Obligation to Disclose a Surety Bond to Potential Beneficiaries

March 20th, 2018

Is the Decision in Valard Construction Ltd v. Bird Construction Co.1 Really Revolutionary in Quebec? 

The Supreme Court of Canada recently ruled on the obligation, whose existence and degree of intensity vary according to the circumstances, to disclose the existence of a surety bond for construction wages and materials to potential beneficiaries, pursuant to general principles of Common Law trusts and equity that do not apply, or at least not in the same way, in Quebec.

After analyzing the decision, we will review the state of the law in Quebec in this regard. 

1. The Valard decision 

General contractor Bird Construction Co. (“Bird”) required its sub-contractor Langford Electric (“Langford”) to provide a CCDC-222-type surety bond for the payment of wages and materials of its sub-contractors and suppliers, including Valard Construction Ltd. (“Valard”), in connection with a private construction project in the Alberta oil sands.

The provisions of the bond created a Common Law trust and named Bird as the trustee of the trust, which was intended to provide protection to unpaid creditors of Langford, who had to give the trustee notice of their claim within 120 days of their last provision of work or materials2.    

When Valard learned of the existence of the surety bond, however, the 120-day notice period had expired, such that its claim was rejected by the surety, Guarantee Company of North America. Following this rejection, Valard sued Bird on the grounds that it had breached its duty to inform Valard of the existence of the bond.

Both the trial judge and the Alberta Court of Appeal dismissed Valard’s action.

The Supreme Court overturned those judgments, concluding that even if the contract3 and Alberta law did not expressly require the trustee to inform potential beneficiaries of the bond, certain circumstances could require it to “take reasonable steps to notify potential beneficiaries of the trust”.

In this case those circumstances were that the surety bond in question was not commonly used in private-sector projects in the oil sands, that it was not advertised or posted in the on-site trailer where Valard was required to attend daily meetings, that Bird had been advised that Valard was experiencing difficulties in getting paid, and that Valard was unaware of the bond’s existence until its right to avail itself thereof had expired.

The Court indicated that in other circumstances, such as where a surety bond is commonly used or expressly referred to in the contract documents, “few if any steps may be required by a trustee” to disclose the bond’s existence.

The Supreme Court analyzed the degree of intensity of the trustee’s duty in situations where a beneficiary arguably should be informed of the existence of the surety but neither the law nor the terms of the bond require this.

In a situation where “a beneficiary would be unreasonably disadvantaged not to be informed of a trust’s existence” the trustee will be liable for damages sustained by the beneficiary. Whether a particular disadvantage is unreasonable is a question of fact that must be assessed in light of the nature and terms of the trust and the social or business environment in which it operates.

The applicable standard for analyzing how the trustee must discharge its duty to disclose the existence of the surety is “not perfection, but rather that of honesty, and reasonable skill and prudence”. Consequently, courts will have to determine what steps a reasonably skilled and prudent trustee would have taken to inform potential beneficiaries of the existence of the surety bond, without being obliged to ensure that each potential beneficiary is aware of its existence, but only to take reasonable measures to that end.

The matter was sent back to the trial judge for adjudication on the quantum of damages sustained by Valard, as the evidence on file did not establish the amount available under the bond at the relevant time.

2. Extent to which these principles apply in Quebec law 

As the Supreme Court noted regarding Alberta law, in Quebec there is no explicit obligation to disclose the existence of a surety for wages and material to potential beneficiaries, either pursuant to the provisions of the surety contract or those dealing with the stipulation for another thereunder.

In a 1991 decision, the Quebec Court of Appeal4 recognized the existence of an implicit obligation on the part of a person requiring that a surety be provided (the project owner or, as in Valard, the general contractor) and also on the part of the surety to respond to a request for information in that regard and to reveal the existence of the surety bond.

The Court’s reasoning was based on the obligations of good faith and equity pursuant to articles 1375 and 1434 of the Civil Code of Québec.

