In a much anticipated decision, the Supreme Court of Canada has recently held that a contractor which is a trustee under a payment bond has an obligation to advise sub-contractors of the existence of the bond applicable to the project.

In Valard Construction Ltd. v. Bird Construction Co., 2018 CarswellAlta 261, 2018 SCC 8, the Supreme Court reversed the decisions of the Alberta courts below, and set aside over 40 years of lower court decisions which had held that owners and contractors had no such duty.

Background

Bird was the general contractor on an oilsand construction project near Fort McMurray, Alberta. Bird subcontracted the electrical work to Langford, and that subcontract required Langford to obtain a labour and materials payment bond.

That bond was in the standard form CCDC 222-2002 format. It was issued by the Guarantee Company of North America for $659,671. The bond named Bird as Obligee, Langford as Principal, and the Guarantee Company as Surety.

Under the terms of the bond, a beneficiary of the bond was a provider of work/labour or materials who had not received payment from Langford within 90 days of the last day upon which it provided work/labour or materials. The beneficiary was entitled to sue Guarantee on the bond for the unpaid amount. The bond designated Bird as the trustee, holding in trust for the beneficiaries their right to recover from Guarantee. The bond required the beneficiary to give note of its claim to Langford, Guarantee and Bird within 120 days of its last provision of work/labour or materials.

Neither the bond, nor notice of it, was posted on the notice board at the work site. Neither Bird nor anyone on its behalf notified Valard of the bond’s existence. Valard was unaware of the bond until after the 120 day notice period had expired. .

Valard began its work on March 17, 2009 and finished on May 20, 2009. At that date, unknown to Valard, the 120 day notice period under the bond started to run.

Valard’s invoices went unpaid by Langford and on March 9, 2010, it was granted default judgment against Langford for $660,000. By then, Langford was insolvent.

In April 2010, or about seven months after the 120 day notice period under the bond had expired, Valard’s project manager learned that there was a payment bond on another project upon which it and Bird were engaged. Valard inquired of Bird whether there had been a payment bond on the project on which it had not been paid, and was told Yes. This was a surprise to Valard’s project manager since he had never encountered a payment bond on a privately owned oilsands project.

Valard then filed a claim with Guarantee for the unpaid amount. Guarantee denied the claim due to Valard’s failure to give timely notice of its claim. Valard then sued Bird for breach of trust, alleging that Bird had failed to inform the beneficiaries of the bond of the existence of the bond and their right of action provided by the bond.

The Alberta Court of Queen’s Bench and the Alberta Court of Appeal dismissed Valard’s claim. Those decisions were reviewed by me in articles dated April 15, 2016 and May 25, 2017. Basically, those courts held that subcontractors on construction projects have a duty to look after their own self-interest and make their own inquiries about the existence of payment bonds; and that since a decision of an Ontario county court judge back in 1970, it has been the understanding in the construction industry that owners or contractors, when they act as a trustee under a payment bond, do not have the obligation to advise subcontractors and sub-subcontractors of the existence of a payment bond.

Decision of the Supreme Court

In reversing the courts below, the majority of the Supreme Court applied the following reasoning:

  1. A trustee has a duty to disclose to the beneficiaries the existence of the trust wherever it could be said to be to the unreasonable disadvantage of the beneficiary not to be informed of the trust’s existence:

“Whether a particular disadvantage is unreasonable must be considered in light of the nature and terms of the trust and the social or business environment in which it operates, and in light of the beneficiary’s entitlement thereunder. For example, where the enforcement of the trust requires that the beneficiary receive notice of the trust’s existence, and the beneficiary would not otherwise have such knowledge, a duty to disclose will arise. On the other hand, “where the interest of the beneficiary is remote in the sense that vesting is most unlikely, or the opportunity for the power or discretion to be exercised is equally unlikely”, it would be rare to find that the beneficiary could be said to suffer unreasonable disadvantage if uninformed of the trust’s existence.

  1. Valard was unreasonably disadvantaged by Bird’s failure to inform it of the trust’s existence:

“Valard required knowledge of the trust in order to enforce it. The expiry of the 120-day notice period before Valard learned of the bond effectively prevented it from enforcing the trust by making a claim against the Guarantee Company and recovering sums owed under its contract with Langford. I would therefore find that Bird, as trustee, had a duty to disclose the bond’s existence to Valard.”

