Valard v Bird: General Contractors Should Notify Subcontractor Beneficiaries Of Labour & Material Bonds

Introduction and Background

Recently, in Valard Construction Ltd v Bird Construction Co (Valard), 1 the Supreme Court of Canada (SCC) decided that the trustee of a labour and material bond (the L&M Bond) is required to reasonably disclose the existence of the L&M Bond to the potential claimants.

Typically, owners and general contractors (the Trustee) contractually require that general contractors and major subcontractors, respectively (the Principal), obtain L&M Bonds from a surety (the Surety) to ensure that the Principal's suppliers and subcontractors (the Claimants) are paid if the Principal experiences financial difficulty. In so doing, the L&M Bond provides the Trustee with security that the Claimants will not register liens or undertake work stoppages due to unpaid bills. However, because the Claimants are third parties to the contract between the Trustee and Principal, the industry has structured L&M Bonds on a trust basis to avoid contractual problems relating to the third-party beneficiary rule.

Historically, the construction industry practice, and arguably some case law, supported the position that the burden was on Claimants to make inquiries about L&M Bonds to protect their interests. In Valard, however, Valard sought recovery against Bird for breach of trust because it failed to advise Valard about the existence of the L&M Bond, causing Valard to miss the deadline for claiming against the Surety.

Facts inValard

Suncor Energy Inc. retained Bird Construction Company as its general contractor for an oilsands project near Fort McMurray. In turn, Bird Construction Company contracted with Langford Electric Ltd. (the Subcontract), who further contracted with Valard Construction Ltd.

Pursuant to the Subcontract, Langford was contractually required to obtain and provide Bird with an L&M Bond, which it did through the surety company, Guarantee Company of North America. The L&M Bond obtained by Langford provided that any Claimant had to notify Bird, Langford and the Surety within 120 days of the Claimant's last provision of work. Upon receipt of the L&M Bond, Bird filed it at its office in Edmonton, Alberta.

During the course of construction, Langford became insolvent. As a result, Valard had unpaid invoices for $660,000.17. Valard was unaware of the existence of the L&M Bond, in part because L&M Bonds were uncommon in the oilsands sector. Therefore, Valard missed the 120 day notice period for claiming against the L&M Bond. Subsequently...