In his reasons for judgment (in which Justice LeBel, then on the Court of Appeal, concurred), Justice Gendreau concluded as follows:        

[48]  [TRANSLATION] In this case however Irving was aware of both the surety bond and the identity of the surety. It notified its new debtor, Les Prévoyants, of the general contractor’s indebtedness towards it and asked to be provided with a complete copy of the suretyship contract, of which it was now the beneficiary. For its part, Les Prévoyants knew that the appellant was unaware of the obligation to act within 12 months, as Irving was not privy to the document that created this obligation. Thus, with each passing day, week and month, the respondent came closer to the day when it would be liberated from its obligation to pay Irving. So instead of providing the appellant with a copy of the contract in order to review and avail itself of it, it did nothing and, without formally denying Irving’s request, informed it that its claim had been received and was being reviewed, leading Irving to believe that the contract formalities had been satisfied and giving it a false sense of security that dissuaded it from taking further action. The Superior Court judge fully realized this, and used the expression “did not follow up” to characterize the respondent’s attitude. I find that under the circumstances, this conduct constituted a fault.

[49]  The situation would have been different had the limitation period been known to the appellant because it was specified in a statute or regulation, or had Irving misinterpreted the contract wording or been tardy in acting despite being fully informed.

 [50]  Ultimately I am in agreement with Professor Louise Poudrier-LeBel, who writes:

“[TRANSLATION] The judge dismissed the action as against the project owner, as it had no obligation to disclose the existence of the surety bond, despite the fact that at Common Law the project owner is considered to be a trustee. We admit the principle that the owner is not bound to notify subcontractors and suppliers of the existence of the payment bond for wages and material, as the ultimate purpose of that type of contract is to protect the owner itself. However, if the owner does not respond to a request for information from a subcontractor or supplier, in our view it thereby commits a fault. It can be maintained that the project owner incurs a general obligation to act fairly when in possession of information that is relevant to the performance of the construction contract. Moreover, if the project owner requires the furnishing of a surety for wages and material in the call for tenders, the subcontractors and suppliers are entitled to take the position that they contracted with the general contractor in consideration of that fact.

 [51]  In my view, and with all due respect for the contrary opinion, the foregoing applies not just to the project owner but a fortiori to the surety as well, because of the creditor-debtor relationship created by the stipulation for another.

 [52]  The respondent argues that Irving could have requested a copy of the surety bond from the contractor’s bankruptcy trustee, or from the project owner. Perhaps. But that does not exonerate Les Prévoyants, which continued to be bound by its general obligation to act fairly. The only way for the respondent to escape its liability is to prove force majeure or a fault on the part of the appellant, which in my view it has not done.

Priority must also be given to the terms of the contract, which sometimes contains more exacting terms, as is the case with the Cahier des charges et devis généraux (CCDG) of the Ministry of Transport, which requires the general contractor to post, in a conspicuous location on the site, a notice to potential beneficiaries of the existence of the surety bond.

3. Conclusions 

While it may be true that, as Justice Karakatsanis (dissenting) points out, “imposing different obligations depending on the particular sector or geographic region within the construction industry introduces uncertainty and instability where there was none” we nevertheless think it apposite to make some concrete recommendations in order to prevent such disputes from arising: 

For owners, general contractors and sureties:  

  • Take cognizance of and ensure compliance with any contractual requirement pertaining to informing and posting advisories, as is the case with the CCDG; 
  • Take reasonable steps to inform potential claimants of the existence of a surety bond for labour and material, for example by posting the information on the site, particularly where such a surety bond is not commonly used, such as on private projects, or by sending the information to a contractor who has evidently not been paid; 
  • Answer correctly and promptly any inquiry in this regard from a potential claimant seeking to know, for example, the identity of the surety. 

For potential claimants: 

  • Request in writing a copy of any surety bond you are entitled to the benefit of in connection with the project, particularly in the event of non-payment, irrespective of the type of project.

1 2018 CSC 8
2 or of the due date for payment of their withholding, under some types of bonds.
3 The decision does not indicate if the surety bond was a standardized contract. We would point out that standardized contracts such as CCDC-222 provide that the contractor has the obligation to have an up-to-date copy of the contract documents on hand at the job site.
4 Pétroles Irving Inc. v. Prévoyants du Canada compagnie d’assurances, 1991 CanLII 3114 (QCCA)
5 Id.