Valard was unaware of the existence of the Bond.
Langford began to suffer financial difficulties, and payment issues arose between Valard and Langford, of which Bird was fully aware. Langford eventually became insolvent. When Valard finally learned of the Bond sometime later, it attempted to make a claim for payment from the surety, Guarantee Company of North America. However, Valard’s claim was rejected as it was outside the time requirements to give notice of a claim under the Bond.
Valard sued Bird for damages, arguing that Bird, as obligee/trustee under the Bond, had a duty to inform Valard of the Bond’s existence in order to enable it to make a timely claim.
The Supreme Court of Canada held that Bird, having been designated a trustee under the Bond, owed a fiduciary duty to Valard in these particular circumstances to disclose the bond’s existence to potential claimants (such as Valard). By failing to do so, Bird breached its fiduciary duty and was liable to pay monies that Valard would have received from the surety had its claim been made in time.
The Supreme Court was clear that a trustee’s duty does not always require full disclosure to potential claimants of a Labour and Material Payment Bond. A trustee’s obligation to disclose the existence of a bond arises wherever it could be said to be to the “unreasonable disadvantage” of potential claimants not to be informed of the bond’s existence. In this case, it was determined that Labour and Material Payment Bonds were not commonly used in private oilsands projects, so an unreasonable disadavantage was created by Bird’s decision not to reveal the existence of the bond to potential claimants. It was found that Bird should have posted notice of the Bond in its on-site trailer in order to discharge its duty in these circumstances. The Court suggested that on different types of projects where Labour and Material Payment Bonds are standard, there may be a limited duty (or possibly no duty) to reveal the existence of the bond to potential claimants.
- An obligee designated as a trustee in a Labour and Material Payment bond may be required to disclose the existence of the bond to potential claimants in circumstances where those potential claimants could be unreasonably disadvantaged by not being informed. If a Labour and Material Payment Bond exists on a project where such bonds are not customary, there is a greater chance of the duty of the obligee/trustee to disclose being triggered.
- An obligee/trustee should seek legal advice if unclear about how to discharge their legal obligations in communicating the existence of a Labour and Material Payment Bond to potential claimants on a project.
This article was written by Ian C. Moes, partner, and Matthew T. Potomak, Articled Student, who practice in construction law with the law firm of Kuhn LLP. This article is only intended as a guide and cannot cover every situation. It is important to get legal advice for specific situations. If you have any questions or comments about this case or other construction law matters, please contact us at 604-682-8868.