Do Something! Labour and Material Payment Bonds should be disclosed to claimants

February 16, 2018

Do Something! Labour and Material Payment Bonds should be disclosed to claimants

Labour and Material Payment (“L&M”) Bonds are commonly issued in the construction industry to ensure that subcontractors and suppliers working on construction projects get paid. L&M bonds also protect the “obligee”, as named in the bond, from work stoppages and liens being registered. Basically, these bonds contain enforceable promises by a third party, the “surety”, to pay subcontractors and suppliers (who fall within the definition of “claimant” as set out in the bond) for their work, provided any claim for payment advanced satisfies the express conditions of the bond (which include express time requirements for making a claim). If unpaid, a claimant can sue on the bond to receive payment from the surety.

Often subcontractors and suppliers have no knowledge of whether such an L&M bond has been issued on a given project. Unless they, or their legal counsel, are savvy enough to ensure the right questions are asked a party could easily lose out on an opportunity to advance a claim under such a bond and the chance to get paid for their work.

This was the situation which occurred in Valard Construction Ltd. v. Bird Construction Co., 2018 SCC 8. Valard was a subcontractor of a party who became insolvent. That insolvent party had been required to obtain a labour and material payment bond for its work. The bond named Bird, who was the general contractor, as the obligee. Valard’s invoices went unpaid. It had no knowledge of the bond’s existence. Importantly, Valard had never seen an L&M bond used on the type of privately owned oilsands project in question. Only after the time period for making a claim on the bond had passed, did Valard ask Bird whether there was an L&M bond. Bird advised there was in fact a bond and Valard made a claim. However, Valard’s claim was denied for being out of time.

Valard sued Bird alleging that Bird had a positive obligation to disclose the existence of the L&M bond. The Supreme Court of Canada (“SCC”) agreed and focused on language contained in L&M bonds which makes the obligee a “trustee” for the claimants. The trustee language creates a fiduciary duty on an obligee, which in certain circumstances can create a duty to disclose the existence of an L&M bond.

The SCC held that due to the unusual context (a privately owned oilsands project where the use of L&M bonds were uncommon) Valard was unreasonably disadvantaged by not being made aware of the existence of the bond. As Bird took no steps to disclose the existence of the bond, such as posting it at the project site, the SCC held that Bird, as trustee, had a duty to act honestly and with reasonable skill and prudence in disclosing the existence of the bond. “Doing nothing” did not satisfy the standard required of it.

How does this decision affect you?

Whether you are an obligee, surety or a claimant, this decision is significant.

If you are an obligee named in a L&M bond, this decision means you should probably err on the side of caution and take steps to ensure the existence of the L&M bond is made known to the cast of potential claimants, failing which you are potentially liable for damages incurred by a party who could have claimed under the bond.

If you are a surety, you must recognize that prudent obligees will likely take positive steps to disclose the existence of an L&M bond – this will certainly mean more claims will be received in the future.

If you are a claimant, or could have been one under a bond had you known about it, the fact that you were not made aware of the bond could give you an action against the obligee who should have taken some positive step to make you aware of the existence of the bond.

In any of these cases, Field Law can help. For more information, contact Field Law, to discuss your options.

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