Labour and Material Bond Claimants May Gain Further Rights

Author: Will Johnston

In Canada, the law imposes an obligation upon owners and general contractors named as “trustee” in a labour and material payment bond (“L&M bond”) to provide a copy of the L&M bond upon request by a potential claimant. The Supreme Court of Canada has granted leave to appeal where they will decide whether a trustee named in an L&M bond must proactively inform potential claimants of the existence of the L&M bond failing which they can be held liable to claimants who unwittingly lose their right to claim under the bond. The decision being appealed to the Supreme Court of Canada is from the Alberta Court of Appeal in Valard Construction Ltd v Bird Construction Company.

A conventional trust imposes onerous obligations upon trustees to act in the best interests of the trust beneficiaries. A typical L&M bond provided by a subcontractor to a general contractor includes language suggesting a trust:

"The Principal (subcontractor) and the Surety (bonding company), hereby jointly and severally agree with the Obligee (general contractor) as Trustee, that every Claimant (sub-subcontractor) who has not been paid … within 90 days … may sue on this Bond"

The Alberta Court of Appeal was divided as to whether an L&M bond creates a conventional trust and therefore divided as to the extent of the duties owed by a “trustee” under an L&M bond.

The Trial Judge and a majority in the Alberta Court of Appeal held that an L&M bond creates a limited trust. Therefore, a trustee named in an L&M bond does not have an obligation to proactively inform potential claimants of the bond’s existence. The majority was unwilling to impose the usual onerous obligations that exist in a conventional trust context upon an L&M bond trustee.

Justice Wakeling of the Alberta Court of Appeal wrote a lengthy dissent. In his opinion, the wording in a typical L&M bond creates a conventional trust thereby imposing the usual obligations on the trustee to advance the interests of the beneficiaries (i.e. potential bond claimants). He concluded that Bird Construction Company, as trustee, was liable to the sub-subcontractor, Valard Construction Ltd. for failing notify potential claimants of the bond’s existence by posting the L&M bond in a conspicuous place at the workplace.

Until the Supreme Court of Canada renders their decision, the law in Alberta does not require a general contractor to post a bond or to actively inform potential claimants that a bond exists. However a general contractor must disclose the existence of an L&M bond and provide a copy when requested by a potential claimant. We will report in a future blog post if the Supreme Court chooses to reverse the decision of the Court of Appeal.