TABLE OF CONTENTS. Table of Cases... Table of Statutes... S-1

Transcription

1 Table of Cases... TC-i Table of Statutes... S-1 CHAPTER 1. INTRODUCTION 1.1 Scope and Focus of Book Bond Wordings The Law Judicial Environment Unreported Decisions and Reference Materials Objectives and Acknowledgements CHAPTER 2. SURETY BONDS AT COMMON AND CIVIL LAW 2.1 General (a) The Modern Context of Surety Bonds Suretyship at Common Law (a) The Indicia of the Obligation of Suretyship (i) Suretyship and The Statute of Frauds (ii) The Requirement that the Surety be Totally Unconnected (iii) What Constitutes an Interest (iv) The Distinction between Object and Motive (b) The Distinction Between Suretyship and Insurance at Common Law (i) General (ii) The Indicia of the Insurance Obligation (iii) The Substance Test (iv) Non-Exclusivity of Risks Underwritten v (Surety Bonds) (2013 Rel. 1)

2 2.3 The Significance of Embodying the Surety s Obligation in the Form of a Bond (a) The Historical Context of Contemporary Surety Bonds (b) The Surety Bond as a Joint and Several Obligation (c) Execution and Delivery of a Surety Bond (i) Historical Background (ii) Execution (iii) Delivery (iv) Acceptance (d) Bond Interpretation (e) Nature of Action Under a Surety Bond The Surety Bond as an On Default Instrument (a) The Trafalgar House Decision On Default vs. On Demand (i) The Facts of the Trafalgar House Case (ii) The Guarantee Issue (iii) The Construction Issue (iv) Conclusion (b) The Fundamental Preconditions to Liability Default and Damages The Distinction Between Accommodation and Compensated Suretyship Province of Quebec Suretyship at Civil Law (a) General Source of the Law of Suretyship (b) Bond Wordings (c) The Nature of Construction Bonds The Distinction Between Insurance and Suretyship (d) Interpretation of Bonds (e) Influence of Common Law Precedents CHAPTER 3. THE STATUTORY REGULATION OF SURETY UNDERWRITING AND OTHER RELEVANT LEGISLATION 3.1 Introduction vi

3 3.2 The Legislative and Regulatory Basis of Surety Underwriting (a) Federal Insurance Legislation (b) The Classes of Insurance Regulations (c) Legislative History of the Classes of Insurance (d) Financial Administration Act Provincial Legislation (a) Alberta (i) Insurance Legislation (ii) Mercantile Law Amendment Act (iii) Statute of Frauds (iv) Electronic Commerce Legislation (b) British Columbia (i) Insurance Legislation (ii) Mercantile Law Amendment Act (iii) Statute of Frauds (iv) The Law and Equity Act (v) The Contaminated Sites Regulation (vi) Electronic Commerce Legislation (c) Manitoba (i) Insurance Legislation (ii) Mercantile Law Amendment Act (iii) Statute of Frauds (iv) Electronic Commerce Legislation (d) New Brunswick (i) Insurance Legislation (ii) Mercantile Law Amendment Act (iii) Statute of Frauds (iv) Electronic Commerce Legislation (e) Newfoundland and Labrador (i) Insurance Legislation (ii) Mercantile Law Amendment Act (iii) Statute of Frauds (iv) Electronic Commerce Legislation (f) Northwest Territories (i) Insurance Legislation (ii) Mercantile Law Amendment Act vii (Surety Bonds) (2013 Rel. 1)

4 (iii) Statute of Frauds (iv) Electronic Commerce Legislation (g) Nova Scotia (i) Insurance Legislation (ii) Mercantile Law Amendment Act (iii) Statute of Frauds (iv) Electronic Commerce Legislation (g.1) Nunavut (i) Insurance Legislation (ii) Mercantile Law Amendment Act (iii) Statute of Frauds (iv) Electronic Commerce Legislation (h) Ontario (i) Insurance Legislation (ii) Mercantile Law Amendment Act (iii) Statute of Frauds (iv) Construction Lien Act (v) Electronic Commerce Legislation (i) Prince Edward Island (i) Insurance Legislation (ii) Mercantile Law Amendment Act (iii) Statute of Frauds (iv) Electronic Commerce Legislation (j) Saskatchewan (i) Insurance Legislation (ii) Mercantile Law Amendment Act (iii) Statute of Frauds (iv) Builders Lien Act (v) The Queen s Bench Act (vi) Electronic Commerce Legislation (k) Yukon Territory (i) Insurance Legislation (ii) Mercantile Law Amendment Act (iii) Statute of Frauds (iv) Electronic Commerce Legislation Province of Que bec (a) Introduction viii

