You are here

Getting Paid for construction work: preventative steps and remedial options

Research articles : 
By Guy Holeksa and Michael Dew
 
INTRODUCTION
You want to be paid for the materials you supply and the work that you do.  There are a number of ways to ensure that you will be paid.  You could ask for payment in advance, but you would not find many clients who can and will agree to that term. The industry operates on a system that you supply the materials and do the work and expect prompt payment in return.  This system runs on the credit that you provide.  You are a lender.  In that respect, you are the same as a bank.
 
This paper is a high-level summary of some discrete considerations related to getting paid in the construction context.
 
Not all remedies are discussed.  For example, garnishing orders, taking a general security interest, warehouseman’s liens, and other remedies that may be applicable in particular contexts are not discussed at all. Legal advice should be obtained when planning for or dealing with non-payment issues.
 
MAKING THE PRINCIPAL OF A COMPANY LIABLE FOR THE COMPANY DEBT
The first step to getting paid is determining that you are contracting with a financially secure entity that will pay for the work you have performed.  This would ideally be the government.  When dealing with parties other than the government proper inquiries must be made about the business to be contracted with and its level of financial strength.  These steps are not within the scope of this discussion.
 
The second step to getting paid involves your course of action when you are contracting with a company. 
 
A company is a separate legal entity.  When you contract with a company and make no other arrangements, only the company is required to pay you.  The principal of the company is not required to pay you.  To ensure that you will be paid by the principal, the principal must agree to be liable to pay you personally.  In the past, this was accomplished by having the principal become a guarantor of the company’s debts. 
 
The guarantee is technically a separate agreement from the credit agreement, although it is not uncommon for the guarantee to be printed immediately below the signature block for the credit agreement.  In the past, you would want the customer to sign the credit agreement and the principal to sign the guarantee. If the company is not able to pay the debt, you will recover from the principal.
 
Problems related to guarantees
Guarantees have two main problems:
 
(a)          the negotiation of a guarantee can be contentious and potentially result in the new customer not agreeing to select your company for the work or result in the principal of the customer not providing the guarantee; and
 
(b)          if the guarantee is signed, your company will have obligations to the guarantor which will potentially result in the guarantee not being enforceable, or requiring the dispute to be tried and significantly reduce your recovery.  
 
Solution – replacing the guarantor with a co-covenantor
A recent decision from the British Columbia Court of Appeal has provided assistance resolving both the problem of negotiating the guarantee and the problem of enforcing the guarantee and made it easier to have the principal of the company become liable for the company’s debt. 
 
The solution is to draft a credit agreement that makes the principal of the company liable for the company debt as a co-covenantor instead of as a guarantor.  A co-covenantor is a party that is equally liable for the main debt.  The credit agreement will refer to the principal of the company as a co-covenantor and be signed by the principal in his/her capacity as principal of the company.
 
This process solves both of the problems of guarantees. 
 
First, since a guarantee involves two separate agreements being the credit agreement with the company and the guarantee with the principal, two signatures are required.  Even if you did not discuss the requirement for a guarantee, the required second signature alerts the principal that a guarantee is being sought and invites the negotiation of the need for a guarantee and the possible decision by the customer to not further proceed with your firm or refuse to provide the guarantee. 
 
The Court of Appeal decision allows you to describe the principal as a co-covenantor.  This description creates a stronger liability and requires only a single signature.
 
Second, becoming a co-covenantor makes the principal equally liable for the main debt with the applicant company.  The principal becomes an equal co-debtors.  Since the principal is no longer a guarantor, the law of guarantee no longer applies to the principal, and the defences available to the principal under guarantee law are no longer available. 
 
As a result, the Court of Appeal decision promotes a revision to credit agreements to make it easier to obtain the principal’s agreement to pay and to make that promise more easily enforceable. 
 
In the Court of Appeal decision, the slightly paraphrased clause stated:
 
In consideration of the Seller granting credit to the principal and applicant, the undersigned principal co-covenantor shall be jointly and severally liable as principal debtor and not as guarantor or surety for due payment of all amounts on money payable by the above-named applicant to the Seller.
The signature block on the credit agreement consisted only of the following::
 
_”Signature of Principal”__
    Principal
 
This clause would need to be amended to ensure that it is consistent with the structure and terms of your credit agreement. 
 