  1. While one of the purposes, and perhaps the main purpose of payment bonds is to protect the trustee — being the owner or a general contractor — from the risk and expense of liens, that purpose can only be meaningful if the beneficiaries are capable of enforcing the bond. Accordingly, the proper operation of the trust “tends to affirm rather than negate the necessity of disclosing their existence.”
  1. While there are longstanding lower court decisions holding that a contractor does not have a duty to inform sub-subcontractors about the existence of a bond applicable to a construction project, that does not prove that there is an understanding and practice in the construction industry to this effect. The existence of such a trade practice or understanding is a matter of fact and would have to be proven by evidence.   The evidence before the court in this case was that payment bonds were uncommon on private oilsands construction projects.
  1. The entitlement of Valard, under s. 33 of Alberta’s Builders’ Lien Act, to obtain a copy of the main contract between the owner and contractor and the subcontract between the contractor and subcontractor, does not eliminates the unreasonable disadvantage that arises from Valard being uninformed about the trust. Nothing in Section 33 is tantamount to a statement that a trustee is absolved of its fiduciary duty to disclose the existence of a trust contained within the bond.
  1. Bird Construction was not just a bare trustee with no duties to perform. A bare trusteeship assumes that the beneficiaries are capable of calling for the trust property on demand. Here, the beneficiaries did not know of the trust’s existence. Accordingly, the trust obligation imposed by the bond at least required the trustee to advise the beneficiaries of the bond.
  1. Bird Construction had the obligation to act an honest and reasonably skillful and prudent trustee. Its obligation to disclose the existence of the trust extended “not to ensuring that every potential beneficiary knows of the trust, but only to taking reasonable steps to that end.” The evidence was that Bird had an on-site trailer in which notices were normally posted. The subcontractors were required to attend daily “toolbox meetings” in Bird’s trailer. In these circumstances:

“Bird could have satisfied its duty to inform beneficiaries of the trust by posting a notice of the bond in its on-site trailer. This would have provided a significant portion of potential beneficiaries with notice of the bond’s existence. The cost of doing so would have been negligible to Bird, and this method of notice would not have been otherwise onerous. I note that this method of notice is already statutorily required on public worksites in Alberta: Public Works Act, R.S.A. 2000, c. P-46, s. 17.

This does not mean, however, that taking such steps will always be necessary in order to resist every claim for breach of trust made by a disappointed beneficiary of a labour and material payment bond. It is also possible that some other method of giving notice — had the evidence disclosed it — might have sufficed. To reiterate: the question is not what Bird could have done in this case, but what Bird should reasonably have done in the circumstances of this case to notify beneficiaries such as Valard of the existence of the bond. Here, Bird did nothing. It filed the bond offsite, did not post it, and told nobody about it. In some circumstances (where, for example, the industrial practice is such that the use of labour and material payment bonds to offset the risks arising from unpaid subcontractors are common), it may well be that very little, or even nothing, will be required on the part of a trustee to notify potential beneficiaries of the trust’s existence. In the circumstances of this appeal, however, where the evidence was that labour and material payment bonds were uncommon, something more than nothing was required from Bird to discharge its duty. Bird therefore committed a breach of trust.”

Judges Côté and Karakatsanis dissented from this reasoning of the majority. They held that a trustee under a payment bond does not in general have a proactive duty to take steps to inform potential claimants of a bond’s existence.

However, Justice Côté held that, by reasons of correspondence between Bird and Langford, Bird was put on specific notice of difficulties that Valard was facing in getting paid by Langford.

On August 10, 2009, an employee of Langford sent an email to Bird’s project manager, advising him of a “serious problem” that Langford was having in paying Valard’s invoices. This email was also sent to Valard’s project manager. The email indicated that the owner was refusing to pay any further amount to cover Valard’s invoices. Langford asked Bird for assistance as to how it should proceed. Bird sent a response by email to Langford, but did not copy Valard, indicating that “We would help you if we could, but Suncor was already upset with our last claim.”

Based on this evidence Justice Côté concluded as follows:

“Upon receiving Langford’s email, Bird was informed of “serious problem[s]” between Valard and Langford Electric, and was alive to the very real possibility of Valard not being paid in full for its services — especially since it knew that additional funds from Suncor Energy Inc. would not be forthcoming. Moreover, Bird was expressly asked to advise on how the parties should proceed with their dispute. Valard, as a recipient of the email, had full knowledge of this. Indeed, it was Valard’s issue with the payment offered by Langford up to that point which prompted Langford to email Bird in the first place.

39      As noted above, I accept that a trustee has an equitable obligation to accurately answer all requests from potential claimants for information pertaining to the existence and particulars of any labour and materials payment bond. As I see it, the August 10, 2009 email effectively amounted to such a request. Although the email was not sent by Valard, and did not explicitly raise questions regarding the existence of any bond, I do not see this as particularly significant. In my view, it is not necessary that a potential claimant articulate a particular set of words before being entitled to information about any existing bond from the trustee. ……On the facts of this case, it is sufficient that Langford’s email alerted Bird to the payment problems between Valard and Langford, and ended with a clear request that Bird outline how the parties should proceed with this payment dispute. As one of the recipients of this email (and part of this conversation), Valard was entitled to expect that, if a labour and materials payment bond were available, its existence would have been disclosed by Bird (as trustee/obligee) at this time.