5 (b) The Act Respecting Insurance and Regulation (c) Guarantee Companies Act (d) Electronic Commerce Legislation (e) Article 2337 of the Civil Code and Unlicensed Sureties Conclusion Table of Concordance of Insurance Provisions CHAPTER 4. THE UNDERWRITING PROCESS 4.1 General The Banker s Perspective The Surety s Perspective The Principal s Perspective The Three C s Capital Character Capacity The Surety s Requirements Foreign or Extra Provicial Contracts Reinsurance Mega Projects Premium Bonding Facility Financial Guarantee Bonds Underwriting on Established Accounts Special Underwriting Cases (a) Manufacturers (b) Contractors under turnkey (design-built) contracts (c) Efficiency guarantees (d) Unusual payment schedules Early Warning Signs of Trouble A Improvident Underwriting Dual Obligees Electronic Underwriting (a) Contract Issues ix (Surety Bonds) (2014 Rel. 1)

6 (b) E-Commerce Laws (c) Technical Standards Adjudication Bonds Art and Science Accountants Liability Underwriting Errors Surety Bonds on P3 Projects CHAPTER 5. GENERAL INDEMNITY AGREEMENTS 5.1 General (a) The Distinction Between Contracts of Indemnity and Contracts of Guarantee Sample Wordings (a) Aviva Insurance Company of Canada Master Surety Agreement (b) Surety Association of Canada Agreement 1996 General Agreement of Indemnity (c) Surety Association of Canada 2008 General Agreement of Indemnity (d) Surety Association of Canada - Table of Concordance (e) Surety Association of Canada Indemnitor s Declaration (Province of Quebec) (f) Surety Association of Canada Consent under the Personal Information Act (Province of Quebec) Obtaining the Indemnity Agreement (a) Execution of the Indemnity Agreement i The Significance of a Seal ii Partnerships (b) Informal Indemnity Agreements (c) Independent Legal Advice The Surety s Main Rights Under the Indemnity Agreement (a) The Basic Indemnity Obligation (b) The Surety s Right of Exoneration (c) The Surety s Right to Settle Claims Made Against the Surety x

7 (d) The Surety s Right to Unilaterally Settle Claims of the Principal (e) The Surety s Right to Information (f) The Surety s Right to Decline to Issue Bonds The Surety s Conduct as Indemnitee (a) The Surety s Duty to Investigate (b) The Surety s Settlement of Claims Enforcement of Indemnity (a) The Surety s Rights of Recovery From Indemnitors (b) Liability and Quantum (c) Availability of Summary Judgment to the Surety (d) Availability of Mareva Injunction Potential Defences of Indemnitors (a) Alleged Failure to Mitigate by the Surety (b) Alleged Failure to Intervene by the Surety (c) Alleged Premature Intervention by the Surety (d) Indemnitor s Entitlement to the Benefit of Available Set-Offs Indemnitor s Notice of Termination Province of Quebec (a) General Nature of Indemnity Agreements (b) Common Law v. Civil Law Provisions in Indemnity Agreements (c) Obtaining the Indemnity (i) Rules Pertaining to Contracts of Adhesion (ii) Certificate of Independent Legal Advice (iii) Indemnities by Spouses (iv) Corporations (v) Partnerships (vi) Execution of the Indemnity Agreement by Individuals (d) Enforcement of Indemnity (i) Indemnitor Funded Settlements (ii) Rights of Recovery Against Indemnitors xi (Surety Bonds) (2014 Rel. 1)