If still using a guarantee follow these steps
If you do not revise your credit agreement and continue to obtain a guarantee, in order to make the guarantee enforceable, you should ensure that the following steps are followed:
 
(a)          make sure the guarantee is in writing and signed by the guarantor;
(b)          if you change the terms and conditions of the credit agreement with the main debtor obtain the consent of the guarantor;
(c)          do not give a release of the main debtor in exchange for payment of part of the debt intending to collect the balance from the guarantor.  Releasing the main debtor releases the guarantor.
 
PAY IF / WHEN PAID CLAUSES  
 
Introduction to pay if / when paid clauses
Clauses that limit the obligation of a contractor to pay a subcontractor are sometimes referred to “pay when paid” clauses, or “pay-if-paid” clauses. Contractors often include these clauses in their standard form contracts as a tool to assist their cash flow, but this can have drastic adverse consequences on the cash flow of subcontractors who are the ones that incurred the expenses to get the work completed and are awaiting payment.
 
Although the usage of terms used to describe these causes is sometimes inconsistent, often:
  • “Pay when paid” clauses merely influence the timing of payment, and once it is determined that the owner will never pay the contractor for work properly completed by the subcontractor then the contractor will be required to pay the subcontractor despite the fact the contractor has not been paid by the owner.
  • “Pay-if-paid” clauses impose actual payment by the owner to the contractor as a condition precedent to payment by the contractor to the subcontractor, and if it is determined that the owner will never pay the contractor then the contractor is not required to pay the subcontractor.
 
Whether a particular provision is a “pay when paid” clauses or a “pay-if-paid” clause depends on the wording used in the contract and interpretation of the contract as a whole.
 
Cases considering pay if / when paid clauses
 
In Timbro Developments Ltd. v. Grimsby Diesel Motors Inc. et al. (1988), 32 C.L.R. 32 (Ont. C.A.) the owner refused to pay the contractor who subsequently refused to pay the
subcontractors. The standard form agreement between the contractor and each of the
subcontractors contained the following clause:
 
Payments will be made not more than thirty (30) days after the submission date or
ten (10) days after the certification or when we have been paid by the owner,
whichever is the later.
 
The majority of the Ontario Court of Appeal upheld the clause and dismissed the claims by the subcontractors, essentially finding that the clause was a pay-if-paid provision:
 
[T]he clause clearly specifies the condition governing the contractor’s legal entitlement to payment and not merely the time of payment. Under the clause, the
subcontractor clearly assumes the risk of non-payment by the owner to the contractor.
(Timbro Developments Ltd. v. Grimsby Diesel Motors Inc. et al. (1988), 32 C.L.R. 32 (Ont CA)).
 
Finlayson J.A., dissenting, held that the clause did not limit the subcontractors right to payment but merely dealt with the time of payment: 
 
[T]he clause relates to the timing of payments due under the contract and in no
sense puts the subcontractors at risk that they will not be paid if the contractor is not paid. They are not co-adventurers or partners in this construction contract. Having done the work as found by the trial Judge, they are entitled to be paid.
(Timbro Developments Ltd. v. Grimsby Diesel Motors Inc. et al. (1988), 32 C.L.R. 32 (Ont. C.A.) per Finlayson J.A., dissenting).
 
In Arnoldin Construction & Forms Limited v. Alta Surety Co., 1995 CanLII 4295 (NSCA) the payment clause was, in substance the same as in Timbro, but slightly more wordy:
 
The balance of the amount of the requisition as approved by the Contractor shall be due to the Subcontractor on or about one day after receipt by the Contractor of
payment by the owners....Final payment shall be made on acceptance of the work
by the Contractor, Architects and/or Engineers, and Owners, and within 30 days
after payment has been received by the Contractor.
 
The Nova Scotia Court of Appeal did not follow Timbro but instead ruled in favour of subcontractor and held the above provision was not sufficiently clear to eliminate the general contractor’s obligation to pay the subcontractor: 
 
In my opinion, in order for a general contractor to impose a term on a subcontractor pursuant to a standard form of contract, that payment for its work is conditional on the contractor being paid by the owner the contract would require much clearer language than that contained in the subcontract between Gem and the appellant. An intention so important cannot be buried in obscure language that would not alert the subcontractor that payment for the subcontract work was conditional on the owner paying the contractor.
(Arnoldin Construction & Forms Limited v. Alta Surety Co., 1995 CanLII 4295 (NSCA)).
 
