In Valard Construction Ltd. v. Bird Construction Company, 2018 SCC 8, the Supreme Court of Canada considered the duties of an obligee-trustee to potential claimant-beneficiaries under a labour and material payment bond. Valard, an unpaid sub-subcontractor, missed its opportunity to claim on the bond because it wasn’t made aware of its existence in time, and commenced an action against Bird, the obligee contractor. While the lower courts dismissed Valard's claim, the Supreme Court allowed its appeal.
The Court held that a trustee has a duty to disclose the existence of a trust to a potential beneficiary wherever it would be to the unreasonable disadvantage of the beneficiary to not be so informed. This duty applies in the context of a labour and material payment bond, where a trustee holds the right to claim on the bond in trust for potential beneficiaries. The Supreme Court found that Bird had failed to discharge their duty to inform potential beneficiaries of the trust, to the standard of an honest and reasonably skillful and prudent trustee.
Bird was the general contractor for an oil sands construction project for Suncor near Fort McMurray. Bird subcontracted some electrical work to Langford Electric Ltd., which was required by the subcontract to obtain a labour and material payment bond in the amount of $659,671. The bond, a standard form CCDC 222-2002 issued by Guarantee Company of North America as surety, allowed for a provider of work/labour or materials who did not receive payment from Langford to sue on the bond, on the condition that the claimant provide notice within 120 days of its last provision of work/labour or materials.
Langford sub-subcontracted directional drilling work to Valard, and Valard completed its work on May 20, 2009. Some of Valard's invoices went unpaid and Valard sued Langford, obtaining default judgment for $660,000.17 in March 2010, by which time Langford was insolvent.
In April 2010, Valard learned that Bird had recently required a labour and material payment bond from a subcontractor on a different project, and Valard asked Bird if it had also required Langford to obtain one on the Suncor project. Bird answered yes, and provided Valard information regarding the bond. Valard immediately gave notice of its claim on the bond, but Valard’s claim was rejected by the surety for Valard’s failure to give timely notice within 120 days of its last provision of work/labour or materials. Valard then commenced an action against Bird for breach of trust – Valard claimed that Bird had breached its duty as a trustee to fully inform the bond beneficiaries of its existence.
The trial judge in the Court of Queen’s Bench of Alberta found Bird owed no duty to inform Valard of the bond. He found that the use of trust language in the bond was for the limited purpose of overcoming the third-party beneficiary rule – to permit then-unknown beneficiaries to sue on the bond if necessary. Importantly though, as a matter of fact, the trial judge found that labour and material payment bonds were uncommon on private oil sands construction projects like the Suncor project.
In a majority decision, the Alberta Court of Appeal dismissed Valard’s appeal. The Court observed the statutory rights for parties on construction projects to request information about the existence of labour and material payment bonds. The Court therefore found that Bird had no duty to disclose the bond, “unless and until a clear and unequivocal request for information about the bond is made.” Justice Wakeling, in dissent, found that if potential beneficiaries would benefit from learning of the existence of a trust, the trustee must take reasonable steps to disclose the trust’s existence to a sufficiently large portion of the class of potential beneficiaries.
In a majority decision written by Justice Brown, the Supreme Court allowed Valard’s appeal, and directed that the quantum of damages be remitted to the trial judge. First, Justice Brown found that Bird did owe Valard a duty to disclose the bond’s existence. Beginning from trust law first principles, Brown found general duties of trustees as fiduciaries, including the duty to account to beneficiaries, were applicable in the case of surety bonds. In considering the case of an unknowing beneficiary, Brown found that “wherever it could be said to be to the unreasonable disadvantage of the beneficiary not to be informed of the trust’s existence, the trustee’s fiduciary duty includes an obligation to disclose the existence of the trust”. Valard would have been (and in fact was) unreasonably disadvantaged by only learning of its rights under the bond after expiry of the period during which those rights could be enforced.
Second, Justice Brown considered whether Bird had done enough to discharge its duty to inform potential beneficiaries of the trust, to the standard of an honest and reasonably skillful and prudent trustee. Justice Brown observed that “what a trustee must do … is highly sensitive to the context in which the particular trust relationship arises.” He relied upon the finding at trial that labour and material payment bonds were uncommon on private oilsands construction projects as a basis for determining that Bird had to do more than just answer a question if asked. While Bird could not have known of all potential beneficiaries when the bond was obtained, Bird ought to have taken reasonable steps to disclose the existence of the trust. Justice Brown noted a point made by the dissenting Justice Wakeling from the Court of Appeal, that Bird had an on-site trailer where notices were posted, and where a significant portion of potential beneficiaries (sub and sub-subcontractors) attended meetings. He agreed with Justice Wakeling that posting notice of the bond in the trailer would have been enough for Bird to satisfy its duty. By doing nothing, Bird committed a breach of trust.
In a concurring opinion, Justice Côté found that a trustee under a bond has no pro-active duty to inform potential claimants of the bond’s existence, but nevertheless found in favour of Valard. Justice Côté found that when Bird became aware of Valard’s problems obtaining payment from Langford during the project, Bird’s duty to disclose the existence of the bond was triggered – without requiring a specific request from Valard as to whether a bond existed.
Justice Karakatsanis wrote a dissenting opinion, arguing that labour and material payment bonds were so common that unpaid potential claimants could be expected to enquire as to their existence, and trustees did not have a pro-active obligation to give notice.
Owners, contractors, and other trustees under surety bonds should carefully consider obligations they may have to inform potential claimants of the existence of trusts for their benefit. In at least the case of Bird, there was an obligation to do “something”, and Bird’s failure to do anything made it liable to Valard.