Some Sure Things About Sureties

Article By Tim Mavko, Partner
and Member of RMRF’s Construction Law Team

In a perfect world, subcontractors always get paid. In an almost perfect world, the occasional subcontractor who gets stiffed then just claims against a labour and material payment bond. The phone call to the surety might go something like this:

“Hello, Acme Bonding Company? Hi, this is Fred of Fred’s Wholesale Electrical Supplies. Can you tell me, did you bond that new submarine factory going up on Highway 99? You did? Good! Well, I was shipping boxes of high-capacity weejawgizzies and roles of extra-fluxie polymaxospore to Tesla and Sons Electrical Contractors. They had a standing order. I think Tesla was subcontracted to do some of the electrical work on that submarine factory, and may have used some of my stuff when it installed the panels. I haven’t been paid in a while, and I’m wondering if I can claim under the bond? How long? I think it’s been about a year and a half since the last shipment. How much? Oh, we’re owed around $5,000. You’ll pay? Oh good. I’ll drop buy and pick up the cheque on Tuesday. See ya.”

Okay, I made this up. There are at least five reasons why this phone call could never happen.

First, most standard-form labour and material payment bonds issued in Alberta only cover subcontractors or suppliers who have direct subcontracts with the principal contractor named in the bond. Second or lower-tier subcontracts and suppliers don’t benefit.

Second, labour and material payment bonds are project specific. They don’t protect bulk purchases, standing orders, or general deliveries. They don’t cover multiple jobs, blanket agreements, or running accounts. To claim, a subcontractor or supplier needs to prove that this particular work or that particular material went to the particular project protected by the bond. And even if the paperwork points to the right project, there will be problems if a subcontractor or supplier with a running account has the habit of paying down older invoices with recent payments without noting which project was the source.

Third, subcontractors and suppliers must prove their claims. The evidence needs to be at least as good as the evidence needed to claim directly against the defaulting contractor. This means complete subcontracts, purchase orders, time sheets, packing lists, delivery receipts, inspection reports, even payment certificates – anything and everything that is needed to prove the right to payment. The surety, on the other hand can (and almost certainly will) raise any defence that the defaulting contractor could have raised. The bond is not a shortcut around disputes or deficiencies.

Fourth, a phone call is not enough. Neither are emails or faxes. Bonds have express and explicit notice requirements and most require written notice by registered mail. Some require notice in the same fashion as legal documents. All require that proper notice in the specified manner be given to the bonding company, the defaulting contractor, and the owner of the project.

And finally, there are strict deadlines and time limits set out in every bond. Most require subcontractors to give notice (other than for holdbacks) within 120 days after the work was last performed or the materials were last supplied. In the case of holdbacks, notice must be given within 120 days after payment was due. And there are deadlines for suing on the bond, if it comes to that: sue too soon (usually before 90 days after the last work or delivery) and the surety does not have to respond; sue too late (often 1 year after the principal contractor stopped work) and the claim is lost.

These rules may appear strict and tough, but there is a reason: a bond, at the end the day, is a contract. It is a complicated contract between three parties – the bonding company (or “surety”), the defaulting contractor (or “principal”), and the project owner (the “obligee”) – involving trusts, indemnities, and multiple conditions, all aimed at protecting the financial interests of a third party beneficiary – the subcontractor. It is a sophisticated arrangement that demands certainty and precision to work.∎

This post is meant to provide information only and is not intended to provide legal advice. Although every effort has been made to provide current and accurate information, changes to the law may cause the information in this post to be outdated.