The Prescribed Bond Forms

The key driver behind the entire Ontario prompt payment initiative was the need to streamline the payment process and expedite the flow of money down the construction payment chain. In search of that objective, the September 2016 Report of the Expert Review entitled “Striking the Balance” made 100 recommendations to the Attorney General of Ontario; virtually all of which found their way into the legislation in some form. Included in that group were three key recommendations regarding surety bonds.

79) The Act should be amended to require broad form surety bonds to be issued for all public sector projects, the form of such surety bonds should be developed in consultation with the Surety Association of Canada, and once finalized they should become Forms under the Act.

81) A Regulation to the Act should be promulgated to embody a surety claims handling protocol, and that such surety claims handling protocol be developed in consultation with the Surety Association of Canada.

From January to April 2018, the Surety Association of Canada worked closely with the Attorney General and MAG staff to develop bond language which met these criteria and aligned with the spirit and intent of the legislation. On April 25th, 2018 the cabinet approved the three template bond forms:

• Form 5 – Holdback Repayment Bond
• Form 31 – Labour and Material Payment Bond
• Form 32 – Performance Bond

All three of these template bond forms can be accessed and downloaded by clicking the links above or by CLICKING HERE.

The following is a summary of these prescribed bond forms under the Construction Act of Ontario. Note that this summary is not intended to be exhaustive or authoritative and readers should review the bonds carefully and consult with counsel for advice on interpretation of the various provisions.

Form 32 - Performance Bond

In the drafting of the Form 32 Performance Bond, SAC along with the Ontario Ministry of the Attorney General started with the Surety Association of Canada Process Enhanced Bond which was published in 2012. Most of the changes to that original document have been made with the objective of further enhancing the processes around claims and administration, and/or to provide clarification as to the meaning and intent. 

While there are few provisions that impose additional liability on the contractors and their sureties (these will be flagged in the discussion below), for the most part the risk profile has not been significantly expanded beyond that found in CCDC or the SAC bond.

There have also been some changes or additions to the terminology employed. For example:

• The term “Demand” becomes "Notice"
• "Emergency Work" becomes "Necessary Interim Work"
• "Remedial Work" becomes "Mitigation Work"
• The parties have been renamed with "Principal" becoming "Contractor" and "Obligee" becoming "Owner"

In addition to these new names for old provisions, several new defined terms have been introduced:

• Surety's Position
• Surety's Option
• Owner's Direct Expenses
• Original Contract
• The Investigation

These new provisions will be discussed in more detail below.

As to the specific components of the bond itself we offer the following observations and guidance:

• The opening paragraph allows several spaces for multiple sureties.
  
  
• Paragraph 1: Written Notice
  • Sets out the Notice to the Surety and provides that the Surety has no obligation until such a Notice has been received
  • Provides for co-sureties or multiple sureties.
    
    
• Paragraph 2 provides for a Pre-Notice Meeting to address potential issues that could lead to a default. This provision is similar to the SAC form in that it is convened only at the request of the Owner and will take place within 7 business days of the Owners’ request to the Surety.
  
  
• Paragraph 3 sets out the requirements for the Surety’s Investigation, its response options and its obligations under the bond.
  
  Among the requirements:
  • If request for a Pre-Notice Conference is made, the Surety must propose such a conference within 7 business days.
  • Upon a Notice of Claim, the Surety must:
    • Acknowledge receipt of the Notice within 4 business days, using Schedule B which sets out any required information.
    • Propose a Post-Notice Meeting within 10 business days and attend that meeting.
    • Within 20 business days, provide Obligee with the Surety’s Position as per Schedule C.
    • Meet with the Owner (at Owner’s request) to discuss status of investigation within 5 business days of the Owner’s request.
  • Once a Surety evaluates the Notice of Claim and supporting documentation from the Owner, it has the following options by way of a response:
    • Accept Liability and promptly initiate one of the completion options.
    • Deny liability but provide reasons for such a denial.
    • Inform the Owner that it cannot determine whether or not it is liable under the bond. If this option is presented to the Owner, it must be accompanied by reasons for taking this position as well is a summary of what is needed to complete the investigation. With the Owner’s agreement the Surety must continue the investigation.
      
