The Impact of Failing to Comply with the Formal Requirements of a Suretyship Contract

September 8th, 2016

The courts have stressed this many times: in order to proceed against a surety, the creditor must have respected the conditions of the suretyship contract. 

The contractual provisions most often submitted to the courts in these matters concern: (1) the notice that the creditor who has not contracted directly with the general contractor (a subcontractor, for example) must give to the general contractor within 60 days of starting the work or supplying the materials, and (2) the notice of claim that the creditor must give within 120 days following completion of the work or final delivery of materials. 

In many cases, a default or irregularity involving such notices results in automatic dismissal of the proceeding. 

However, as the Quebec Superior Court has recently reminded us1, it all depends on the circumstances of the case, as the law recognizes that a surety remains bound despite imperfect compliance with a condition of the suretyship contract when the latter is substantially respected. 

In that matter, the general contractor and its surety argued that Panfab, the supplier of a subcontractor, had not respected the formal requirements applicable to the notice to be given to the general contractor under the suretyship contract, as the notice had not been given “directly” to the latter, who was instead provided only with a copy. They also argued that the notice appeared to indicate that the price was fixed rather than per-unit. 

The Court found that these irregularities were inconsequential, that the suretyship contract did not expressly require that the nature, price and terms of payment for the supplier’s materials be specified, and that the purpose of the formal requirements had been met, since the general contractor had effectively been informed that its subcontractor had entered into a contract with a supplier. 

This decision is essentially based on the principles established in 1983 by the Supreme Court of Canada2, when it refused to allow a defence that was “technical in the extreme” on the part of a professional surety. In that matter it had been shown that the surety had effectively been provided with information that technically was supposed to have been provided to it in writing, and that a holdback had consequently been made vis-à-vis the principal debtor, such that the intended purpose of the condition had been achieved and the surety had not been prejudiced in any way. 

It should be noted that in 1989, the Quebec Court of Appeal3 also refused to give precedence to the formal requirements of a suretyship contract, given that the intended purpose of its conditions had been met and the irregularity relied on by the appellant had not caused it any prejudice. In examining the validity of the notice to the general contractor, the Court made a distinction between the date of the initial delivery of the materials and the actual commencement of the work. 

Thus, courts in Quebec were already applying these principles before the Panfab case, but appear to have been rarely called upon to consider the specific circumstances justifying their application. 

An interesting aspect of the Walsh decision is that the Court of Appeal recognized that the absence of a contract of enterprise between the beneficiary of the surety (a sub-subcontractor, for example) and the general contractor does not prevent the latter from being solidarily liable jointly and severally with the surety, despite the suretyship contract requiring such an agreement. 

While the Court in the Panfab case did not specifically say so, its conclusions in favour of the plaintiff, the supplier of a subcontractor, apply not only to the surety but to the general contractor as well. 

Thus, in addition to the terms of the suretyship contract, which of course must be examined carefully, it is important to bear in mind the following: 

  • the importance of the factual background when considering an irregularity under a suretyship contract;
  • the possibility that an apparent default is not truly a default or is not fatal;
  • fulfillment of the purposes intended to be achieved by the provisions of the contract, such as effective knowledge of the information covered by the notice requirement, the possibility for the general contractor to require that its subcontractor provide it with the appropriate acquittances, or the possibility of making a holdback, may defeat an excessively technical defence on the part of a “professional” surety.

1 Industries Panfab Inc. v. Axa Assurances Inc., 2016 QCCS 1625
2 Citadel General Assurance Co v. Johns-Manville Canada Inc., [1983] S.C.R. 513
3 Walsh & Brais Inc. v. Tro-Chaînes Inc., [1989] R.L. 635 (C.A., 1989-08-31)