On February 15, 2018 the Supreme Court of Canada released its decision in Valard Construction v. Bird Construction. The Court found that in certain circumstances, a trustee has an obligation to disclose the existence of a Labour and Material Payment Bond (“L&M Bond”) to a beneficiary.
The factual context in which the obligation of disclosure was imposed by the Court is important. The defendant company, Bird Construction Co. (“Bird”) was a general contractor to Suncor Energy Inc. for a construction project in the oilsands near Fort McMurray, Alberta. Bird entered into a subcontract with Langford Electric Ltd. (“Langford”) for electrical work. The subcontract required Langford to obtain an L&M Bond. Langford obtained the L&M Bond in the standard CCDC 222-2002 form naming Langford as Principal, the bonding company as Surety, and Bird as Obligee.
Langford contracted with the plaintiff Valard Construction Ltd. (“Valard”) to provide work on the project. However, Langford became insolvent and amounts owing to Valard went unpaid. The evidence before the Court was that Valard was never notified of the existence of the L&M Bond. After the time period to make a claim on the L&M Bond had expired, Valard became aware of the L&M Bond and filed a claim with the Surety, but the Surety denied coverage. Valard then sued Bird for breach of trust on the basis that the L&M Bond, by its terms, created an express trust naming Bird as trustee, and that it was a beneficiary.
In the decision, the Court discussed, at some length, the obligations that may arise when a trust is created. The Court stated that, in general, when a beneficiary would be unreasonably disadvantaged not to be informed of a trusts existence, a trustee’s fiduciary duty includes an obligation to disclose the existence of the trust.
The Court considered the argument by Bird that the purpose of an L&M Bond is to protect the owner or general contractor who had required the L&M Bond (the Obligee) and that a corresponding duty to disclose placed on that same party would be inconsistent with the purpose of obtaining the bond. Although the Court acknowledged that an L&M Bond serves the purpose of protecting owners and general contractors, it stated that the “proper operation” of an L&M Bond tends to affirm disclosing its existence.
After determining that Bird as trustee had a duty to disclose the existence of the trust to the beneficiaries, the Court considered what actions would discharge that duty. It stated that with all trusts, the standard to be met is not one of perfection, but rather of honesty, reasonable skill and prudence. The demands of disclosure in a specific case are informed by the facts and circumstances. As a result, a Court is not to look in hindsight what “ideally” could have been done, but rather what steps a reasonable trustee in the particular circumstances would have taken. Moreover, the Court stated that in circumstances where a trustee can reasonably assume that beneficiaries know of the trusts existence or where practical issues make notification impractical, it may be that few, if any, steps are required to be taken.
The facts before the Court included that Bird had an on-site trailer in which notices were normally posted and that at least some of the potential beneficiaries including Valard worked on-site and attended daily “toolbox” meetings. The Court took notice of this fact and stated that, in the circumstances of the case, Bird could have satisfied its duty to inform potential beneficiaries of the existence of the bond by posting a notice of the L&M Bond in the on-site trailer. It also looked at the industry standard and the evidence before it that L&M Bonds were uncommon on private oilsands construction projects.
However, the Court reiterated that taking any step will not always be necessary to resist a claim for breach of trust by a disappointed beneficiary of an L&M Bond. Other methods of giving notice might suffice and the situation will depend upon the facts. The Court stated that the question to be asked is not what could have been done in the case, but what an Obligee should “reasonably” have done in the circumstances to notify beneficiaries.
Based on the facts, the Court decided that Bird did not take any steps to discharge its duty with respect to the L&M Bond and the trust it created, and therefore committed a breach of trust. Bird was found liable to Valard for the sum Valard would have been entitled to claim had it been aware of the L&M Bond.
Of interest, one Judge of the Supreme Court of Canada disagreed with the majority decision. In her dissenting decision she states that for more than 45 years the understanding and practice in the construction industry in Canada has been that the trustee of an L&M Bond is not required to take steps to notify potential claimants of the existence of the bond. Rather, the obligation has generally been limited to responding accurately to enquiries made about a bond. In her decision she questions the practical and legal implications of a test for disclosure that might depend on the circumstances of the project, the particular sector of the construction industry or even the geographic area of the project, and states that the requirement has the potential of creating instability and uncertainty.
This decision from the Supreme Court of Canada has the potential to create some uncertainty as to what if any steps an owner or general contractor should reasonably take, in the specific circumstances of a project, to notify potential beneficiaries of the existence of an L&M Bond.
John B. Martens is a partner in the construction law practice group at MLT Aikins LLP. Reach him at email@example.com or (204) 957-4856.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.