Is there a labour and material payment bond on my project?: Why it’s always wise to ask

Many owners, particularly large corporations or public entities, require contractors to provide a labour and material payment bond to ensure that sub-trades are paid and (hopefully) avoid protracted payment disputes. A typical labour and material bond creates a tri-partite relationship among the principal (the contractor who is being bonded), the surety (the bonding company) and the trustee or obligee (typically the owner or head contractor). Any party with a direct contract with the principal may make a claim against the bond; however, most standard bond forms have very strict notice requirements and very strict time limits for submitting notice of a claim and (if necessary) commencing an action to enforce the claim. If these procedures are not complied with, the right to claim under the bond will be lost.

One question that often arises in this context is whether the trustee under the bond has any duty to advise sub-contractors of the bond’s existence. In its recent decision in Valard Construction Ltd. v. Bird Construction Co.,[1] the Alberta Court of Queen’s Bench answered this question with a definitive “no”.

The facts of the case were relatively straightforward. Bird Construction Co. was the general contractor on a project in Alberta and entered into an electrical subcontract with Langford Electric Ltd. Langford’s subcontract with Bird required it to obtain a labour and material payment bond. The bond was issued by the Guarantee Company of North America with Langford as the principal and Bird as the trustee. Langford then entered into a further sub-contract with the Plaintiff, Valard Construction Ltd.

Valard was not fully paid by Langford, so it sued Langford and obtained a default judgment. Valard then asked Bird whether there was a labour and material bond and Bird confirmed that there was. However, Valard’s claim on the bond was denied because it had not complied with the notice requirements in the bond. Valard sued on the bond, but also added Bird as a defendant, claiming that Bird had a fiduciary duty to inform it of the existence of the bond in a timely manner. Bird denied that it had any duty to take the initiative to advise Valard as to the bond’s existence.

Valard argued that Bird’s fiduciary duty as trustee under the bond included a positive obligation to inform potential claimants that a bond existed, and noted that Bird could have easily discharged this obligation by taking steps such as posting a copy of the bond at the site, providing copies at project meetings, or including a term in its contract with Langford to oblige Langford to inform its sub-trades as to the existence of the bond.

Justice Verville of the Alberta Court of Queen’s Bench disagreed with Valard’s position. He found that the trust wording in the bond making Bird the nominal trustee of the bond, was really a procedural convenience intended to permit claimants to sue the surety directly, and did not create a substantive duty on the part of the trustee to take positive steps to protect the interests of potential claimants. He also found that Valard was a large and sophisticated company that must have been familiar with the use of bonds and ought to have had standard procedures in place to request bond information on all subcontracts. He noted that Bird had readily revealed the bond’s existence when asked, and concluded that Valard simply ought to have asked sooner.

While the result in this case may depend somewhat on the finding that the claimant was a “large and sophisticated entity” and thus ought to have known better, the safest course is always to ask for bond information at the commencement of the project, or indeed even during the bid stage. It is clear from the result in Valard Construction that the courts will be very hesitant to impose any positive obligations on bond trustees to take any positive steps to look out for the interests of potential bond claimants. Given the strict timelines and notice requirements that apply to claims under bonds, it is good practice to have all bond information available before any problems develop, rather than waiting until it becomes necessary to submit a claim. When in doubt, it cannot hurt to ask.

[1] 2015 ABQB 141.

Please note that this case is under appeal.