Source: https://watttieder.com/portfolio/performance-bonds-north-border-primer-performance-bond-issues-defenses-canada/
Timestamp: 2019-04-22 06:13:46+00:00

Document:
Many attorneys and surety claims representatives in the United States focus solely on domestic matters; however, to the extent an issue arises in Canada, it is useful to have at least a rudimentary understanding of how Canadian courts analyze performance bond claims. With that in mind, this article will provide a basic overview of Canadian courts’ treatment of performance bond issues and defenses.
The Canadian Court System consists of four basic levels of courts. The first level is the provincial or territorial courts similar to a circuit court or district court in the United States. These courts handle the vast majority of the cases filed in the Canadian legal system. Next are the superior courts. The superior court is the highest level court in each province. Typically, these courts handle the more serious crimes, but they also take appeals from the provincial or territorial court judgments. On the same level as the superior courts is the Federal Court. The Federal Court deals with matters specified in federal statutes. The third level consists of the appellate level for both the provincial courts and the Federal Court. Finally, the Supreme Court of Canada functions as the final court of appeal in Canada.
Similar to the standard industry forms such as the American Institute of Architects A312 Bond form, Canada has certain industry standard bonds such as the Canadian Construction Documents Committee 220 bid bond form (“CCDC 220”) and the 221 performance bond form (“CCDC 221”). Like in the United States, the terms contained in standard bond forms have been drafted by the industry and judicially interpreted. Non-standard bond forms are still widely used, however, and provide considerably less certainty to the parties as to the meaning or interpretation of the terms. Canadian owners view payment and performance bonds as a form of security to ensure the contractual obligations are performed. In most cases, the owner will elect to require the penal sum of the bond to be either 50 percent or 100 percent of the contract amount.
For Canadian bond forms, if the principal properly performs, the bond and the surety’s obligations are null and void. Moreover, as a condition precedent, the obligee must have promptly and faithfully performed the contract. Generally, the standard industry forms in Canada allow for several performance options for the surety once the principal is declared in default: remedy the default; complete the contract; or tender a new contractor to complete and ensure sufficient funds are available to pay the new contractor, less the remaining contract funds. Other options include financing the principal and tendering the penal sum.
In Canada, like the United States, the surety may have several surety specific defenses. In fact, Canadian courts have cited to cases interpreting the Miller Act as persuasive authority regarding surety defenses. For example, the obligee’s failure to satisfy contract terms such as the payment obligations may forfeit the rights the obligee has under the bond.
Any alteration in the form of the agreement between the principals, or an alteration of any provision thereof (as distinct from a variation of the work in making of which is provided for by the original contract and contemplated by the contract and guarantee), will discharge the surety, unless it is self-evident that such alteration cannot prejudice him.
Id. at ¶3 (quoting from Hudson’s Building and Engineering Contracts, 10th ed. (1970) p. 809).
Moreover, the court recognized that the exhaustion of the contract funds, in a manner inconsistent with the terms of the contract, prejudiced the surety, as the surety’s collateral, the remaining contract funds, had been depleted.
A material change to the bonded obligation, absent a benefit to the surety, will relieve the surety of its obligation under the bond. Holme v. Brunskill,  3 Q.B.D. 495. In Holme, a yearly farm tenancy was secured by a bond. After a dispute between the landlord and the principal, the landlord ordered the principal off the land. The landlord and the principal then negotiated a change to the contract, including a significant adjustment to rent and a return of certain land covered by the bond. Later, the landlord attempted to call upon the bond, and the surety argued the obligation had been materially altered. The court noted that a material change can discharge a guarantee as long as the material change occurs without the consent of the guarantor, with the qualification that a change that is beneficial to a surety does not discharge the surety. The court stated that it is not for a judge or jury to decide the materiality of the alteration in the contract, but that “the surety himself must be the sole judge whether or not he will consent to remain liable notwithstanding the alteration, and that if he has not so consented he will be discharged.” Id. at 505.
