The Alberta Court of Queen’s Bench recently considered an interesting issue relating to labour and material payment bonds. When a contractor requires a subcontractor to obtain such a bond, does the contractor have a duty to tell the subcontractors about the existence of the bond so that they can make a timely claim under it, particularly when the contractor is shown in the bond to be a trustee for those subcontractors? In Valard Construction Ltd. v. Bird Construction Co., the court said No. Is this the just result?

Background

Bird was the general contractor and Langford was the subcontractor on a construction project. Bird required Langford to provide a CCDC 222-2002 payment bond. Valard was an unpaid sub-sub-contractor of Langford. It was unaware of the existence of the payment bond until after the notice period in the bond had expired, and its claim was accordingly rejected by the bonding company. It submitted that Bird, as trustee under the bond, had a duty to inform it of the bond’s existence within the relevant notice period in the bond.

Decision of the Application Judge

The judge hearing the application held that the trusteeship wording in the bond was solely for the purpose of avoiding the rule in contract law that third parties cannot sue on a contract and to enable the sub-subcontractors to sue on the bond even though they were not parties to it. The trusteeship wording did not create a fiduciary duty toward Valard obliging Bird to tell Valard of the existence of the bond. The judge noted as follows:

“In order to avoid the application of the third party beneficiary rule, the standard bond wording provided, and still provides, that the obligee is “trustee” for the benefit of all beneficiaries/claimants. Significantly, the bond expressly states that the obligee is not obliged to do or take any act, action or proceeding against the surety on behalf of any of the claimants to enforce the provisions of the bond. It provides, however, that claimants may use the name of the obligee to sue on and enforce the provisions of the bond….The express negation of any requirement on the part of the trustee to take action on behalf of the beneficiaries, combined with the ability of claimants to sue in the name of the trustee support the conclusion that the trustee wording is used in the Bond in order to avoid the obstacle raised by the third party beneficiary rule.

The court noted that this issue had been addressed by the Ontario county court some 45 years ago in Dominion Bridge Co v Marla Construction Co, [1970] 3 OR 125. In that case, Judge Grossberg asked the following questions:

“I asked in argument: when did the duty arise? At what point of time? What exactly was that duty? Must Sun Oil embark upon inquiries who were the labourers? Who were the creditors? Who were the suppliers? Must Sun Oil seek out the creditors and suppliers? If the contention of counsel for the plaintiff be upheld, Sun Oil would be obliged to acquire knowledge of all materials purchased, all labourers on the job from day to day and to keep a constant surveillance. The consequence of the submission must be that Sun Oil must seek out material, men, suppliers, labourers, subcontractors, etc., of Marla and acquaint each that there was a bond in existence. No such duty is imposed by the bond itself…”

In the Valard case, the court concluded that “the sole purpose of the trust wording in the Bond is to address the difficulties that the identities of the claimants cannot be ascertained at the time the bond is entered into, and that the third party beneficiary rule would otherwise prevent a claimant from suing the surety.”

The application judge was not impressed with the equities of the situation from the standpoint of Valard, the sub-subcontractor. He said:

“In any event, a simple standard inquiry by Valard would be a more reliable means of obtaining the information. While it may be that employees of subcontractors may not always be aware of the possibility of a bond, this does not explain why a large and sophisticated entity such as Valard would not have in place a mandatory protocol under which bond information is requested on all subcontracts, especially given the state of the law on the issue. In this case, we are not dealing with the disadvantaged and infirm, but rather with a large sophisticated company with five or six hundred employees in Canada which has its own surety or bonding company.”

Accordingly, the court held that Bird had no duty to advise the sub-subcontractors of the bond.

Valard had originally sought relief from forfeiture in respect of its claim against the bonding company. But during the application, that claim was withdrawn since the bonding company was able to establish actual prejudice arising from the delay in making the claim.

Discussion

The court seems to have been heavily influenced by the long period of time since the Dominion Bridge case was decided and the apparent acceptance of that decision in the construction industry. Yet, this decision seems hard to reconcile with the trustee obligations which contractors assume when they require a payment bond to be obtained by the subcontractor.

Which is the greater burden: if there is a payment bond, for the contractor to find out which sub-subcontractors are beneficiaries of the bond and notify them of the bond; or for every sub-subcontractor on every construction project to ask whether there is a payment bond?

Even though the latter seems to be the more burdensome approach, it seems to be the law based on the Dominion Bridge and Valard decisions.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 15, part 10

Valard Construction Ltd. v. Bird Construction Co., 2015 CarswellAlta 342, 2015 ABQB 141

Building Contracts – Bonds – Payment Bonds – Duties of Trustee – Rights of Subcontractors

Thomas G. Heintzman O.C., Q.C., FCIArb                                             April 15, 2015

www.heintzmanadr.com

www.constructionlawcanada.com