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Ontario’s Construction Act: Mandatory performance bonds for public contracts > $500,000

In July 2018, the Ontario legislature passed a bill to amend the Construction Lien Act, which is now renamed as the Construction Act, to address many of the concerns raised by the construction industry with the previous legislation.

One amendment affecting public sector organizations is the requirement to use performance bonds in the prescribed form for public contracts $500,000 or greater.1

This article: (A) discusses when the performance bond must be in the prescribed form; and (B) points out the significant differences between the prescribed form performance bond and the often used CCDC performance bond (“CCDC Form”).

A. When Must the New Prescribed Form Be Used?

Section 85.1 of the Construction Act (“Act”) requires the contractor who enters into a “public contract” with a contract price being $500,000 or greater to use the prescribed form when furnishing a performance bond to the public sector organization.2 The Act defines a “public contract” as a contract where the owner is the:

  • Crown;
  • Municipality; or
  • Broader public sector organization.

However, it excludes contracts where the contractor is an architect or engineer.

The form the Act requires contractors to use is called Form 32. The form was re-released by way of a regulation in August 2019 and that version has been in force since October 2019.3

The value of the bond must be at least 50% of the contract price and the insurer issuing the bond must be registered under the Insurance Act. For P3 projects, where the contract price is greater than $100,000,000, the minimum coverage is capped at $50,000,000.4

B. Comparison of the Features of Form 32 Relative to the CCDC Form

The default performance bond form currently used by many in the construction industry is the CCDC Form. Following the Ministry of Attorney General’s Report5 and in consultations with the Surety Association of Canada along with other industry stakeholders, this new Form 32 was produced by the Ministry. The Form was produced to fill in many of the gaps in the CCDC’s form of bond.

Form 32 is exceptionally detailed and precise. It appears to provide a full answer on the basics steps on how an owner can obtain recourse using the bond. Such a detailed procedural regimen should, in theory, limit disputes when claiming remedies under the bond. There’s no similar detailed regimen in the CCDC Form.

(1) Owner Must Provide Notice To Surety When Contractor is in Default

Under Form 32 where there is an alleged default by a contractor, the owner has the option of calling a pre-notice meeting with the surety and contractor. The discussions during this meeting are without prejudice.6 It’s an opportunity for parties to get together and resolve the dispute before going any further.

After the pre-notice meeting, if the contractor default is not cured, the owner can bring a notice using a prescribed form attached to Form 32. This notice will activate obligations for the surety.

Once the surety receives notice, it must promptly investigate the default and determine its liability, if any.7 Within 4 business days of the receipt of the notice, the surety must provide an acknowledgement of the notice to the owner.8

The contents of the CCDC Form doesn’t remotely come close to the detail in Form 32. The CCDC Form does not lay out a process on how an owner can pursue a claim under the bond and is silent on when a surety must respond to an owner’s claim. This silence forces parties under the CCDC Form to rely on the reasonableness and collaboration of the parties to establish timelines – and it goes without saying that during periods of dispute, reasonableness and collaborations can be in short supply.

(2) Owner Allowed To Perform Necessary Interim Work Without Surety Approval

In Form 32, prior and during the surety’s investigation of the default, owners are now expressly allowed to take control of the jobsite and perform interim work if they can prove that work is necessary to ensure people’s safety, protect the work from deteriorating, or to comply with applicable laws.9

Though an owner can perform the work without obtaining the surety’s approval, it must provide written notice within 3 business days of when the work is commenced to the surety. It must also allow the surety access to the work sites while the work is being performed.

Under Form 32, a surety is also prohibited from raising an argument that it was prejudiced by the owner performing the necessary interim work.

In contrast to Form 32, the CCDC Form does not provide any instructions for the owner to perform necessary work. If the owner does decide to perform work, it would be prone to the surety contesting or invalidating the bond on the basis that it was prejudiced by the owner’s decision to take over the work.

(3) Post-Notice Meeting and Mitigation Work

In Form 32, within 5 business days of the owner’s notice to the surety, the surety must propose a meeting with the owner where the contractor also has the option of participating.10 The purpose of this meeting is for the owner to outline for the surety any work that must be done while the surety is conducting its investigation to mitigate costs.11 So long as the owner has reasonable evidence that certain work is required to mitigate costs, it can perform the work. The surety can object and must provide reasons for its objections to the owner.

The owner can resume with the work and the objections can be resolved through negotiations with the owner or in court.12

It’s critical to note the key differences between necessary interim work from mitigation work. Necessary interim work does not require surety approval whereas the mitigation work does. Also, necessary interim work is done prior to mitigation work.

(4) Surety Investigation and Response

In Form 32, within 20 business days of the owner providing notice to the surety, the surety must conclude its investigation and determine if the condition precedents have been met as these have to be satisfied for the surety to be liable under the bond. The conditions precedent are listed in section 8 of the form, they are as follows:

  1. the owner must declare the contractor to be in default;
  2. owner has given notice to the contractor of the default;
  3. owner has performed its obligations under the contract; and
  4. owner has agreed to pay the balance of the contract price to the surety.13

After the surety has concluded it is liable, it will determine how much it is liable for and must provide a written response to the notice sent by the owner.14 Section 3.3 of Form 32 lays out the acceptable responses by the Surety.

