The July 2018 amendments to the Construction Lien Act, renamed as the Construction Act (“Act”), brought upon substantial changes to construction bonds in general.
Labour and Material Bonds (“L&M Bonds”) as of July 2018 are required for public contracts that have a contract price of over $500,000.[1] If the contract price is $100,000,000 or less, the bond amount should be 50% of the contract price.[2] On the other hand, if the contract price is in excess of $100,000,000, then the bond amount is capped at $50,000,000.[3]
The amendments were accompanied with the new L&M forms (“Form 31”) contractors must now use when furnishing L&M Bonds to broader public-sector organizations.
We have already discussed the changes to the performance bonds,[4] to accompany that article, we will examine and highlight the Form 31 changes and compare it to the form that is more commonly used, the Canadian Construction Document Committee labour and materials bond form (the “CCDC Form”).
One of the objectives of Form 31 was to address the concerns raised by industry stakeholders highlighted in the Ministry of Attorney General’s Report (the “Report”),[5] where stakeholders viewed that the bond claim process was overly time consuming and expensive. As it will be demonstrated below, Form 31 creates a detailed protocol on the bond claims process with specific deadlines that must be adhered to.
A. L&M Definition of Claimant
Previously under the CCDC Form, for a party to bring a claim under the bond, it must have had a direct contract with the Contractor for the supply of labour or material. Form 31 defines a Claimant differently. It states that anyone that has a direct contract with the Contractor or with a Subcontractor can become a Claimant under the bond.
Form 31 is effectively expanding the definition to companies who have a contract with the sub-contractor.[6] Thereby giving a sub-subcontractor the ability to benefit and enforce the terms of the bond. However, and reasonably so it limits the quantum a sub-subcontractor can be entitled to the amount it was entitled to be paid in its contract with the subcontractor.[7]
B. Claim Process
(1) Notice of Claim
One of the primary concerns of the construction industry was the uncertainty and delay of resolving claims. The CCDC Form was silent on many issues such as timelines on when the Surety should respond to a claim, investigate and conclude on whether it will accept or reject a claim submitted by a Claimant.
Section 3 of Form 31 stipulates that a claim can be initiated by the Claimant as soon as it has not been paid by the due date stipulated in the contract. In respect of amounts other than amounts required to be held back by the Act or the terms of the contract, the Claimant must provide notice demanding payment from the Surety within 120 business days of when it last performed labour or supplied materials.[8] In respect of amounts required to be held back by the Act or the terms of the contract, the Claimant must provide notice within 120 calendar days after it should have been paid full under the contract.
In either case, the Claimant must use the notice of claim form (“Notice of Claim”), which is Schedule A to Form 31. A copy of the notice must also be sent to the Owner and Contractor.
(2) Surety Acknowledging Notice of Claim
Section 6(a) of Form 31 requires the Surety to acknowledge the Claimant’s Notice of Claim using Schedule C to Form 31. The Surety must provide acknowledgement within 3 business days of when it receives the Notice of Claim. Within this period, the Surety must also request from the Claimant any information and/or documentation it needs to conclude on whether the Claimant is entitled to any proceeds under the bond.
The Surety must provide its position using Schedule D to Form 31 not later than the earlier of:
- 10 business days after it receives of information it requests;
- 25 business days after receipt of the Notice of Claim; or
- Any other deadline agreed on by the parties.
Section 6(b) gives the Surety another 5 days when the Notice of Claim is from a sub-subcontractor.
The CCDC Form does not have such deadlines or schedules. Therefore, it relies on the parties to act reasonably or rely on the courts to provide direction.
(3) Payment of Claim and Adjudication
According to section 8 of Form 31, within 10 business days of the Surety providing its position, payment of the undisputed amounts must be made to the Claimant. The disputed portion, if any, will be regulated by the new adjudication provision in the Construction Act.[9] Once the matter enters upon the auspices of the Construction Act’s new adjudication provisions, the Surety’s obligations under the bond are stayed.[10]
The Act’s new adjudication regime is designed to provide a summary dispute resolution process for parties who contravene the new prompt payment provisions. The Act by regulation permits Claimants under L&M Bonds to bring their disputes to the authorized nominated authority, which is legislatively charged with administering the construction adjudication including certifying adjudicators.
C. Right of Subrogation
The Surety now has an express right in section 13 of Form 31 to obtain all the rights the Claimant has in respect of any claims against the Contractor or Subcontractor. The CCDC Form 31 does not have this express right, and unless the Surety is requiring the Claimant to execute a right of subrogation, the Surety would have to rely on the common law right of subrogation under a suretyship.[11]
D. Boilerplate Clauses
Section 16 of Form 31 provides that in addition to the rights and obligations under the Bond, the parties to the agreement are able to exercise their respective rights and obligation at common law and equity.
Section 15 and 17 are forum and choice of laws clauses. Expectedly, the forum is a competent court in Ontario and the laws of Ontario will govern.
E. Takeaways for Public-Sector Organizations
Though the obligation is on the contractor to provide the L&M Bond in the prescribed form, Form 31, it is in the interest of public-sector organizations to only accept such bonds. The new Form 31 contains a set of robust detailed procedures and puts on pressure on the Surety to provide its position in respect of claims fairly quickly.
This will ensure projects are not delayed for non-payment by the contractors to the subcontractors and subcontractors to sub-subcontractors.
However, as we have concluded in our previous article on performance bonds, the bids may come at a greater price as a result of the Surety increasing the premiums of their bonds to offset the cost of implementing measures to respond to the shortened timelines set out in Form 31.
[1] Construction Act, RSO 1990, c. c 30, ss 85.2 [Construction Act].
[2] Ont Reg 303/18, Form 32 (Performance Bond under Section 85.2 of the Act (2018)).
[3] ibid.
[4] Hyper link Performance Bonds Article
[5] Striking the Balance: Expert Review of Ontario’s Construction Lien Act.
[6] See also s. 85.1(4)(c) of Construction Act: L&M Bond must extend protection to subcontractors and persons that supply labour or material to the improvement.
[7] Form 31 at section 1.
[8] Form 31 at section 5(b).
[9] Ontario Regulation 306/18 at section 25.
[10] Construction Act at Part II.1.
[11] “Scott and Reynolds on surety bonds”, Scott, K. W., Reynolds, B., McGovern, P., & Baillargeon, c. (1993). Toronto, Carswell at part 6.9(a).