The court explained that if the general contractor had intended to only pay the subcontractor “if” paid by the owner, then it should have used the word “if”:
 
Had Gem intended that nothing would be owing or payable to a subcontractor upon completion of the work unless payment was received from the owner, the contract ought to have contained clear words to denote such an intention. Appropriate words would have been that the balance claimed by the subcontractor for the completion of the work pursuant to the terms of the subcontract would only be paid “if” the owner paid the contractor. The word “if” is defined in the Oxford Dictionary as meaning "on the condition or supposition that". To impose on a subcontractor a term that payment was conditional on the contractor receiving payment from the owner would require the clear language of the nature I have identified.
(Arnoldin Construction & Forms Limited v. Alta Surety Co., 1995 CanLII 4295 (NSCA)).
 
Subsequent cases have followed Timbro and enforced such clauses if they were considered sufficiently clear, or followed Arnoldin if it was considered that the clauses were not sufficiently clear to deprive the subcontractor of payment in light of non-payment by the owner.
 
Clear wording shifting the risk of non-payment to the sub-contractor will be enforced.  In Brookswood Ironworks Ltd. v. DGS Construction Co., 1993 CanLII 2374 (BCSC) the defendant was the general contractor in a condominium project and the plaintiff was a subcontractor who agreed to supply and install structural steel, steel joists, metal decking and related items. Various payments were made during the project, but after the owner failed to pay some of the remaining amounts the general contractor refused to pay the subcontractor. A supplementary contract provision prepared by the defendant and included in the subcontract provided as follows:
 
It shall be a condition precedent to the payment by the Contractor to the Sub-Contractor of any monies due under the Sub-Contract that the Contractor shall first have received payment in full from the Owner ... unless the non-payment by the Owner shall be due to the fault or neglect of the Contractor.... The Sub-Contractor acknowledges that it shall bear the risk of bankruptcy, insolvency or default in payment by the Owner pursuant to the terms of the Prime Contract. (emphasis added)
 
The court found that the clause excused the contractor from paying the subcontractor unless it was paid by the owner (the court referred to it as a "pay when paid" clause but according to the classifications described above the court essentially found that it was a pay-if-paid clause):
 
I accept the proposition of the defendant that a contractor and a sub-contractor may validly agree on a "pay when paid" clause, such as Clause 12 of Appendix "A". 
I can see no basis on which to avoid what I see as the proper interpretation of the agreement, which is that Clause 12 of Appendix "A" prevails over any conflicting provisions in the contract.
 
The result is that the defendant is not liable to pay the plaintiff unless it has been paid.
 
(Brookswood Ironworks Ltd. v. DGS Construction Co., 1993 CanLII 2374 (BCSC)).
 
Courts have also considered the conduct of the general contractor when assessing the enforceability of pay if / when paid clauses. Where it has been found that it was the fault of the general contractor that lead to the owner not paying the general contractor courts have sometimes said that the general contractor cannot rely on such provisions to avoid paying the subcontractor who completed its work on time and without deficiency. See McBrien v. Shanly (1874), 24 U.C.C.P. 28 (Ont. C.A.) and subsequent cases.
 
Bill M-233
On May 28, 2019 Bill M-223, the Prompt Payment (Builders Lien) Act was introduced to the Legislative Assembly of British Columbia. If passed into law, Bill M-233 will amend the Builders Lien Act to create prompt payment rules for builders, contractors, and subcontractors.
 
The text of Bill M-233 can be seen at the following link:
 
Key elements of Bill M-223 include the following:
  1. Contractor must provide monthly “proper invoices” to the owner, which triggers the owner’s payment obligation (s. 3.2(1)).
  2. The contract cannot provide that a proper invoice is only delivered when approved by the payment certifier or owner (s. 3.2(2)).
  3. The owner has 14 days to issue a “non-payment notice” if the owner does not agree that payment of a proper invoice is due. The non-payment notice must detail the reasons for non-payment (s. 3.3(2)).
  4. To the extent an owner has not issued a non-payment notice it must, within 28 days, pay the invoice (s. 3.3(1) & (3)).
  5. If the contractor receives a notice of non-payment from the owner, it has 7 days to issue notice of non-payment to its subcontractors (s. 3.4(7)(a)). If the owner did not issue a notice of non-payment, then a contractor has 35 days (from the issuance of the proper invoice to the owner) to issue notice of non-payment to the subcontractors (s. 3.4(7)(a)).
  6. A contractor must pay subs within 7 days of receiving payment from the owner, or issue its own notice of non-payment to applicable subcontractors (s. 3.4(1)).
  7. If the owner does not pay the portion of a proper invoice from a contractor that relates to a particular subcontractor, the contractor must either:
    1. pay that subcontractor within 35 days of delivering the invoice (despite the contractor not having been paid by the owner) (s. 3.4(4)); or
    2. deliver its own non-payment notice to its subcontractors and also undertake to refer the matter to “adjudication” within 21 days of delivering the notice (s. 3.4(5)(a)).
  8. Similar prompt payment rules apply to subcontractors paying their own sub-subcontractors.
 