      
• Paragraph 4 sets out the parameters for the Necessary Interim Work. These provisions are similar to those found in the SAC bond provisions for "Emergency Work" except:
  • 4.1 c) has been added, and requires that any action taken by the Owner is in accordance with applicable law.
  • The Owner is now required to notify the surety within 3 business days of commencing any work under this paragraph. The SAC bond contains no such requirement.
    
    
• Paragraph 5 Now deals with the Mitigation Work (formerly Remedial Work). Again, the approaches taken under each bond are similar with the exception of the timeline for arranging a Post-Notice Conference in 5.1. The Ontario bond requires that this meeting take place within five business days of the receipt of the Notice. The SAC bond allowed ten days to convene the meeting.
  
  
• The Completion Options described in Paragraph 6 are virtually identical to those in the SAC bond and in the current standard CCDC document.
  
  
• Paragraph 7 is entirely new and seeks to provide more clarity around the Owner’s default related costs and expenses that are compensable under the bond. These covered expenses are fully articulated in 7.1. Also, under Paragraph 7:
  • 7.2 includes protection for "extension of duration" as defined in the Act. Costs of extended duration are essentially the costs of carrying out the work.
  • 7.3 establishes the Surety shall have no liability for:
    • Liquidated or other Delay Damages
    • Consequential Damages
  • 7.4 allows the owner to deduct allowable default related expenses from the Balance of Contract Prince (see discussion of Paragraph 9 below) that will be payable to the Principal or its Surety.
    
    
• Paragraph 8 sets out the four Conditions Precedent to the Surety’s liability under the bond. These conditions reflect those set out in the SAC bond, however, as discussed above, there is effectively a fifth condition precedent found in Paragraph 1.1 which sets out that the Surety has no liability until the Owners’ Notice of Claim has been delivered to the Surety.
  
  
• While the concept of Balance of Contract Price is incorporated into the SAC document, the Ontario Bond devotes a new section in Paragraph 9 to defining the term and setting out the parameters for its application.
  
  9.2 requires that the Owner use these funds to mitigate the surety’s loss under first the performance bond and then the payment bond and make payments as directed by the Surety. This provision was added to ensure that project funds stay within the construction pyramid.
  
  
• Paragraph 15 sets out the requirement for sending notices to the named parties under the bond along with the designated addresses for the Contractor Owner and Surety. This follows the SAC model with changes added to make the document Ontario specific.
  
  
• The Schedules attached to the bond were devised to bring uniformity to the Claims process by providing guidance to Owners and minimize or eliminate the need to prolong the claims process by asking for additional or more complete information. The three Schedules referenced within the text of the bond are:
  • Schedule A - Form of Notice of Claim.
  • Schedule B - Form of Surety’s Acknowledgement; including a sample list of required information to conduct the investigation.
  • Schedule C - Surety’s Position setting out which of the three response options chosen and, if applicable the reasons for that choice.

Form 31 - Labour & Material Payment Bond

Unlike the performance bond, the new labour and material payment bond was not based on a SAC generated form, instead using the existing (2002) CCDC version as its template. However, As was the case with the performance bonds, the Form 31 L&M bond introduces changes and additions to the terminology. Many of the new or revised terms under the performance bond have found their way into the payment bond; e.g. Notice of Claim, Investigation, Surety's Position. Additional terms such as Sub-contractor and Sub-Subcontractor have also been incorporated.

Turning to the key features of the bond:

• The opening paragraph and Paragraph 4 provide for co-surety and multiple surety situations in the same manner as the performance bond.
  
  
• Paragraph 1 expands the definition of Claimant. While 1st tier subs and suppliers are covered in the same manner as before, two new categories of Claimant have been added:
  • Claims from 2nd tier subcontractors and suppliers are now covered; but only to the extent that they would have been protected under the Lien provisions of the Act. This is analogous to the approach found in the federal government payment bond. 
  • Unions have been added, but only to the extent of wages and "Supplementary Monetary Benefits".
    
    
• Paragraph 2 holds that the Owner is not required to act on behalf of the Claimants under the bond. While a similar provision is found in the standard L&M bond, it has special significance here in that unlike the traditional CCDC document, the Ontario bond does not name the Owner as a trustee for the Claimants.
  
  The trustee provision is not necessary here as the Third-Party Beneficiary Rule is circumvented under Section 85.2 of the revised Construction Act. This is probably the most significant difference between the Ontario bond and the existing CCDC standard.
  