8 (iii) The Consequences of the Indemnitors Joint and Several Obligation (iv) Summary Judgment (v) Interpretation (e) Common Defences by Indemnitors (i) The Surety Made Payments under its Bonds, Without Consulting the Indemnitors and Before Judgment was Rendered (ii) The Surety Settled a Claim under its Bond by Mistake (iii) The Surety did not Raise Defences which were Available to It Under its Bond (iv) The Surety Sued by a Claimant under One of its Bonds, Cannot Call the Indemnitors in Warranty until Judgment has been Rendered Against It (v) The Indemnity Agreement was not Signed by the Bonding Company (vi) The Indemnity Agreement under Which the Surety is Claiming, was Replaced by a More Recent One, to which the Indemnitor was no Longer a Party (vii) The Indemnity Agreement is a Contract of Adhesion (viii) Delay Within Which to Institute Proceedings Against Indemnitors Prescription (ix) Surety Did Not Respect its Obligation to Inform (x) The Principal Was Not in Default and the Surety Did Not Properly Advance a Claim for Extras (f) Liability and Quantum (i) Proof to be Made (ii) Claim for Attorneys Fees (iii) Garnishment of Pension Plans and R.R.S.P.s (g) Allocation of the Surety s Claim as Between the Indemnitors (h) Limitation of the Surety s Rights to Claim Against Indemnitors xii

9 CHAPTER 6. THE SURETY S RIGHTS OF SUBROGATION AND ASSIGNMENT 6.1 General Subrogation Defined The Equitable Remedy of Subrogation Conditions Precedent to the Right of Subrogation Rights Conferred in Subrogation (a) All Rights and Remedies (b) Rights of Recovery (c) Surety s Right to Sue in the Name of the Person Indemnified The Mercantile Law Amendment Act (a) Entitlement to Assignment Formal Assignment (a) Assignable Choses (b) Written Notice Order to Continue Performance Bonds: Subrogated Rights to Remaining Contract Balances (a) The Canadian Indemnity v. B.C. Hydro Decision (b) Subrogation to the Owner s Right of Set-off Against Contract Balances (i) The Right of Set-Off (ii) Competing Claims (c) The Owner s Right of Set-Off against Trust Funds (d) Performance Bond Jurisprudence (i) Re. Jason Construction Ltd (ii) Standard Industries v. Treasury Trails (iii) Newfoundland Government v. Newfoundland Ry. Co (iv) Commercial Union v. City of Surrey (e) Newfoundland: The Newtown Construction Decision (f) Subrogation to Other Rights: Claims in Negligence xiii (Surety Bonds) (2014 Rel. 1)

10 6.10 Labour and Material Payment Bonds: The Surety s Right of Subrogation (a) Subrogation to Lien Rights (b) Subrogation to Trust Rights (c) Subrogation to Other Rights Construction Lien Bonds: The Canada Heating Decision Bid Bonds Province of Quebec (a) General (b) Legal Subrogation (c) Contractual Subrogation (d) Assignment of Debts and Rights (e) Hypothecs on Claims (f) Floating Hypothecs on Claims (g) Surety s Defence that It Cannot be Subrogated in a Creditor s Rights (h) Conditions Precedent to the Rights of Subrogation, Assignment and Hypothec (i) Right of Subrogation (ii) Assignment of Debts (iii) Hypothecs on Claims (i) Rights Conferred by Subrogation, Assignment and Hypothec (i) By Subrogation (ii) By Assignment or Hypothec (j) Surety s Right to Sue in the Name of the Person Indemnified (i) By Subrogation (ii) By Assignment (k) Surety s Right to Pursue Proceedings Started by the Party Paid by the Surety (l) Subrogation and Performance Bonds (m) Subrogation and Labour and Material Payment Bonds (n) Subrogation in the Right of the Obligee to Set-Off Costs of Payment of Subcontractors or Suppliers of the Principal xiv

11 CHAPTER 7. THE UNDERLYING CONTRACT 7.1 General The Principal Must Be in Default Obligee s Default Damages for Delay Provisions Requiring the Payment of Labour and Material Suppliers Provision for Changes Arbitration Provisions Provisions Requiring Insurance (4) 7.9 Bond Limits (5) 7.10 Subsurface Soil Conditions (a) Builder s Risk Clauses (b) Owner s Risk Clauses Impossibility of Performance Contractors Equipment to Complete A The Bonding Requirement B Consultant s Determination of Damages C Extended Warranty Provisions D Collateral Monetary Obligations Province of Quebec (a) General (b) Interpretation of the Underlying Contract (c) The Principal Must Be in Default (d) The Obligee s Default (e) Damages for Delay (f) Provisions Requiring Payment of Labour and Material Suppliers (g) Provisions for Changes (h) Arbitration Provisions (i) Provisions Requiring Insurance (j) Bond Limits (k) Impossibility of Performance (l) Contractor s Equipment to Complete CHAPTER 8. THE SURETY S RIGHTS OF PRIORITY OVER COMPETING CLAIMS xv (Surety Bonds) (2014 Rel. 1)

