What it Means to Public Owners

Mandatory Performance and Payment Bonds:

After July 1, 2018 all public owners are required to call for 50% bonds on projects in excess of $500,000. For the majority, this will not represent any change to existing practice as most public work in the province is already carried out under bonded contracts.

Where the change may be more noticeable is in the AFP/P3 sector where performance and payment bonds are now required on the construction contract to guarantee the performance of the design-build contractor to the Special Purpose Vehicle. On AFP projects there is some flexibility as to the bond amounts although a minimum of $50 million is required for projects over $100 million.

Public owners will still enjoy the unique benefits offered by the surety approach. The due diligence process undertaken by sureties before a bond is authorized provides owners with assurances that the bonded contractor is fully qualified to undertake the bonded project and see it through to a successful conclusion. An unbonded contractor is ten times more likely to fail than its bonded counterpart (Canadian Centre for Economic Analysis, 2017).

Owners also receive the security of a performance bond which does more than provide financial protection in the event of Contractor failure. Under the performance bond, the Surety will work with an Owner to bring the defaulted project to across the finish line.

More Certainty and Clarity:

But the big change for Owners is in the new claims protocols that have been embedded into the performance bond itself. Public owners will find several new provisions that offer more certainty and clarity when making a claim under the new bond (review the required performance bond by CLICKING HERE).

  • The new bond calls for a prompt reply to a Notice of Claim; allowing four business days for a Surety to send a formal acknowledgement and request the information required to conduct its investigation.

  • The Surety will provide the Owner with its position within 20 business days, confirming that it will either:
    • Accept liability under the bond; setting out how it will fulfill its obligation; or
    • Deny liability under the bond; providing the reasons for its position; or
    • Be unable to make a determination as to its liability; again, providing the reasons for its position.

  • The performance bond provides more clarity around extent of coverage for default-related expenses and costs for time extensions that are consistent with the Act itself. The instrument also sets out certain default related costs that are not covered by the bond.

  • The provisions of the bond are supported by a number of "schedules" which are actually template forms to provide guidance to the Owner and Surety and bring a measure of standardization around the claim process. For example, Schedule A sets out the template for an Owner’s Notice of Claim to the Surety. Schedule B provides the standard template for the Surety’s acknowledgement and request for information.

  • The bond introduces several features that enhance the level of communication between Surety and Owner.
    • A Pre-Notice meeting between Owner, Surety and Contractor provides an opportunity for the parties to resolve developing issues regarding the project and engage in default prevention.
    • Similarly, once default has been declared, the bond provides for a Post-Notice Meeting between Owner and Surety to discuss the status and sort out the necessary steps to be taken by the owner to mitigate costs while the Surety is conducting its investigation.

  • Often when a project has been abandoned by a defaulting contractor the Owner is required to act quickly to address "can’t-wait" issues (e.g. public safety, work site protection) during the Surety’s investigation. The bond gives the Owner the flexibility to proceed with the "Necessary Interim Work" without having to worry about prejudicing their rights under the bond.

A few Tips for Public Owners:

1. Read the Bond and Understand its Terms.

In order to derive the maximum benefit from bond, a public owner will need to fully understand its rights and obligations under instrument. The new claim processes are interactive and require an Owner to meet certain requirements. For example, when undertaking the Necessary Interim Work to address public safety issues, the Owner is required to provide written notice to the Surety "…within three (3) Business Days of the commencement of such Necessary Interim Work". (Paragraph 4.1).

Ensure that front line staff are brought up to speed regarding the new procedures and requirements. Most importantly, we urge Owners to consult with counsel and other knowledgeable people within their organizations for advice as to the meaning of the various clauses and provisions.

2. Work with the Surety.

A Contractor default is the doomsday scenario for everyone involved in any construction project. Surety, Contractor and Owner will typically find themselves embroiled in a situation which is fraught with stress and intense pressure; hardly conducive to collaborative problem solving.

Despite these challenging circumstances however, cooperation between the parties is crucial to the successful and timely resolution of the difficulties arising from the default. A few suggestions:

  • Ensure that your initial Notice of claim includes all pertinent data as set out in Schedule A to the bond. Incomplete or incorrect notices can result in unnecessary and frustrating delays. Although it’s not required under the bond, it’s probably good practice to provide a copy to the Contractor.

  • Once the Surety has acknowledged receipt of the Notice, Paragraph 3.2 of the bond requires the owner to "…promptly and in accordance with terms of the Contract, provide the Surety with the requested Information and access to personnel and the work site(s) within its possession or control". The importance of providing this information and access as expeditiously and in as much detail as possible can’t be overstated. A Surety relies heavily on this information for its investigation and will be far more likely to provide the Owner with a definitive response if the information is thorough and prompt.

  • Be flexible where possible. The bond calls on the Surety to deliver its acknowledgement and communicate its position within a very small window of time and it’s certainly your right as an Owner to expect the bonding company to work to resolve your claim as expeditiously as possible.

    But Paragraph 3.3 of the bond also allows for flexibility by requiring the surety to provide its position to the owner within 20 business days; or "… such longer period as may be agreed between the Surety and Owner". In the event of complex claim with multiple layers of issues and/or technical factors to consider, 20 days may not allow sufficient time for a surety to do a thorough evaluation and make a definitive determination as to its liability.

    Granting the Surety the time it needs (along with the required information of course), particularly in circumstances where the status of the default is not straightforward, will enhance the likelihood of a receiving definitive response and a plan of action to move forward.

3. Keep Expectations Realistic.

A surety bond can help an Owner navigate through the minefield of problems created by a Contractor failure, but it can’t make those problems simply disappear.

Regarding the issue of delays, when a messy default occurs on a very complex project, delays will be inevitable; irrespective of the contract security in place. Again, a bond cannot turn back the clock, but having that bond will bring in the expertise of the Surety to minimize the delays and mitigate the impact of their effect.

This information is provided for information purposes only and is not intended to be exhaustive or authoritative. Nothing here should be construed as legal advice and readers are urged to read the Construction Act of Ontario and supporting documentation thoroughly and consult with counsel for advice as to specific issues.