Bird Construction Co. (“Bird”), as general contractor, entered into a contract with Suncor Energy Inc. (“Suncor”) for construction work on one of Suncor’s oilsands projects (the “Project”). Bird subcontracted a portion of its work to Langford Electric Ltd. (“Langford”).
The subcontract between Bird and Langford obligated Langford to obtain and provide a Labour and Material Payment Bond (the “L&M Bond”). Langford obtained the required bond, which named Bird as obligee, Langford as principal, Vermillion as obligee, and The Guarantee Company of North America (“GCNA”) as surety.
Valard Construction Ltd. (“Valard”) entered into a subcontract with Langford, but was not paid in full for its work after Langford became insolvent. Valard was unaware of the existence of the L&M Bond and did not find out it existed until approximately a year after Langford last worked on the Project. Valard’s project manager gave uncontradicted evidence at trial that although he had experience with labour and material payment bonds on municipal projects, he had never encountered one on any of the oilsands projects in which Valard was engaged.
When the payment issues between Valard and Langford arose, Langford’s representative advised Bird’s representative that there was a problem as Valard was looking for further payments for extra work it had carried out. Valard also knew Bird was aware, but did not raise the issue with Suncor directly as it did not want to “rock the boat”.
Upon learning of the L&M Bond, Valard immediately made a claim to GCNA on the L&M Bond with respect to amounts it claimed were due and owing but unpaid. GCNA denied Valard's claim as it was outside of the express time requirements of the L&M Bond (Valard's claim was approximately seven months late).
Valard sued GCNA and Bird. The claim against GCNA was dropped by Valard after GCNA was able to demonstrate to Valard that it had been prejudiced by Valard's late claim (with such prejudice undermining Valard's ability to seek relief from forfeiture, which otherwise may have allowed the Court to find Valard's claim was valid notwithstanding it was late).
With respect to its claim against Bird, Valard had no knowledge of the L&M Bond until after the notice period had already long expired. Valard argued that Bird as obligee, and as trustee under the L&M Bond, had a fiduciary duty to inform Valard of the L&M Bond’s existence within the relevant time frame, and that Bird breached this duty by not disclosing the existence of the L&M Bond to Valard.
Bird denied it had any duty to advise potential claimants of the existence of the L&M Bond. Justice Verille of the Alberta Court of Queen's Bench agreed with Bird and dismissed Valard's claim: Valard Construction Ltd. v Bird Construction Co., 2015 ABQB 141. Valard appealed and the Alberta Court of Appeal upheld the Queen’s Bench decision: Valard Construction Ltd. v Bird Construction Co., 2016 ABCA 249. Valard then took its argument to the Supreme Court of Canada.
II. HELD: Bird, as trustee, owed a fiduciary duty under the L&M Bond to Valard. In these circumstances that duty required Bird to disclose the existence of the L&M Bond. As Bird took no steps to disclose the existence of the L&M Bond, it breached the fiduciary duty it owed to Valard.
Brown J. writing for the majority of the Supreme Court of Canada agreed with Valard that the text of the L&M Bond created an express trust which named Bird as trustee, the potential class of defined “claimants” being the beneficiaries of the trust, and the subject matter of the trust being the ability to claim from GCNA the sums owed by Langford.
Properly, the Supreme Court then identified the “hallmark” characteristic of the trust to be the fiduciary duty owed by a trustee to a beneficiary of the trust. That then led the Supreme Court to consider whether, on the facts before it, that general fiduciary duty included a duty on the trustee (i.e. Bird) to disclose the existence of the trust (i.e. L&M Bond) to a beneficiary (i.e. Valard).
The Supreme Court was clear that a trustee’s duty does not always necessarily include the obligation to disclose the existence of a trust. However, the Supreme Court did then explain when such an obligation does arise:
In general, 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. Whether a particular disadvantage is unreasonable must be considered in light of the nature and terms of the trust and the social or business environment in which it operates, and in light of the beneficiary’s entitlement thereunder [emphasis added].
The Supreme Court continued:
For example, where the enforcement of the trust requires that the beneficiary receive notice of the trust’s existence, and the beneficiary would not otherwise have such knowledge, a duty to disclose will arise. On the other hand, “where the interest of the beneficiary is remote in the sense that vesting is most unlikely, or the opportunity for the power or discretion to be exercised is equally unlikely”, it would be rare to find that the beneficiary could be said to suffer unreasonable disadvantage if uninformed of the trust’s existence.
Applying the facts before it to that law, the Supreme Court held that Valard was “unreasonably disadvantaged by Bird’s failure to inform it of the trust’s existence”. In assessing the social and business environment in which this trust existed, the Supreme Court held:
Questions of industry understanding, practice, and expectations are, however, matters of fact [emphasis in the original].