It seems very plain that the plaintiffs should have brought in the surety and explained the whole matter to it and any arrangement or adjustments that were to be made, either with the sub-contractors or with the contractor himself leading to a final acceptance of the work and the payment of the balance of the contract moneys, should have been made, under all the special circumstances of the case, with the knowledge and consent of the surety. It cannot fairly be said that it was self-evident that these positive acts of the principal in dealing with the contract were not to the prejudice of surety, and in the absence of any notice or knowledge on the part of the surety these acts operated to discharge the surety.
The court in Truro (Town) v. McCulloch considered the interplay of a material alteration on the underlying prime construction contract and potential payment bond claimants.  S.C.R. 1129 (sub nom. Truro (Town) v. Toronto General Insurance Co.). In Truro, a contractor entered into an agreement with the town of Truro to build a school. The contractor was required to and did obtain a payment and performance bond from a surety to guarantee performance. Although work on the school was substantially complete, the contractor abandoned work due to serious financial difficulty. The obligee on the performance bond, the town, subsequently transferred all rights in the school to the school board. The surety argued that the bonded obligation had been altered based on such transfer of rights and that the surety should be deemed discharged.
Plaintiffs brought a claim against the surety under the payment bond for unpaid subcontract work. The court noted that any potential alteration of the underlying contract between the town and the contractor was unavailing as to potential payment bond claimants. The court held that there had been no change in the contract between the contractor and the subcontractor making the payment bond claim.
In response to the above line of cases, some owners have attempted to quantify a “material alteration” at the contracting stage by defining the percentage change in the contract amount, such as 25 percent, that the parties acknowledge would be a material change. Courts have rightly recognized, however, that the contract amount is not the only way to materially alter a contract, and these clauses that attempt to avoid a later claim of material alteration have proven largely unsuccessful and are not recognized as controlling the issue.
Canadian courts do recognize certain limits to the extent of a change in the material obligation. In Five-Fifty Beatty Street Ltd. Partnership v. Markwood Construction Ltd., the general contractor entered into an agreement with the owners of a warehouse for renovation of the property.  17 B.C.L.R. (2d) 72. The surety issued a performance bond as well as a labor and material payment bond. The contract, incorporated in the bond, contemplated change orders. After various extensions and after the execution of numerous change orders, the total contract price increased by more than 23 percent. The surety denied liability under the bond because the cost increase constituted a material change in the risk under the bond. Notwithstanding, the court noted that the contract between the parties contemplated change orders and that there was “no language in the bond or in the contract which changed the surety’s obligation if there was a variation in the price.” Id. at ¶86. The court relied on Hayes, Trustee of PreLoad Co. of Can. Ltd. v. Regina (City), where “the court held that a surety was liable under a performance bond where the surety agreed in advance to variations and alterations in the construction contract.  S.C.R. 801, 20 D.L.R. (2d) 586. It remained liable where such alterations were made, although it received no notice thereof.” Five-Fifty Beatty Street at ¶87.
Where, as in the present case, the impugned alteration is an extension of time, the circumstances of the case must be addressed to determine whether the prolongation amounted to a mere indulgence incidental to the guaranteed contract, or a substantial variation going to the root of the contract . . . . On the other hand, there has to be some limitation to such extensions. At some point, one must encounter a threshold beyond which the surety may reasonably maintain that the agreement can no longer be the one he or she guaranteed, but another one. The guarantor cannot be taken to have accepted to be indefinitely bound to the convenience or caprice of the parties as to the time for completion of their bargain in the absence of any provision in the guarantee authorizing dealings between the contracting parties.
St. John’s Metropolitan Area Board v. William J. Vokey & Sons Ltd.,  287 A.P.R. 147, 92 Nfld. & P.E.I.R. 147 at ¶13.
The court then affirmed the trial court’s decision to dismiss the plaintiff’s action against the surety on the grounds that the original contract which bound Hunt was waived and replaced with a second contract that did not concern Hunt.
Does A Performance Bond Extend Beyond Sticks And Bricks?