Point 7 in the list above contemplates a situation where the contractor is required to pay the subcontractor despite the owner not having paid the contractor i.e. if the contractor has not complied with 7(b) then 7(a) applies. Therefore, if this legislation comes into effect in British Columbia it will likely modify the law regarding pay if / when paid provisions.
 
The draft British Columbia legislation is modelled on similar legislation in Ontario, parts of which came into effect on October 1, 2019. The first round of the British Columbia legislation is similar to the first round of the Ontario legislation in the sense of not having detailed provisions setting up adjudication panels, but later drafts of the British Columbia legislation will likely include such adjudication panel provisions just like the later drafts of the Ontario legislation did. It is not clear when, if ever, such legislation will become law in British Columbia.
 
BUILDERS LIENS
The following provides a high-level overview of rights that exist under the Builders Lien Act, SBC 1997, c. 45.
 
What is a builders lien?
 
A builders lien is a special right of recovery provided by the Builders Lien Act to persons who provided labour or supplied materials to a construction project in British Columbia. The term “construction project” is used broadly because it is not only labour and material provided for new developments that qualify for builders liens, but liens may be claimed when any land is worked on or building is erected, altered, repaired, or added to. Therefore, contractors or material suppliers who have contributed to any improvement in British Columbia may be able to file claims of builders liens for recovery of at least part payment for the value they added to the improvement.
 
According to the Builders Lien Act, if a person with a valid lien claim is not paid voluntarily, the land on which the improvement occurred may be sold to provide the payment due according to the legislation. 
 
Not all projects are lienable e.g. federal crown land, highways, and First Nations Land are generally not lienable.
 
Builders liens are designed to facilitate credit in the construction industry
Builders liens are, in essence, a tool for facilitating credit in the construction industry. Because payment in advance for construction work is generally not practical from the owner’s perspective, builders lien legislation gives persons who are not promptly paid for contributing to improvements to land the right to file a lien against the title to the land which restricts the owner’s ability to deal with the land until the lien is removed.
 
Speaking generally, the object of the Mechanics Lien Act is to prevent owners of the land getting the benefit of buildings erected and work done at their instance on their land without paying for them.
(Chaston Construction Corp. v. Henderson Land Holdings (Canada) Ltd., 2002 BCCA 357 at para. 49 citing Hickey v. Stalker (1923), 53 O.L.R. 414 at 415 (C.A.)).
 
Builders lien rights were created because remedies for unpaid creditors in other contexts are not available in the construction context. For example, a bank can foreclose on a house bought on credit (i.e. using a mortgage) if payments are not made, and a vehicle dealership can repossess a vehicle bought on credit, but an excavation contractor cannot un-dig an excavation made for the construction of a basement, a worker cannot take back the hours worked, and a concrete supplier cannot detach concrete from the rebar and repossess the concrete.
 
Who can file a builders lien?
A wide range of persons, including the following, can claim builders liens in British Columbia:
1.      workers;
2.      material suppliers (including renters of equipment);
3.      contractors, subcontractors, sub-subcontractors; and
4.      engineers and architects.
 
A lien claimant may recover against the land even if he or she did not contract with the land owner directly. For example, if a land owner, A, hires a contractor, B, who hires a subcontractor C, and then B fails to pay C, the Builders Lien Act provides that C can recover at least part payment from A as the land owner. This is considered fair to the owner, A, because it was his land that was improved by the efforts of the lien claimant, C, and the land owner had control over the selection of B, and if A kept the holdback required by the Builders Lien Act and followed all proper procedures A will not have to pay any more than A would otherwise have been required to pay B.
 
45 day time limits (with various triggering events) apply to the filing of builders liens. The 45 day period does not necessarily begin on the last day the lien claimant worked on the project. Depending on the circumstances the 45 day period may run from when a certificate of completion was issued in respect of the subcontract, or from when the entire improvement was substantially completed.
 