  
• As discussed above, Paragraph 4; deals with Co-Surety situations.
  
  
• Paragraph 5 sets the Notice of Claim as a condition precedent to the Surety’s liability in the same manner as the existing CCDC version. It’s noteworthy however, that the CCDC form includes the additional condition that the Claimant shall have brought suit under the bond. No such condition is found in the Ontario form.
  • Like the performance bond, its L&M counterpart uses the same prescribed format for making a claim (both sub and sub-sub); i.e. acknowledging the claim and providing the Surety’s response.
  • The Ontario version retains the CCDC 120-day time limitation for advancing a claim. However, the CCDC requirement that the Claimant cannot advance a claim before 90 days from the last day worked has been eliminated.
    
    
• Paragraphs 6 and 7 Set out the timelines for acknowledgement of the Notice, providing the Surety’s position and paying undisputed amounts.
  • 3 business days for the Surety to acknowledge the claim and request information.
  • For a Subcontractor claim, the Surety’s Position must be delivered:
    • Within 10 business days from the receipt of the Information or 25 business days from the receipt of the Notice of Claim.
  • For a Sub-Subcontractor claim, the Surety’s Position must be delivered:
    • Within 15 business days from the receipt of the Information or 35 business days from the receipt of the Notice of Claim.
      
      
• Paragraph 8 requires the Surety to pay any undisputed amounts within 10 business days of Surety’s Position.
  
  
• Paragraphs 9 and 10 address the new issue of adjudication. It’s worth noting that no such provisions are found in the performance bond which is not subject to the adjudication requirements under the Construction Act.
  • Under Paragraph 9, once an adjudication notice is received, the clock stops and the Surety’s obligations under the bond are stayed until the adjudicator delivers its ruling.
  • Paragraph 10 confirms the surety’s right to pursue litigation against claimant should it lose an adjudication.
    
    
• Paragraph 12 allows the Surety to apply to the court for direction in the event that the aggregate amount of outstanding claims could exceed the bond amount.
  
  
• Paragraph 13 allows the Surety to be subrogated to the rights of the Claimant regarding any action, or warranties once a claim has been paid.
  
  
• Paragraph 18 sets out the protocol for giving notice to the various parties under the bond in the same manner as that found in the performance bond.
  
  

Other provisions (i.e. Paragraphs 11, 14, 15, 16, 17) reflect similar clauses in the CCDC BOND. As with the performance bond, the L&M bond includes supporting schedules that are included to bring uniformity to the claims process by providing guidance to Claimants and minimizing or eliminating the need to prolong the claims process by asking for additional or more complete information. Form 31 includes four such Schedules:

• Schedule A – Notice of Claim – Subcontractor.
• Schedule B – Notice of Claim – Sub-Subcontractor.
• Schedule C – Surety's Acknowledgement and requests for information.
• Schedule D – Surety's Position setting out disputed and undisputed amounts. 

Form 5 – Demand Worded Holdback Repayment Bond

Section 22 of the Construction Act allows for the posting of a bond as a substitute for the traditional cash holdback. The prescribed wording for the holdback repayment is an amalgam of several different forms in common use within the industry. The bond is quite simple, and its provisions will be familiar to most SAC members and others who may have had experience with bonds of this nature. 

• Paragraph 1 allows the Owner to make a demand, or, if necessary, multiple demands not to exceed the aggregate amount of the bond, whenever a lien against the holdback has not expired or been discharged. 
  
  
• Paragraph 2 establishes the on-demand nature of the obligation and requires the Surety to pay any amount demanded by the Owner within 20 business days of receipt of such a Demand. 
  
  The Surety must accept the Owners' Demand as prima facie evidence that the underlying condition has been met (i.e. outstanding liens) and is barred from raising any defence regarding the validity of that Demand. 
  
  
• Paragraph 4 requires that any Demand under the bond must be received by the Surety within 120 calendar days from the last day when any lien under the Contract could have been registered. This is in accordance with the terms of the Construction Act.
  
  
• Paragraph 7 establishes the protocol for providing notice to the parties to the bond in the same manner as found in the performance and payment bonds. 
  
  

The bond has one attached Schedule which sets out the format for a Demand from the Owner. 

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.