Legal Column

East-West Performance Bond Showdown
by David Bristow

It came without warning from the West. Like two legal tectonic plates colliding were the decisions of the courts of appeal in Ontario and Saskatchewan .

The key obligations of a bonding company under its performance bond held to be so far reaching under recent Ontario law were suddenly obliterated by the courts in the province of Saskatchewan .

The Ontario decision was called Whitby Landmark and the Saskatchewan decision Lac La Ronge. The aftershock is still being felt in Ontario and indeed across the country.

The contract in Whitby Landmark stated that Whitby Landmark, the owner, was entitled to 75 per cent of any saving realized by the contractor, Mollenhauer, over the original contract cost. The cost savings were unexpectedly significant. Mollenhauer defaulted and Whitby Landmark claimed the excess costs to finish the contract over the original contract price and the 75 per cent savings.

The bonding company argued that the bond only covered completion of the contract physically, the bricks and mortar approach, while the owner’s position was that the bonding company must complete the contract in every respect in accordance with all the contract terms both physical and otherwise.

The Ontario Court of Appeal considered the words of the bond which stated that in the event of the contractor’s default, to promptly complete the contract in accordance with its terms and conditions. One term of course was the 75 per cent savings clause, and so was born the law in Ontario that this provision embraced all of the obligations of the contractor under its contract with Whitby Landmark. In the end, however, the court of appeal found that the owner had not reported the default to the bonding company in time, and failed in the action.

In the Saskatchewan Lac La Ronge case, the trial judge followed Whitby Landmark and stated that the owner could deduct contractual liquidated damages from the amounts otherwise payable to the contractor, therefore reducing the remaining funds on the original contract. The bonding company’s obligation extended beyond the physical completion of the work.

The Saskatchewan Court of Appeal reversed the trial judge and found the wording of the bond meant the physical completion of the contract, the bricks and mortar theory, and not all the other terms of the contract between the contractor and the owner, including liquidated damages and the cost to the owner who supervised completion of the job.

The decision in Ontario in Whitby Landmark was rejected in a rather summary fashion by the Saskatchewan Court of Appeal, much to the disfavour, I would think, of the judiciary in Ontario . The court relied heavily on an article titled, Whitby Landmark: much ado about nothing?, that attacked the Whitby Landmark case. This article was authored by a very distinguished Canadian surety lawyer who represents bonding companies on a regular basis.

Leave to appeal the case to the Supreme Court of Canada was not taken by the owners in Lac La Ronge. So now the tectonic plates from the West and East push against each other at an impasse. The only way to relieve pressure, according to the legal minds, is a decision in the Supreme Court of Canada as to which court was right.

For now, however, cases in Ontario will probably follow Whitby Landmark and those in Saskatchewan Lac La Ronge. In all other provinces it is pure conjecture as to which way the court will go. Both claimants and bonding companies will be warily circling each other, and deals will be made on the strength of the two judgements, until such time as the Supreme Court of Canada makes a final pronouncement. This may just be later than sooner, as both sides have enormous amounts to gain or lose on a Supreme Court of Canada decision.

A first year law student read a draft of this column and commented: “Would it not be easy for the bonding companies to amend their bond wording to make it clear that they are only liable for bricks and mortar in the cost of completion?”

That solution may be too simple.

David Bristow Q.C., LSM, C.Arb. is a partner with Team Resolution in Toronto www.teamresolution.ca Contact him at bristow@gsnh.com, or at 416-597-6585.