Canadian courts have competing cases examining the scope of performance bonds, including the standard CCDC form. Like similar decisions in the United States, Canadian courts have struggled with whether the performance bond simply covers the structure to be built or incorporates all terms of the underlying construction contract. Historically, Canadian performance bonds have been limited to physical construction of the project; however, in Whitby Landmark Development Inc. v. Mollenhauer Construction Ltd., this conventional wisdom was questioned.  67 O.R. (3d) 628, 178 O.A.C. 49. In Whitby, an owner entered into an agreement with the contractor to build a condominium building, and the contractor secured a performance bond from a surety. Under the terms of the contract between the owner and contractor, the owner could recover 75 percent of the savings if the cost of the project was below the price in the contract. At several points, it became clear that the work would cost less than what the parties agreed to in the contract. At one point, the parties agreed that the owner could deduct certain savings from the monthly payments to the contractor. Later, during the course of the project, the owner once again was entitled to additional savings, but this time the parties did not come to an agreement as to how the owner should acquire the savings. As a result, the contractor received full monthly progress payments and eventually owed the owner over $600,000 in cost savings. The owner sued the surety to recover the $600,000 and the court held that the bond incorporated all of the issues concerning the construction contract. In doing so, the court held the surety liable for more than just the “bricks and mortar” that accompany the construction of the work.
There is no authority in the Contract to set off these amounts against the funds available to complete the contract. Once one reaches that conclusion, on what basis can the surety be made liable for these costs? They are costs incurred by the owner to “complete the Contract” but neither the original contractor nor the surety contracts to pay the owner’s costs. A surety is not liable for all costs to complete the contract. A surety is only liable for those costs contemplated by the bond. . . . A surety’s obligation on this point can be no greater than if it had completed the contract or had found a responsible bidder to complete it. If either of those options had occurred, Western would not be liable to the Band for the extra costs incurred by it. Accordingly, I find that the trial judge erred in holding Western liable for these amounts.
Id. at ¶¶ 102, 104.
It is well established in Canada that if only one party has signed the bond they will not be held liable. The courts will relieve them of such liability even though they intended to be held liable under the bond.
In Magna Contracting & Management Inc. v. Newfoundland, a general contractor sued an owner for awarding a contract to another bidder based, in part, on the general contractor’s non-conforming bid, specifically, the lack of mutual consent to a bid bond.  206 Nfld. & P.E.I.R. 225, 618 A.P.R. 225. In Magna Contracting, the owner invited bids for the construction of a school and required each bid bond to be issued by an approved surety company. The owner provided that any incomplete tenders would be rejected, any incorrectly prepared tenders could be rejected and any tenders received after the closing date would not be considered. A contractor, the plaintiff, submitted a tender form and bid bond before the closing date for tenders. The bid bond was not signed by the contractor. Shortly after the closing date, the contractor and the bonding company contacted the owner to confirm the mutual obligation under the bond. The owner disqualified the contractor’s tender and awarded the contract to another party. After ruling that it was implied in the contract that the bids would be assessed at the time of the closing, the court acknowledged that “there is a long line of authority standing for the proposition that when a bond is executed by only one of the parties intending to be liable under it, the party who has in fact signed is relieved from any liability under it.” Id. at ¶14. The court ruled that because the bond lacked the principal’s signature, it was legally unenforceable against the surety and within the owner’s right to reject the bid. The court in Magna Contracting impliedly recognized the tripartite relationship of a bond when it noted that the failure of the contractor to execute the bond resulted in an incomplete instrument that would be unenforceable against the surety.
Like courts in the United States, Canadian courts review and adjudicate similar performance bond claims and recognize similar defenses as those raised south of the border. Similar to the certainty provided by standard bond forms like the AIA A312 bond form, industry standard forms in Canada like the CCDC have been drafted by practitioners and interpreted by the court. Based on the various defenses raised above, and others not discussed, Canadian courts will recognize various suretyship defenses to performance bond claims.

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