12 8.1 General The Surety s Claim to Priority (a) The Funds at Issue (i) Statutory Holdback (ii) Earned but Unpaid Funds (b) The Sources of the Surety s Priority Surety v. Lien Claimants and Trust Claimants (a) General (b) The Lien Claim (i) Who is Entitled to a Claim for Lien? (ii) Preserving a Claim for Lien (iii) Holdback Fund (iv) Perfecting a Claim for Lien (v) Other Requirements to Maintain a Claim for Lien (vi) Sheltering (vii) Priorities (c) Waiver of Rights (d) Trust Claims (e) Lien and Trust Actions (f) Other Rights (g) Priorities Surety v. Principal s Bank (a) The Bank s Position (b) Surety s Subrogation to the Owner s Right of Set-Off (c) The Breach of Trust Issue (d) The Test (i) Whether the Funds Deposited by the Contractor are Subject to a Statutory Trust (ii) Whether the Bank Knew or Ought to Have Known of the Statutory Trust (iii) Whether the Bank Knew or Ought to Have Known of the Breach of Trust and Participated Therein (e) The Bank s Ordinary Course of Business Defence (f) The Penta Stolp Decision xvi

13 (g) Post Penta Stolp Decision (i) Knowing Assistance (ii) Knowing Receipt (h) Review of Selected Case Law on the Degree of Knowledge a Bank Must Possess Before It Will Be Held Liable for Breach of Trust Workplace Safety and Insurance Board Surety v. Canada Revenue Agency (a) Super Priority Claim (i) Where the Surety is Subrogated to Lien and Trust Claims (ii) Where the Surety is Subrogated to the Obligee s Right of Set-Off (iii) The Owner s Position (b) Excise Taxation (i) Input Tax Credit (A) Remedy the default (B) Settles the claim and the obligee engages a new contractor to complete the construction (C) Surety completes the construction contract (ii) Garnishment Surety v. Trustee in Bankruptcy/Receiver/Monitor (a) Restructuring Under the Bankruptcy and Insolvency Act or the Company Creditors Arrangement Act Province of Quebec (a) General (b) Trust Funds, Statutory Holdbacks and Privileges; Conflicts Between Claimants Holding Legal Hypothecs and Creditors Holding Other Forms of Hypothecs (c) Surety v. Owner-Obligee (c.1) Surety v. Owner-Obligee s Bank (d) Surety v. Claimants Holding Legal Hypothecs 8-45 (e) Surety v. Principal s Bank or Other Holder of Rights on the Principal s Debts or Claims xvii (Surety Bonds) (2014 Rel. 1)

14 (i) Introduction Formalities of Banks Rights under an Assignment of Debts (ii) Extent of Banks Rights under a Contractor s Hypothec on Claims (iii) Types of Receivables under a Construction Contract (iv) Conflict Between Banks and Sureties, for the Unpaid Value of the Principal s Work Done Prior to its Default (v) Conflicts Between Banks and Sureties for the Payment of Funds for Work Performed by the Surety after the Principal s Default (vi) Conflicts Between Banks and Sureties for the Payment of Holdbacks under the Contract (vii) Conflicts Between Banks and Sureties for Funds Withheld by Obligees to Provide for Privileges Registered by the Principal s Sub-trades and Suppliers (viii) Conflicts Between Banks and Sureties, for Funds Withheld on Account of Claims by the Commission de la sante et de la sécurite au travail (CSST the Equivalent of the Workers Compensation Board in the Other Provinces) and the Commission de la construction du Que bec (CCQ the Quebec Construction Commission) (f) Surety v. Trustee in the Principal s Bankruptcy (i) When the Surety s Rights are Exercised Pursuant to a Hypothec on the Principal s Debts (ii) When the Surety does not Exercise its Rights under a Hypothec on Claims (g) Surety v. CCQ and CSST (h) Surety v. Department of Revenue (i) Surety v. Principal s Judgment Creditor (j) Hold Harmless Agreement by the Surety xviii