Builders liens do not guarantee full payment
Merely filing a builders lien does not guarantee full payment will be made to the lien claimant. The Builders Lien Act provides a scheme which ensures at least part payment to all lien claimants, but when an entire project fails lien claimants may receive only a fraction of what they are owed.
 
A lien is merely security for payment i.e. if a lien claimant proves entitlement to payment from the person the lien claimant contracted with then the lien claimant may be able to force the sale of the land to ensure it is paid the amount the court ruled the lien was worth. Having a lien does not make it easier for the lien claimant to prove its entitlement to payment and whether or not the court will declare payment is due to the lien claimant will depend not only on the act of filing the lien but also on whether the lien claimant can prove that it provided work or materials to the land and that proper payment was not made.
 
The Builders Lien Act is not designed to provide full recovery for contractors and material suppliers, but is merely designed to provide security for partial payment to all lien claimants. This is part of the balance seeking to make the Builders Lien Act fair to both lien claimants and owners.
 
There are various situations (e.g. when a contractor goes bankrupt) that lien claimants may receive only a fraction of what they are owed. Further, if there is no equity in the land (e.g. if, in a declining real estate market the mortgages registered against title to the land before the lien was filed exceed the value of the land) then the lien claimants may not recover any payment at all from sale of the land.
 
The rules for determining how much security a lien will provide are complicated, but, by way of example, where A hires B who in turn hires C, the amount secured by a lien filed by C may be as little as 10% of the value of the contract between A and B. Therefore, if B acts as a middle man who does little work and subcontracts most of the work to C, but B does not pass on to C the payment B receives from A, then the amount a builders lien will secure for C may be far less than the amount B actually owes C. Having a lien for less than the amount due does not mean that the lien claimant will never receive the full amount due, but does mean that:
  • the lien claimant cannot rely on the lien as security for the full amount due;
  • the amount the lien claimant can recover from the owner of the land as a non-contracting party is limited; and
  • to recover the full amount from the contracting party the lien claimant must resort to regular creditors remedies procedures (e.g. garnishment, foreclose on land owned by B, seize and sell personal property owned by B, etc.).
 
For these reasons contractors and material suppliers should carefully select who they grant credit to and only rely on lien rights as a last resort. Having said that, in many cases filing a builders lien can be a powerful tool to ensure proper payment.
 
What can owners do if a lien is filed against their land?
A lien being filed against property can be disruptive to owners by restricting their ability to complete transactions involving the land, including interfering with the ability of the owner to obtain further construction financing using the land as security. Fortunately for owners the Builders Lien Act:
  • limits owner liability and
  • provides mechanisms to pay money into court in exchange for discharge of liens against the land.
 
The intent of the Builders Lien Act is that if owners properly follow the procedures required by the Builders Lien Act they will not have to pay more to have their projects completed than they would otherwise have had to pay if liens had not been filed.
 
Owners should carefully examine the liens that have been filed against their land and consider whether all requirements of the Builders Lien Act have been complied with, including that the lien was not filed late. In many cases liens are filed late or have other defects that allow the land owner to have the lien relatively promptly removed from the land.
 
What holdbacks are required by the Builders Lien Act?
In a scheme designed to ensure at least partial recovery to all project participants while also protecting project participants from default by those below them on the contractual chain, the Builders Lien Act requires participants up the contractual chain to hold back 10% of the amount owed to those below them (except that no holdback need be retained from those at the very bottom of the contractual chain). The holdback amounts are then available to those lower down the contractual chain if an intermediate party defaults. If the lien claims of those claiming on a single holdback exceed the value of that holdback the lien claimants will unlikely be fully compensated and may have to resort to suing the defaulting intermediate party for breach of contract in order to obtain greater recovery.
 
A party who fails to retain a proper holdback may be liable to pay twice i.e. once to the party the holdback should be been retained from, and a second time to the lien claimant lower down the contractual chain. Legal advice should be obtained before paying out on a lien because the lien may have been filed late, or be defective, which may be a complete defence to the claim of lien.
 
Other remedies under the Builders Lien Act
In addition to allowing filing of claims of lien against title to project lands (noted exceptions apply to federal lands, highways, etc.), the Builders Lien Act allows a lien to be asserted against holdbacks retained by the owner or other parties on the contractual chain between the owner and the lien claimant. In some cases it is possible to file a lien against a holdback even if the deadline for filing a claim of lien against the land has been missed. But if a particular holdback has been released then no lien can be asserted against that holdback.
 