The surety has the option of either:

  1. accepting liability and choosing one of the courses of action set out in in the bond (laid out in part (5) of this article below);
  2. rejecting liability and provide reasons; or
  3. where the surety cannot determine whether it is liable, the surety can propose a process to collaborate with the owner to mitigate the owner’s cost.15

(5) Surety’s Options When It Accepts Liability

Like the CCDC Form, section 6.1 of Form 32 stipulates that, once the surety accepts liability it can either:

  1. remedy the default;
  2. perform the agreement in accordance with its terms and conditions;
  3. obtain bids to submit to the owner to complete the contract; or
  4. pay the owner lesser of: (1) the bond amount; or (2) the owner’s direct expenses plus the owner’s proposed cost of completion of the agreement and taxes less the balance of the contract price.16

(6) Surety’s Limited Liability Under the Bond Where Bids Obtained

A significant difference between the CCDC Form and section 6.1 of Form 32 is that the latter limits the scope of liability where the surety chooses the option of obtaining bids.

In the CCDC Form, when the surety chooses to obtain bids, the surety becomes liable for (a) the cost of completing the contract and (b) the owner’s direct expenses incurred as a result of the contract default. In contrast, in Form 32, the surety is only liable to the sum required to complete the contract but not the owner’s expenses.17

Further, section 7.3 of Form 32 lays out expenses an owner can claim for against the surety. To note, it excludesliquidated, indirect, or consequential damages and damages due to delay or non-performance. The CCDC Form does not exclude these heads of damages.

(7) General Cap on Surety Liability

Section 10.1 provides a general limitation of liability clause for the surety. It states that the surety’s liability cannot exceed the bond amount. This clause is broad enough to capture not only when the surety accepts liability where the contractor breaches the main contract but also where the surety itself breaches the terms of the bond. Either way, the surety cannot exceed the bond amount.

The CCDC Form does not have any language limiting the surety’s liability in respect of its breach. Theoretically, in the CCDC Form, if the surety breaches the terms of the bond, it can be liable for sums greater than the bond amount.

(8) Boilerplate Clauses

Form 32 also includes boilerplate clauses that are generally found in modern day commercial agreements such aschoice of forum18 and choice of law clauses,19 which the CCDC Form does not.

In Form 32, as discussed above, the mode of communication to trigger obligations is the provision of notices between owners and sureties. Sensibly so, Form 32 has a section describing how notice can be sent under the bond. Section 15 provides a robust notice clause detailing how notices must be sent, who it is sent to, when it is received and means of which to send the notice.

The CCDC Form is silent on these matters, therefore, it relies on the common law to fill in those vacant gaps. Given that the common law can be vague on certain points, parties using the CCDC Form are at a higher risk of entering in a dispute on which common law rule applies, which can lead to litigation.

C. Advantages and Disadvantages of Form 32

(1) Advantages

The provision of Form 32 is a legal requirement mandated by section 85.1 of the Construction Act. It applies to public contracts with a contract price over $500,000. Though the section obligates the contractor to produce a Form 32, public sector organizations should only accept performance bonds that are in line or in excess of the section 85.1 and Form 32 requirements. Form 32 is a minimum mandatory bond however owners are not limited to just asking for this mandatory form of bond. Under section 85.1(7), an owner can require the contractor to provide additional bonds or securities.

Outside of it being a minimum legal requirement, Form 32 produces a comprehensive protocol for the owner to obtain a recourse under the bond. Form 32 streamlines the claims process and mandates precise deadlines for both the owner and the surety, whereas in the CCDC Form, the timelines are up to the parties.

We see the certainty as to the claims process as an advantage for the owner, surety and the contractor as there will be less of a chance of a dispute about the procedural aspects of bringing a claim under the bond. The area of dispute will be pushed to the substantive issues such as whether the contractor was in default or not.

(2) Disadvantages

The disadvantages can be different depending on if you are the owner, surety or contractor. From the owner’s perspective, your access to damages have been limited in scope. Form 32 excludes owner’s expenses resulting from the contractor default and, effectively, indirect damages.

From the surety’s perspective, the short deadlines may render upon undue pressure on the surety to comply with the terms of Form 32. This may require the surety to invest in processes and controls to ensure the deadlines are met. On the other hand, the short deadlines for the surety to investigate to acclaim or disclaim liability will keep the project moving without excessive delay. This is a clear benefit for the owner.

Lastly, because of the added administrative requirements associated with operationalizing the claims process, sureties may have to increase the premiums they will charge the contractor for providing the bonding facility. Contractors may pass the cost over to the owner. Therefore, the use of Form 32 may increase the cost of procuring construction services for public sector organizations.

Concluding Statements

While some of our clients have expressed concern over the length and complexity of Form 32, the new prescribed form of bond should clarify, and hopefully facilitate, an orderly resolution of disputes between contractors and owners and facilitate the exercise of the public sector owner’s remedies under the bond which we believe is a good thing for all involved.

*****

1 Construction Act, RSO 1990, c. c 30, ss 85.1.
2 ibid at ss 85.1(1), 85.1(3)
3 Ont Reg 303/18, Form 32 (Performance Bond under Section 85.1 of the Act (2018))
4 Ont Reg 303/18, s. 3.
5 Striking the Balance: Expert Review of Ontario’s Construction Lien Act.
6 Form 32, s. 2.
7 Form 32, s. 3.1.
8 Form 32, s. 3.2.
9 Form 32, s. 4.1(a)-(c).
10 Form 32, s. 5.1.
11 Form 32, s. 5.2.
12 Form 32, s. 5.4.
13 Form 32, s. 8.1.
14 Form 32, s. 3.1.
15 Form 32, s. 3.3.
16 To note, “balance of the contract” is a define term in Form 32, please see section 9 of the form.
17 Form 32, s. 6.1(c)(ii).
18 Form 32, s. 12.2.
19 Form 32, s. 13.1.

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