15 CHAPTER 9. BID BONDS AND THE AGREEMENT TO BOND 9.1 The Bid Bond Sample Wording A CCDC Bid Bond Form General Mistakes in Tenders (a) Mistakes by Contractors (i) Ron Engineering (ii) Calgary v. Northern Construction (iii) Other Cases (iv) Summary (v) Potential Bid Bond Defences (vi) Measure of Damages (b) Mistakes by the Owner The Privilege Clause, the Duty of Fairness and the Application of the Ron Engineering Principles (a) Broad Interpretation (b) Strict Interpretation (c) Recent Appellate Decisions (i) Twin City Mechanical v. Bradsil (ii) Naylor Group v. Ellis-Don Construction (iii) Tarmac Canada v. Hamilton- Wentworth (iv) Ken Toby v. BCBC (v) Arrow Construction v. Nova Scotia (vi) Martel Building v. R (d) Summary (e) The M.J.B. Enterprises Ltd. Decision (f) The Application of MJB Enterprises (g) Strict v. Substantial Compliance (h) The Double N Earthmovers Case Extraordinary Remedies (a) General (b) Glenview v. Canada (c) Peter Kiewit v. Richmond xix (Surety Bonds) (2014 Rel. 1)

16 (d) Limitation of Damages (i) Elite Bailiff Services v. British Columbia (ii) Tercon Contractor Limited v. British Columbia (Transportation and Highways) Conclusion (2) 9.8 The Agreement to Bond (a) Sample Wording (b) General Province of Quebec (a) General (b) Mistakes in Tenders (i) Mistakes by the Contractor (ii) Mistake by Owner (c) Discretionary Language in the Tender Documents (d) Quebec Bid Depository System (e) Irregularities in Bid Bonds (f) Extent of the Principal s Liability under a Bid Bond (g) Effect on a Bid Bond, when the Obligee Fails to Formally Accept the Principal s Bid, after the Principal has Notified the Obligee of a Mistake in its Bid (h) The Surety s Obligation to Issue Performance and Payment Bonds when the Performance of the Work is Allowed to Start Prior to the Signature of the Contract and the Issuance of the Final Bonds (i) When the Terms of the Contract Submitted for Signature are Different from the Conditions of the Bid Documents (j) The Measure of Damages which may be Claimed from a Bidder Withdrawing its Bid (k) Obligee s Obligation to Mitigate Damages (l) Agreements to Bond (m) Obligee s Obligation to Accept Within Specified Delay CHAPTER 10. PERFORMANCE BONDS xx

17 10.1 The Performance Bond Sample Wordings (a) CCDC Performance Bond Form (b) Federal Wording A CCDC Performance Bond Form B Surety Association of Canada Renewable Performance Bond for a Multi-Year Contract General (a) The Surety s Performance Bond Options (i) The First Option: Remedy the Default (ii) The Second Option: Complete the Contract (iii) The Third Option: Put a Bid for Completion (b) The Fundamental Option A The Obligee s Notice of Default and Formal Demand on the Surety Defences to Performance Bond Claims (a) The Unenforceability of the Bonded Contract (i) Invalidity (ii) Impossibility (iii) Illegality (iv) Obligee s Release of the Principal (b) The No-Default Defence (c) The Defence of Failure to Notify (d) The Defence of the Obligee s Default (e) The Defence of Variation of the Contract (i) General (ii) The Defence of Variation in the Scope or Nature of the Work (iii) The Overpayment/Variation of the Payment Terms Defence (iv) The Defence of Extension/Variation of Time for Performance (v) Variation of One of Two Bonded Contracts (f) Misrepresentation xxi (Surety Bonds) (2014 Rel. 1)

18 (g) Other Defences (1) (i) The Limitation for Suit (1) (ii) Exclusory Wordings (4) (iii) Failure to Mitigate (5) (iv) Default Without Loss to Obligee (v) Surety s Tender of Performance Rejected by Obligee (vi) The Obligee s Failure to Insure (5) (vii) Completion in Fact (6) (viii) Release of Co-Surety (6) (ix) No Right of Action to or For the Use of Any Person Other Than the Obligee (6) (x) Estoppel (7) (h) The Extent of Discharge Issue (7) (i) Claims for Payment of Suppliers under a Performance Bond (j) Waiver, Estoppel, Reservation of Rights Surety s Entitlement to Contract Funds (a) Pursuant to the Bond Wording (b) Pursuant to the Obligee s Right of Set-Off The Bad Faith Issue Province of Quebec (a) General (b) The Performance Bond Options (i) Bond Wordings (ii) Option (1) v. Option (2) (iii) Two Unwritten Options (c) The Surety s Maximum Financial Liability under the Performance Bond (d) Defences to Performance Bond Claims (i) The Defence of Failure to Notify (ii) The Defences of Variation of the Contract and of its Scope, of Overpayments and of Extension of Time for Performance (iii) The No Default Defence (iv) The Partial Defence Resulting from the Failure to Mitigate Damages xxii