The Builders Lien Act also establishes trust rules which provide that money received by a project participant for work done is impressed with a trust for the benefit of persons retained by that project participant. Trust funds cannot be used to the personal benefit of the project participant until the amounts owed to trust beneficiaries retained by that project participant have been paid and project participants who do not abide by the trust rules may be personally liable for breach of trust. This is sometimes a way for lien claimants who are not fully paid using their lien rights to recover further amounts owed to them.
 
 
LABOUR AND MATERIAL PAYMENT BONDS
 
Introduction to LMPBs
In basic terms, a labour and material payment bond (“LMPB”) is a promise, typically from a credit worthy insurance company (the “Surety”), to pay amounts owing to contractors or subcontractors if the party primarily responsible to pay them defaults in making payment when due.
 
While a LMPB could be insisted upon by any project participant who selects contractors or subcontractors, LMPBs are typically only required from parties completing larger contracts (e.g. > $1 million). LMPBs are often required by the owners of government projects (e.g. federal, provincial, municipal projects), sometimes with the intent of protecting subcontractors where lien rights are limited e.g. projects on federal land, highway projects, etc.)
 
Although relatively rare, where the solvency of the owner is in question a general contractor may require the owner to take out a LMPB.
 
Who can claim under a LMPB?
 
The contractor that takes out the LMPB is the “Principal”, the party higher up the contractual chain that required the Principal to take out the bond is the “Obligee”, and the claimants under the LMPB are the “Beneficiaries”.
 
If the LMPB specifies that the beneficiaries are those parties that have a direct contract with the Principal, then it is a “one tier” bond i.e. there is just one layer of claimants directly below the Principal.
 
If the LMPB specifies that both contractors to the Principal and the subcontractors under those contractors can claim under the bond then it is a “two tier” bond i.e. there are two layers of claimants under the Principal.
 
Subcontractors concerned about not being paid should enquire about what, if any, LMPBs exist above them and whether those bonds are one or two tier bonds. 
 
Finding out if there is a LMPB in place
 
In Valard Construction Ltd. v. Bird Construction Co., 2018 SCC 8 the general contractor, Bird Construction Company, required its subcontractor, Langford Electric Ltd., to take out a labour and material payment bond. Langford took out the bond as required and that bond designated Bird as a trustee, holding in trust for the beneficiaries (subcontractors to Langford) their right to claim against and recover from the Guarantee Company (para. 4).
 
Lanford failed to pay its subcontractor Valard Construction Ltd., and by the time Valard discovered the existence of the bond it had missed the 120 day notice period (para. 6). 
 
Given the language of the bond designating Bird as trustee the majority of the Supreme Court of Canada held that Bird owed a positive obligation to inform Valard of the existence of the bond:
 
It is true, as the trial judge observed, and as the Ontario cases upon which he relied emphasized, that the bond did not expressly impose a duty on Bird as trustee “to protect the interests of [beneficiaries]” by, for example, disclosing the bond’s existence to them. The absence of an express term imposing a duty on Bird to disclose the trust’s existence is not, however, fatal to Valard’s appeal. While the “main source” of a trustee’s duties is the trust instrument, the “general law” which sets out a trustee’s duties, rights and obligations continues to govern where the trust instrument is silent.
In my view, Valard was unreasonably disadvantaged by Bird’s failure to inform it of the trust’s existence. Valard’s interest under the trust was not so “remote” that vesting was unlikely — indeed, Valard’s interest vested 90 days after its final day of work on the project. And, Valard required knowledge of the trust in order to enforce it. The expiry of the 120-day notice period before Valard learned of the bond effectively prevented it from enforcing the trust by making a claim against the Guarantee Company and recovering sums owed under its contract with Langford. I would therefore find that Bird, as trustee, had a duty to disclose the bond’s existence to Valard.
 
(Valard Construction Ltd. v. Bird Construction Co., 2018 SCC 8 at para. 15 and 20).
 
Regarding the scope of the duty to disclose, the majority of the Supreme Court of Canada held that the steps required from the trustee are highly sensitive to the context:
 
[T]he proper inquiry is into what steps, in the particular circumstances of the case — including the trust terms, the identity of the trustee and of the beneficiaries, the size of the class of potential beneficiaries and pertinent industrial practices — an honest and reasonably skillful and prudent trustee would have taken in order to notify potential beneficiaries of the existence of the trust. But, where a trustee can reasonably assume that the beneficiaries knew of the trust’s existence, or where practical exigencies would make notification entirely impractical,[33] few, if any, steps may be required by a trustee.
 