The Supreme Court noted that one fact was uncontradicted: that the use of labour material payment bonds was uncommon on private oilsands construction projects. That fact, combined with the finding “that Valard’s interest under the trust was not so “remote” that vesting was unlikely”, cemented the Supreme Court’s conclusion that, on these facts, the fiduciary duty owed by Bird to Valard included a duty to disclose the existence of the L&M bond.
While the Supreme Court acknowledged the labour and material payment bonds do protect obligees, such as Bird, from work stoppages and builders’ liens, it rejected Bird’s argument that then it was solely Bird who was to benefit from the L&M Bond. The Supreme Court noted that if potential trust beneficiaries cannot enforce their rights under a labour and material payment bond, the protection such a bond offers an obligee is lost.
Having found that Bird had a duty to disclose the existence of the L&M bond, the Supreme Court then considered what should have been required of Bird to discharge its duty. The Supreme Court held:
Like all duties imposed upon trustees, the standard to be met in respect of this particular duty is not perfection, but rather that of honesty, and reasonable skill and prudence.
Again depending on the facts, the extent of the effort required by an obligee/trustee changes and one must be careful to not use the perfect vision that comes with hindsight:
In considering what was required in a given case, therefore, a reviewing court should be careful not to ask, in hindsight, what could ideally have been done to inform potential beneficiaries of the trust. Rather, the proper inquiry is into what steps, in the particular circumstances of the case — including the trust terms, the identity of the trustee and of the beneficiaries, the size of the class of potential beneficiaries and pertinent industrial practices — an honest and reasonably skillful and prudent trustee would have taken in order to notify potential beneficiaries of the existence of the trust.
The Court noted that, depending on the specific facts, an obligee/trustee may not have to expend much effort to disclose the existence of a labour and material payment bond:
But, where a trustee can reasonably assume that the beneficiaries knew of the trust’s existence, or where practical exigencies would make notification entirely impractical, few, if any, steps may be required by a trustee [emphasis in the original].
Of course, Bird did nothing at all, except file the L&M Bond in an office drawer. That amount of effort was not going to discharge its duty on any analysis. The Supreme Court adopted the observation of Wakeling J.A. from the Alberta Court of Appeal, who in his dissent noted that Bird had an on-site trailer where project-related notices were commonly posted. In stressing the question was not what Bird could have done, but what Bird should reasonably have done, the Supreme Court held that with little effort and cost, Bird could have posted the L&M Bond at the on-site trailer. Given the context of a private oilsands construction projects where labour and material payment bonds were uncommon, Bird had to do more than nothing.
Côté J. and J. Karakatsanis J. each wrote separate reasons which differed in result. However, both agreed that an obligee/trustee did not have any proactive duty to take steps to inform potential claimants of the existence of a labour and material payment bond.
Côté J. held that on the specific facts, the discussions between Langford and Bird regarding the “serious problem” Langford had with Valard, did trigger Bird’s duty to respond accurately to enquiries by potential claimants. Valard was aware Langford had asked Bird how it should proceed. When Bird did not advise Valard of the L&M Bond when it knew of the issues with Valard, combined with the communications between, Valard, Bird, and Langford, it failed to respond accurately to Valard, notwithstanding Valard did not specifically enquire about a bond. For those reasons, she concurred with the result held by the majority.
Karakatsanis J., in his dissent, noted that for decades the practice and understanding in the construction industry has been that an obligee/trustee has no obligation to inform potential claimants of the existence of a labour and material payment bond. Rather the practice and understanding has been that claimants are expected to enquire if a bond exists.
Karakatsanis J. noted that the trustee language found in the L&M Bond serves a narrow purpose of ensuring a claimant would not be prevented from successfully suing on a labour and material payment bond due to the operation of the “third party beneficiary rule”, as any claimant lacks privity of contract with the parties expressly identified in the bond. He also noted that Ontario and British Columbia have ensured that no such bar exists by enacting legislation which ensures a claimant has a cause of action against a surety under a labour and material payment bond.
Karakatsanis J. also highlighted that a labour and material bond protects an obligee (whether an owner or general contractor) by ensuring they do not need to spend time and money dealing with liens or other claims resulting from a defaulting contractor’s subcontractors and suppliers. Karakatsanis J. concluded that it was absurd to interpret a labour and material bond, the purpose of which is to provide an obligee protection, as including obligations on the obligee. He also noted that using the fact that the project in question was “a privately owned oilsands project” to justify a determination that a fiduciary duty to disclose the bond’s existence was triggered would only lead to instability and uncertainty.