Canadian Underwriter

Surety Association seeks changes to Ontario bill to prevent ‘rash of claims’ on performance bonds

April 8, 2014   by Canadian Underwriter

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The Surety Association of Canada, whose members include 17 primary insurers offering surety bonds in Canada, is expressing some reservations about a proposal before the Ontario legislature to give contractors on construction sites the ability to terminate contracts when they do not receive progress payments on time.

“The Surety Association of Canada is very supportive of the principles behind Bill 69,” said the association’s president, Steve Ness, at Queen’s Park before the Standing Committee on Regulations and Private Bills, noting the association has “serious concerns.”

Ness was referring to Bill 69, an Act Respecting Payments Made Under Contracts and Subcontracts in the Construction Industry, which was tabled last May and is currently before the regulations and private bills committee.

If passed into law, Bill 69 would give contractors and subcontractors the right “to receive progress payments and to suspend work or terminate a contract if such payments are not made,” Liberal MPP Steven Del Duca said last May when he tabled the private member’s bill.

Last month, Ness told the regulations and private bills committee that in its current form, Bill 69 “is silent on what happens should a contractor exercise their rights” to either suspend or terminate a contract in the event that a progress payment on a construction project is not made on time.

“We think that further clarification is required to prevent a rash of claims coming at our performance bonds,” Ness said. He added that a draft version of the bill, which was circulated before the current version was tabled, had a provision requiring that a contractor who exercises its rights to terminate or suspect a contract could not be deemed as being in breach of contract.

“That was not present in the legislation as it’s tabled,” Ness told the committee. “While there is a loose provision in there to say that the contract is so amended to incorporate the terms of the act, that’s, in fact, cold comfort. We can see a scenario developing where, under the performance bond, you could have a claim as a result of simply exercising your rights.”

When asked by Percy Hatfield, NDP MPP for Windsor-Tecumseh, to confirm the Surety Association of Canada is supportive of the principles but had “serious concerns,” Ness replied, “Yes, sir.”

Ness added: “I think this bill could be much better, and with broader consultation, I think that would almost certainly be the case.”

Bill 69 is intended to address the problem of contractors not getting payments in a “timely fashion” by either the project owners or general contractors, Del Duca suggested in May when he introduced the bill.

“Owners are not required to pay a fee for delaying payment. Therefore, there’s no obligation to them to make payments on time,” Del Duca said at the time of some construction contracts. “In addition, pay-when-paid and pay-if-paid clauses provide a loophole for owners in situations where they cannot make payment.”

With some construction contracts, “an owner can say to a subcontractor, ‘I will pay you as and when I get paid,’ or worse, he can say, ‘I will pay if I get paid,’” Liberal MPP Dipika Damerla told the legislature in May.

“It is about having the right to be paid for a service rendered in a timely fashion, something I am sure each of us can relate to,” added Damerla, who represents the riding of Mississauga East-Cooksville. “After all, I cannot tell my phone company, ‘Listen, I am not paying you this month, because I did not get paid my salary,’ and I cannot tell my landlord ‘I’m not paying my rent until my subtenant pays me,’ yet this is exactly what takes place in the construction industry.”

During a committee session in March, Ness noted that the Surety Association of Canada has a labour and material payment bond, which is required by law in the United States and is designed to protect tradespeople and suppliers.

“Perhaps some thought should be given to bringing that up here in a more prescriptive form,” Ness said. “We’re going to suggest that perhaps this bill should be taken back, reconsidered and reworked to bring in more protections and make it a lot clearer than it currently is.”

In replying to question from Hatfield, Ness noted that most – but not all – public bodies in Canada require the labour and material payment bond.

“It’s not in universal use here,” he said at the time. “There are some jurisdictions that require it; others don’t.”

On construction projects without such bonds, he added, tradespeople  “are very vulnerable to failure to pay” by the general contractor.

A labour and material payment bond, he suggested, is “a very, very effective tool for giving that ‘sleep comfortably’ feeling to trades and suppliers, knowing that they’re going to get paid for work done and materials supplied.”

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