What it Means to General Contractors
New Bond Forms:
General contractors, like all construction industry stakeholders will have their hands full trying to assimilate all of the improvements and changes to the construction payment regime after July 1, 2018. One of the key changes will be new and improved surety bond forms that address the need for enhanced claims processes. The Act requires Contractors to post 50% performance and payment bonds on all “public work” where the contract amount is $500,000 or greater “…in the prescribed form”.
The prescribed forms are set out in the in the regulations and are accessible from the Ontario Government Court Forms website by CLICKING HERE (see forms 31 and 32). These instruments were developed by the Ministry in consultation with the Surety Association of Canada and conform to the provisions of the Act as recommended by the Reynolds / Vogel Report.
The first impression of the new documents is the length. The current standard CCDC performance bond fits on one page; in stark contrast to the new template form that extends to 12 pages. Likewise, the new payment bond fills a full 11 pages in comparison to its two page CCDC counterpart.
Timing and Responsiveness around Claims:
Much of the extra content consists of template schedules, or forms which set out the standard responses and acknowledgements under the bond. However, the bonds also include enhancements and additions that introduce more clarity to the claim process and set standards for the timing and content of a Surety’s response to a Notice of Claim.
Regarding the timing, as soon as a Notice is received; either from an Owner under a performance bond or a Claimant (Subcontractor or Supplier) under a labour and material payment bond, the clock begins to tick. In fact, several clocks begin to tick at once. As an example, consider the time limitations imposed upon a Surety when it receives a Notice of Claim from a Subcontractor under a payment bond.
- Immediately upon receipt of the Notice, a Surety has three business days in which to acknowledge receipt to the Claimant and request the information required validate the claim.
- At the same time, it has 35 business days (or less) to communicate its position to the Claimant; setting out what portion of the claim, if any, is being disputed.
- Once the Surety delivers its position to the Claimant, it has 10 business days to pay any amounts that aren’t in dispute.
Similar deadlines are found in the performance bond as well.
But it doesn’t stop there. The new surety protocols require claim handling to be responsive as well as timely and the new regulations raise the bar by establishing more stringent response standards. The performance bond is quite specific in setting out the options that are available to a Surety in communicating its position to an Owner in response to a Notice. Under Paragraph 3.3. a Surety may either:
- Accept Liability and propose a method for completing the project; or,
- Deny liability and communicate the specific reasons for that denial; or,
- Inform the Owner that they cannot determine whether or not liability exists and provide them with the specifics as to what the issues are and how they can be addressed.
Similarly, when communicating its position to a Claimant under a payment bond, a Surety is required to set out the amount of the Claim that is being disputed and provide the reasons for its challenge. It must then pay any undisputed amount within 10 business days of this response.
The common thread here is the imposed responsiveness which calls for sureties to communicate their positions clearly and resolve claims in a timely manner. When your surety receives a Notice of claim, it must take action, or explain in detail why it will not; all within a very tight timeline.
But don’t forget that the clock is ticking for the bonded Contractor as well. While the onus appears to be on the Surety to take the required action, general contractors need to be mindful of the impact that these new augmented standards will have on their organization; both on their administrative responsibilities and, ultimately, their own liability under the bond. It falls upon the Contractor to keep the Surety informed about the circumstances surrounding the claim and any defenses or mitigating circumstances that may be in play.
New Risks to Consider:
For the most part, the new protocol for claims handling, while imposing more stringent standards for behaviour and communication, do not significantly expand the risk profile to contractors or their sureties from that found in the standard CCDC bonds. The bonds remain conditional instruments that are only triggered should the contractor default on the Contract or fail to pay Subcontractors or Suppliers.
One exception to this rule is found in the payment bond where protection has now been extended to 2nd tier subcontractors and suppliers. However, the protection afforded to these 2nd tier claimants is similar to that found in the federal payment bond and is “…limited to such amounts as the Contractor would have been obligated to pay to the Sub-subcontractor under the Construction Act (the “Act”)”. This would effectively limit liability to sub-subcontractors under the bond to that portion of the holdback that the Contractor would be liable to pay under the Act.
The performance bond, while not introducing any new risks to the matrix, does attempt to bring more clarity as to what is covered and what is not. For example, Paragraphs 7.1 and 7.2 specify which default-related expenses are compensable under the bond. This would include coverage for soft costs (professional fees, certain legal fees, miscellaneous expenses) and costs for time extensions that are consistent with the provisions of the Act itself. In addition, Paragraph 7.3 sets out which costs or expenses are not covered by the bond (delay damages, consequential damages such as business interruption costs).
A Few Tips for General Contractors:
- Read the Bonds and Understand their Terms.
Make sure that key staff are familiar with the terms of the bond and the need for keeping the surety informed of any developments on the project in a timely manner. We would suggest that a review the new surety bond regime be included in any internal training conducted by the organization.
It’s also important to ensure that the systems are in place to provide the quick turnaround required by the new protocols. A dedicated email address for notifications should be set up and the roles and responsibilities for staff should be clearly delineated to ensure that nothing falls between the cracks.
- Consult with your Broker and Surety.
SAC has been contacted by several stakeholders inquiring as to how the new regime may affect the commercial arrangements between a Contractor and its Surety. We suggest that general contractors meet with their broker and bonding company to discuss these arrangements and the changes, if any, that take place after July 1, 2018.
- Work with your Surety in the Event of a Claim.
We can’t stress enough the paramount importance of promptly providing your surety with any and all information/documentation around any claim submitted under a performance or payment bond. Of equal importance is to provide the surety with access to knowledgeable staff who can offer insight on the issues that may not be apparent from the supporting documents.
Once again, a Surety has a very small window in which to prepare its response to a claim and will need all the assistance you can provide to develop a full understanding of your perspective and any mitigating circumstances that may exist. A Surety cannot consider your position if it doesn’t know what that is, and/or it doesn’t have the appropriate documentation to support it.
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.