40      Rather than doing so, Bird removed Valard from the email chain and informed Langford that additional funds from Suncor would not be forthcoming. It is my view that, by failing to notify Valard of the L&M Bond’s existence upon receiving what effectively amounted to a request for guidance as to how this payment dispute could be resolved and with knowledge that additional money from Suncor was unavailable, Bird breached the equitable duty it owed to Valard. Valard was entitled to assume that this request would have triggered a duty on the part of the trustee to advise it of any available bond, and that it therefore did not need to make any further requests in this regard.” (emphasis added)

Accordingly, Justice Côté agreed with the majority that the appeal should be allowed.

Justice Karakatsanis held that nothing in the facts of this case activated Bird’s duty to inform Valard of the existence of the bond. Accordingly, she would have dismissed the appeal.

Discussion  

This decision is obviously of great importance to the law relating to labour and material payment bonds on construction projects.

There are two specific factual bases upon which the duty to disclose the existence of a payment bond was found to exist in the present case:

  • According to the majority, because the “construction project” was not the sort of project upon which payment bonds are normally used, then the duty to disclose the bond arose in this case. The legal principle behind that decision is much broader: the duty arises wherever it could be said to be to the “unreasonable disadvantage” of the beneficiary not to be informed of the trust’s existence. But the majority declined to define what other circumstances would trigger that duty to disclose.
  • According to Justice Côté, because Bird received notice (from Langford) of the difficulty that Valard was having getting paid by Langford, it had a duty to respond to Valard and advise Valard of the existence of the bond.

The importance of Justice Côté’s decision is apparent. She agreed with Justice Karakatsanis that generally there is no duty on the contractor to advise the sub-subcontractor of the existence of the bond. But she found that such a duty was triggered when the contractor learned of a sub-subcontractor’s difficulty in getting paid, even though that information was not received from the sub-subcontractor (and indeed in this case, it was received from the defaulting subcontractor!). So the duty found by Justice Côté can arise even if the use of payment bonds on such a construction project is common. In effect, Justice Côté’s decision has a much broader application to construction projects than that of the majority.

The majority of the Supreme Court would seemingly agree with Justice Côté’s approach since the “unreasonable disadvantage” to the sub-subcontractor in not being advised of the bond is much more obvious when the sub-subcontractor is having difficulty getting paid by the subcontractor, and the contractor knows that.

If one combines these two elements of the Valard decision, then it may be highly risky for an owner or contractor which is a trustee under a payment bond not to take steps to alert the beneficiaries of the existence of the bond. Applying the majority’s decision, the circumstances in any particular case may amount to an “unreasonable disadvantage” to the beneficiaries, thereby triggering the duty to disclose. Applying Justice Côté’s reasoning, some email, job minute or other event may later be found to have been sufficient notice to the trustee to trigger the duty to disclose the bond. Both these elements are pretty indefinite, which may make the risk of non-disclosure of the bond too high.

If this is so, then owners and contractors who are trustees under payment bonds may start posting notice of the bonds on the site or otherwise take steps to bring the bonds to the attention of subcontractors and sub-subcontractors, simply in order not to run the risk that the Valard decision will be used against them. The Valard decision may change the whole industry landscape by changing the conduct of owners and contractors.

Another issue is: can the ruling in Valard be avoided by re-wording the bond? For instance:

  1. If the owner or contractor under the bond is not named as a trustee, will the result in Valard apply?

The trusteeship role of the owner and contractor under a payment bond is intended to avoid the rule under common law that a third party cannot enforce a contract. And so the owner or contractor is a party to the bond as a trustee for the beneficiaries. But can the structure of the bond be changed so that this trusteeship role is done away with and yet the bond can be enforced by the beneficiaries? There are other forms of payment bonds in which the owner or contractor is not shown as a trustee, but rather as an agent. But the law of agency may raise the same duty of disclosure as the law of trusts. In any event, bonding companies, owners and contractors may be considering ways in which bonds may be re-structured to avoid the result of the Valard decision.

  1. Can the duty found to exist in Valard be negated in the bond itself? Can the bond validly state that there is no duty on the trustee to advise the beneficiary of the bond? If the existence of the duty is based upon an implied duty, can the implied duty be over-ruled by an express statement to the contrary?

Or is this duty to inform of the existence of the bond part of the fundamental nature of trusteeship, such that it cannot be over-ruled, especially without the knowledge and consent of the beneficiaries? Can the right of the beneficiary to know of the bond be eliminated by the wording of the bond which they don’t even know exists?

There is much to think about as the full implications of the Valard decision are analyzed.

See Heintzman and Goldsmith on Canadian Building Contracts (5th ed.), chapter 15, part 6.

Labour and material payment bonds – duty to disclose existence of the bond to beneficiaries

Valard Construction Ltd. v. Bird Construction Co., 2018 CarswellAlta 261, 2018 SCC 8

Thomas G. Heintzman O.C., Q.C., LLD (Hon.)                                          April 23, 2018

www.heintzmanadr.com

www.constructionlawcanada.com