Implications of Recent Court of Appeal Bond Decision on Local Contractors

May 13, 2013

The Nova Scotia Court of Appeal has unanimously affirmed its interpretation of the standard labour and materials bond used by the Nova Scotia Department of Transportation and Infrastructure Renewal.

In 1992, a majority of the Court held that under this form of bond a general contractor could “perform its obligations to perfection” and still not discharge the bond. In a decision released on May 10, the Court confirmed that this particular bond creates an independent obligation on a general contractor to ensure everyone on the project gets paid, no matter the circumstances.

APM Construction Services Inc. was the general contractor for renovations to the Bridgewater Provincial Building, a Provincial Crown project. It retained Caribou Island Electric Limited who in turn subcontracted a portion of its work to Advanced Cabling Systems. Caribou became insolvent and ACS’ account went unpaid by more than $86,000. Among others, Caribou was indebted to the Canada Revenue Agency for close to $200,000.

After both CRA and ACS claimed the holdback fund (which was sufficient to pay ACS’ account), APM sought to pay the holdback into Court in exchange for a discharge of its obligations under the Builders’ Lien Act and the bond. Justice Peter P. Rosinski directed APM to pay the holdback to CRA (pursuant to CRA’s superpriority under the Income Tax Act) and, through its surety, to pay ACS’ account as well. In effect APM had to pay twice. Notwithstanding his direction to pay, Justice Rosinski declined to discharge APM under either the Builders’ Lien Act or the bond.

On appeal, the Court of Appeal held that the bond required APM to pay everyone who did work on the project, regardless of whether it had paid its own subcontractors or complied with the Builders’ Lien Act. In effect, APM had agreed to insure subcontractor accounts in the event of non-payment. While APM had met its obligations under the Builders’ Lien Act (overturning Justice Rosinski on this point), it had not discharged the bond.

Partially successful on the appeal, APM and its surety, Travelers Guarantee Company of Canada, were represented by Ezra van Gelder of Cox & Palmer.

Implications for Other Projects

This decision will be particularly important for any general contractor doing work for the Province. Where the Province requires this form of bond, the general contractor will have to accept a degree of risk substantially greater than what it might otherwise expect. In effect, it must undertake to unconditionally guarantee all subcontractor accounts up to the face value of the bond, thereby losing the protection of the holdback provisions of the Builders’ Lien Act and, potentially, any other contractual protections. No matter what the reason, if anyone on the project is left unpaid the bond must respond.

There are measures a general contractor can take to mitigate this risk, including:

  • requesting performance and payment bonds from its own subcontractors which remain in effect for the duration of the contract;
  • requiring its subcontractors to obtain similar bonding from any other subcontractors retained on the project;
  • making payments to its subcontractors contingent on proof of payment from those lower in the construction pyramid;
  • building in a contractual mechanism by which it renders payment directly to those doing work on the project, thereby controlling the flow of funds and ensuring subcontractors get paid; and
  • including in its bid for the work a contingency amount reflective of the additional risk associated with this particular form of bond.

This decision confirms that, contrary to what one might expect, a bond can effectively turn the general contractor into the project insurer. It should serve as a reminder to everyone working on complex construction projects to consider the scope of the bonds they are asked to provide and the steps they should take to mitigate their risk.

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