19 (v) The Defence of Absence of Liability for Damages (vi) The Defence of Impossibility of Performance (vii) The Defence that the Bond was Never Delivered (viii) The Defence of Work Suspension (ix) The Defence of the Obligee s Insolvency or Failure to Undertake to Make the Balance of the Contract Funds Available to the Surety (x) Prescription: The Defence of the Obligee s Failure to Commence an Action within the Time Prescribed in the Bond (xi) The Defence that the Obligee did not Provide the Surety with the Information Requested by the Surety under Article 2345 C.C.Q (xii) The Defence that the Claim was for Work which could not be foreseen (e) The Extent of Discharge Issue (f) The Surety s Obligations to Labour and Material Claimants and with Respect to Legal Hypothecs (g) Entitlement to Contract Funds (i) General (ii) Funds earned by the principal prior to its default (iii) Funds earned by the surety for the completion of the work (iv) The surety s obligation to produce releases from the principal s sub-trades (h) The Bad Faith Issue and Consequences of the Surety s Refusal to Intervene (i) Waivers, Estoppel and Reservations of Rights CHAPTER 11. LABOUR AND MATERIAL PAYMENT BONDS 11.1 The Labour and Material Payment Bond xxiii (Surety Bonds) (2014 Rel. 2)

20 11.2 Sample Wordings (a) CCDC Wording (b) Federal Form A CCDC Labour & Material Payment Bond (Trustee Form) Form B Surety Association of Canada Renewable Labour and Material Payment Bond for a Multi-Year Contract General (a) The Trustee Wording (b) Terms and Conditions General Forms of Labour and Material Payment Bonds (a) Federal Government (b) Private Bonds (c) Other Standard Forms Qualifying as a Claimant (a) Three Requirements (b) The Standard Definition of Claimant (c) Services and Materials (d) Allocation of Supply Between Contracts (e) Second Tier Claimants (f) The Unnamed Principal The Claimant s Obligation of Fair Dealing Surety s Liability to Claimant Co-Extensive With That of Principal (a) General (b) Pay When Paid Clauses (2) (c) Interest (d) Delay Damages Notice to the Surety (a) Form of Notice Under Private Bond (b) Timing of Notice (i) General (ii) Holdback (iii) Commencement of the 120-Day Notice Period (iv) Re-attendance to Rectify Deficiences (v) Notices Failing to Comply with the 120-Day Notice Requirement xxiv

21 (A) CCDC Form (B) Federal (vi) Prejudice (A) Onus on the Claimant to Establish Lack of Prejudice (B) Prejudice Arising From Lack of Relevant and Essential Information The Obligee s Conduct (a) The Conduct of the Obligee as Trustee (b) Material Variation of the Prime Contract by the Obligee Bond Limits Issues The One-Year Limitation Period Province of Quebec (a) General Nature of the Labour and Material Payment Bond under Civil Law (b) Bond Forms (c) Qualifying as Claimant (i) General (ii) The Obligee (iii) Second Tier Claimants (iv) The Supplier of Services or Materials Intended Exclusively for the Work (v) Transportation Companies (vi) Creditors Holding a Legal Hypothec (vii) Engineers and Architects (viii) Claimants Having Accepted the Principal s Bankruptcy Proposal (ix) The Assignee of Subcontractor s Claim (x) A Claimant not having Fulfilled its Contractual Obligations (xi) The Quebec Construction Commission (d) Notice to the Surety (i) Who Can Give the Notice (ii) Form and Content of Notice (iii) Commencement of the 120-Day Notice Period for Claims other than for Holdbacks xxv (Surety Bonds) (2014 Rel. 2)

22 (iv) Commencement of the 120-Day Notice Period on Claims for Holdback (v) The Effect of Not Giving the Required Notice (e) Claims Covered under a Labour and Material Payment Bond (f) The Obligee s Default (g) Bond Limits (h) Delay Within Which to Bring Action Prescription (i) Effect of the Principal s Release on the Surety (j) Surety s Benefit of Discussion CHAPTER 12. LIEN BONDS 12.1 The Construction Lien Bond Sample Wording (a) Long Form Wording (b) Ontario Construction Lien Act Form General Standard Form of Lien Bond The Limits of the Surety s Liability (a) Delivery Up for Cancellation Where Lien Found Invalid (b) Neutral Substitution (c) Northern Air (d) Francon v. Nicolini (e) Reliance Electric (f) Interest not Payable from the Construction Lien Bond (g) Limits to Costs Available from Lien Bond (h) The Significance of Privity (i) Multiple Liens, Multiple Securities (j) Reduction of Lien Bond Security (k) Substitution of Lien Bond for Cash In Court (l) Timing of Payment From Lien Bond xxvi