It will be readily apparent that what a trustee must do to discharge its duty to disclose the existence of the trust to beneficiaries is highly sensitive to the context in which the particular trust relationship arises.
 
(Valard Construction Ltd. v. Bird Construction Co., 2018 SCC 8 at para. 26 – 27).
 
In light of the ruling in the above case subcontractors may receive direct notice that a LMPB has been required of the party they are contracting with. Alternatively, a subcontractor can make a request under s. 41(1) of the Builders Lien Act for production, within 10 days, of details of any LMPB posted by the contractor with the owner: 
 
(1) A lien holder or a beneficiary of a trust under this Act may, at any time, by delivering a written request, require
(a) from the owner
(iv)   particulars of any labour and material payment bond posted by the contractor with the owner in respect of the head contract or contract under which the lien holder or beneficiary claims, and
(3) The person to whom a request is made under subsection (1) or (2) must comply within 10 days after the day the request is delivered.
 
(Builders Lien Act, s. 41(1) and (3), emphasis added).
 
Applicable time limits
 
Waiting period
LMPBs typically specify a waiting period (e.g. until 90 days after claimant last did work or supplied materials) before which a claim cannot be made. This is partly to avoid unnecessary administrative work arising from over eager claimants starting the claims process while payment is still in the works. However, it should be kept in mind on long projects that by the time “90 days after the claimant last worked on the project” comes around the claimant may be facing serious cash flow difficulties.
 
Notice periods
LMPBs commonly say that notice for claims for:
  • progress payments must be provided within 120 days of last performing work or supplying materials; and
  • holdback must be provided within 120 days after the claimaint should have been paid in full.
 
Notice is typically required to be in writing and is to be sent to all of the Principal, the Obligee, and the Surety.
 
Although a casual attitude should certainly not be taken to notice periods, there is some small amount of latitude in that if a notice period is missed relief from forfeiture may be available if the Surety is not prejudiced by the late notice.
 
Limitation period
A claimant who has made a claim under a LMPB but has not been paid by the Surety may commence an action against the Surety to obtain judgment for the amount of the claim:
 
A claimant under a labour and material bond has a cause of action against the surety named in the bond if the principal named in the bond defaults in the principal's obligations under it and may commence an action against the surety on the claimant's own behalf and on behalf of other claimants to recover the amount of the claim.
(Law and Equity Act, RSBC 1996, c. 253, s. 48).
 
The deadline for commencing a court action against the Surety for payment under a LMPB is typically one year after the Principal ceased work on the project.
 
Unlike for missed notice periods for which relief from forfeiture may be available, a missed limitation period is typically fatal to a claim under a LMPB:
 
The case law has generally treated failure to give notice of claim in a timely fashion as imperfect compliance whereas failure to institute an action within the prescribed time period has been viewed as non-compliance, or breach of a condition precedent.  Thus, courts have generally been willing to consider granting relief from forfeiture where notice of claim has been delayed: ...
 
On the other hand, cases in which failure to meet a time requirement has been held to be non-compliance rather than imperfect compliance have largely been cases in which the time period was for the commencement of an action rather than for the giving of notice: D.S. Ashe Trucking Ltd. v. Dominion Insurance Corp. (1966), 55 W.W.R. 321 (B.C.C.A.); National Juice Co. v. Dominion Insurance Co. (1977), 1977 CanLII 1375 (ON CA), 18 O.R. (2d) 10 (Ont.C.A.).
 
The reasons for the distinction are bi-fold.  First, failure to give notice of claim has been viewed as a breach of a term rather than a breach of a condition.  Clearly, being akin to failure to meet a limitation period, failure to bring an action within the time required is a more serious breach than failure to give timely notice.  A notice of a claim simply informs the insurer of the possibility of a future action, thereby allowing the insurer some time to investigate the merits of the claim and to negotiate a settlement; the actual brining of an action, however, is the legal crystallization of the claim which sets its parameters and magnitude.  Second, and probably more importantly, failure to give notice of the claim within the time required is a defect in provision of proof of loss for which relief against forfeiture is, by the terms of the statute, available.
 
(Falk Bros. Industries Ltd. v. Elance Steel Fabricating Co., [1989] 2 S.C.R. 778 at 784-785)