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In this article, Tim discusses labour and material payment bonds. Tim wrote this article for the Fall 2016 issue of Alberta Construction Magazine.
A labour and material payment bond, often called an L&M bond, is meant to protect subcontractors and suppliers from getting stiffed. The idea is that a subcontractor or supplier (usually called the claimant) who provides work or supplies materials to another company on a construction project (the principal) can seek payment from the bonding company (the surety) if the principal doesn’t pay.
Not all construction projects have L&M bonds. They are project-specific, and someone has to call for them. In bond lingo, that someone is the obligee—usually the owner or general contractor at the top of the food chain who wants a safety net for sub-subcontractors and suppliers several layers below. The obligee insists that the party directly below—with whom the obligee has a direct contract and over whom it has some control—posts an L&M bond for the benefit of those further down.
L&M bonds tend to have strict terms. An unpaid claimant must submit a claim in the required manner, to the proper parties, within the specified time. Get any of it wrong and the surety may deny the claim.
And there’s the problem. Sometimes sub-subcontractors and suppliers don’t even know there is an L&M bond on the project, let alone its terms, until it’s too late. If it exists, the bond was negotiated and posted as part of a different contract up the chain, and the claimant may never have seen or heard of it. By the time a claimant learns there is an L&M bond, the deadline for making a claim may very well have been blown.
That’s what happened in the recent Alberta case of Valard Construction Ltd. v Bird Construction Company (2015 ABQB 141), which involved an oilsands project near Fort McMurray. The general contractor hired an electrical subcontractor to do some work. In turn, the subcontractor hired a sub-subcontractor for some directional drilling. The sub-subcontractor did the drilling but didn’t get paid. It sued the electrical subcontractor and got a judgment for $660,000. Unfortunately, the electrical subcontractor was broke.
The sub-subcontractor later learned there was an L&M bond. The general contractor (as obligee) had required the electrical subcontractor (as principal) to obtain an L&M bond to cover payment to sub-subcontractors. The drilling sub-subcontractor (the claimant) learned this by asking the general contractor, who readily disclosed the L&M bond—once asked.
The problem was that at this point the deadline had passed for the drilling sub-subcontractor to submit its claim. Under the bond’s terms, the sub-subcontractor had to give notice to the surety within 120 days of its last day of work. Unfortunately, it learned of the bond about a year late. The surety denied the claim.
So the drilling sub-subcontractor sued the general contractor. It alleged that the general contractor had a duty to inform the sub-subcontractor about the L&M bond. It argued that the general contractor was a trustee under the bond for the benefit of claimants and as such was obliged to search out and inform potential claimants, including the drilling sub-subcontractor. By failing to alert the drilling sub-subcontractor about the bond, it was argued, the general contractor breached its duty and caused the loss.
But the law and the facts were against the drilling sub-subcontractor. The judge followed
the decisions in previous cases saying an obligee must provide information about a bond when requested, but has no duty to search out potential claimants. Indeed, it would be impractical and unreasonable to expect an owner or general contractor to ferret out all sub-subcontractors and suppliers—with whom the obligee has no contract and about whom it may have no knowledge—on the outside chance that the sub-subcontractors haven’t been paid. It’s far easier for the sub-subcontractors and suppliers to ask.
In this case, the judge noted that the drilling sub-subcontractor was a large and sophisticated company, and it was well versed in how bonds worked. All it had to do was ask, and it would have learned of the L&M bond in time.