23 (m) Recovery of Lien Bond Premium in Judgment The Surety s Intervention in the Lien Action Joinder of Lien and Bond Actions Surety s Right of Subrogation Payment out of Court/Delivery Up of Lien Bonds for Cancellation (a) Payment of Funds out of Court (b) Delivery up for Cancellation Province of Quebec (a) General (b) Legal Hypothecs (c) The General Rule Under the Civil Code of Lower Canada that Bonds Cannot be Posted to Replace a Privilege on Property (d) The Exceptions Under the Civil Code of Lower Canada (e) The New Rule Under the Civil Code of Quebec that the Court may Allow the Posting of Security to Replace a Legal Hypothec (f) Bond Wording (g) The Surety s Liability Under a Bond to Replace a Legal Hypothec (h) Security for the Release of Holdbacks by the Owner (i) The Surety s Intervention in the Action on Legal Hypothec (j) Joinder of Legal Hypothec and Bond Actions CHAPTER 13. SURETY CLAIMS: INVESTIGATION AND ADJUSTING 13.1 General The Commencement of the Surety s Involvement: Three Factual Scenarios (a) Financing the Principal (b) The Contract Dispute Situation (c) The Formal Default Situation Investigating the Alleged Default (a) Investigative Steps xxvii (Surety Bonds) (2014 Rel. 2)

24 (i) The Original Bond (ii) Notice to the Indemnitors (iii) Review of Bonded Contracts (iv) Review of Work in Progress and Contract Accounting (v) Preservation of the Contract Funds (vi) Consideration of Completion Option (vii) Obtaining a Bid or Bids for Completion (viii) Lump Sum Completion Contract (ix) Completing Contractor s Bonds (x) Insurance (xi) Ongoing Contact with Indemnitor(s) (xii) Potential for Recovery (b) Urgency of the Situation (c) The Disputed Default and the Surety s Investigation (d) Recovery from the Indemnitors The Surety s Duty of Care (a) Nature of the Surety s Duty (b) Insurer s Duty v. Surety s Duty (c) Surety s Duty Not that of a Fiduciary (d) The Investigative Duty of Care (i) Duty to Investigate (ii) No Duty to Investigate in the Absence of a Proper Declaration of Default (iii) Breadth of Duty to Investigate (iv) Reliance Upon the Position of the Principal (e) Duty Owed to Principal and Indemnitors (f) The Bad Faith Issue (i) No Legal Basis for Bad Faith Claims Against a Surety in Canada (ii) Availability of Punitive Damages (iii) The U.S. Context of Bad Faith Claims CHAPTER 14. FINANCING AND COMPLETION BY THE SURETY AND MITIGATION AGREEMENTS xxviii

25 14.1 General Considerations Re The Financing Option (a) The Principal s Financing Proposal (b) The Financing Decision (c) The Three C s (i) Capacity (ii) Character (iii) Collateral (d) The Form of Financing (e) Concerns Re Financing Completion By The Surety (a) Why Sureties Do Not Complete (b) Situations Where Completion May Be Required (c) Situations Where the Surety May Choose To Complete (i) The Work Is Almost Complete (ii) Material Or Equipment To Be Supplied Is Proprietary (iii) The Surety Believes That It Can Minimize The Loss Mitigation Agreements (a) With The Obligee (b) With The Indemnitors CHAPTER 15. CONCLUSION 15.1 First Surety Company in North America a Canadian Company Surety Association of Canada The Future APPENDIX A FORMS... A-i APPENDIX B UNREPORTED DECISIONS... B-i APPENDIX C CIVIL CODE CONCORDANCE... C-1 APPENDIX D SELECTED STATUTORY PROVISIONS... D-i APPENDIX E THE SURETY ASSOCIATION OF CANADA S POSITION PAPERS... E-i GLOSSARY... GLO-1 xxix (Surety Bonds) (2014 Rel. 2)

26 INDEX... I-1 xxx