Liability of surety in Quebec under a labour and material payment bond consistent with common law principles
L’Unique Assurances Générales inc., Appelante, c Échafauds Plus (Laval) inc., Intimée, 2015 QCCA 1725 [4174]
I. FACTS AND ISSUES
This decision was reported only in French and involves the interpretation of the Québec Civil Code.
In 2010, the Ministry of Transport of Québec (the "Ministry") granted a contract to repair a ramp of a motor interchange (the "Project") to AC Construction and Demolition (the "Contractor"), a company specializing in concrete repair. Pursuant to the requirements made by the Ministry, the contract included a bond for wages, materials and services (the "Bond") signed by UAG Inc. (the "Surety") to guarantee the Contractor’s financial obligations to suppliers and subcontractors, for an amount up to $3,977,810. Our translation of the relevant provisions of the Bond is:
1. [UAG Inc.], whose principal office is located at 925 Grande Allée West, Suite 240, Québec (Québec) G1S 1C1, represented by Mélanie Fournier, attorney, duly authorized, hereinafter called the SURETY after taking cognizance of the tender duly accepted by the MINISTRY OF TRANSPORTATION OF QUEBEC
hereinafter called the PUBLIC BODY for File no. 8503090230 Repair of the ramp E Turcot Interchange (repair of the upper slab and building interiors slabs) 850 783 311 Contract
and on behalf of 91222497 Québec Inc. (AC Construction Demolition) [the Contractor] whose principal office is located at 5555, boul. Forges, Suite 203. TroisRivières, Québec, G8Y 5L5 here represented by Alain Crête duly authorized, hereinafter called the entrepreneur,
are jointly and severally obliged with the CONTRACTOR, to the PUBLIC BODY to pay directly the creditors hereinafter defined, the SURETY may in no case be required to pay more than three million nine hundred and seventy-seven thousand and eight hundred ten dollars ($3,977,810).
2. Creditor means:
1. Any subcontractor of the CONTRACTOR;
2. Any natural person or legal person having sold or leased to the CONTRACTOR or its subcontractors services, materials or equipment intended exclusively for the work, equipment hire being determined only as Current standards for the construction industry; and
3. Any supplier of materials specially prepared for that work and for this contract.
4. Subject to Article 3, no creditor has direct recourse against the SURETY unless he has addressed to him and to the CONTRACTOR, a request for payment within 120 days after the date he completed his work or supplied the last services, materials or equipment.
Any creditor who has contracted directly with the CONTRACTOR has no direct recourse against the SURETY unless the creditor has notified the CONTRACTOR in writing of the contract within 60 days of the rental beginning or delivery of services, materials or equipment, such notice must indicate the work concerned, the object of the contract, the name of the subcontractor and the PUBLIC BODY concerned.
A subcontractor has no direct recourse against the SURETY for deductions imposed on it by the CONTRACTOR unless he has sent a request for payment to the SURETY and to the CONTRACTOR within 120 days following the date on which these deductions were due.
5. Any creditor may institute proceedings against the SURETY on the expiry of 30 days following the notice provided for in Article 4, provided that the prosecution is not instituted before 90 days of the date on which the creditor's work was executed or the date on which the last services, materials or equipment were provided
[. . . ]
The Contractor entered into a contract with EPL Inc. for scaffolding equipment and services. The Project was suspended during winter. In spring, when the Contractor was preparing to resume its work, EPL Inc. served the Contractor with notice to pay the cost of the equipment rental, then unpaid. At the same time EPL Inc. issued a request for payment to the Surety in accordance with the Bond conditions. Due to a lack of response from the Contractor, EPL Inc. commenced an action to recover from the Contractor and the Surety.
The Contractor and EPL Inc. negotiated an agreement under which the Contractor agreed to immediately pay EPL Inc. partial recovery and settle the remainder of the account when the equipment was returned at the end of the Project (the “Settlement”). The Settlement also reserved to EPL Inc. the right to pursue from the Defendants rental incurred subsequently.
Following the Settlement, and after the Project was complete, EPL Inc. amended its Statement of Claim to reflect the new claims for additional rental fee for the equipment used since May 2011 and the value of unreturned equipment. EPL Inc. did not issue to the Surety a new request for payment under the Bond. At trial, EPL Inc. successfully recovered from the Defendants $166,462,51 for value of unreturned equipment and rental costs. The Surety appealed.
II. HELD: Appeal allowed in part;
On appeal, the Court of Appeal considered four issues:
1. What is the scope of the Bond? More specifically, did it impose on the Surety an obligation to compensate EPL Inc. for damages suffered due to non-return of its equipment?
2. Did the Settlement novate the original contract? If not, did the Settlement, in any way, effectively release the Surety from its obligations under the Bond?
3. Has EPL Inc. met the formalities prescribed in the Bond? Specifically, was a second request for payment to the Surety required regarding the amended claim?
4. Does the evidence establish that the Contractor has used the equipment as part of the Project, from May to September 2011?
The Court of Appeal allowed the appeal in part. The Court cited five provisions of the Québec Civil Code relating to the law of surety. The English versions of those provisions are:
2333. Suretyship is a contract by which a person, the surety, binds himself towards the creditor, gratuitously or for remuneration, to perform the obligation of the debtor if he fails to fulfill it.
2335. Suretyship is not presumed; it is effected only if it is express.
2342. Suretyship may be contracted for part of the principal obligation only and with less onerous conditions.
2343. Suretyship may not be extended beyond the limits for which it was contracted.
2344. Suretyship extends to all the accessories of the principal obligation, even to the costs of the original action, and to all costs subsequent to notice of it given to the surety.
On the first issue the Court of Appeal held, reversing the trial decision, that the Bond provided that workers, subcontractors and suppliers would be paid for services rendered, but did not cover damage in connection with loss of equipment. Damages for loss of equipment were not an accessory to the price for services rendered and therefore, the trial judge erred in granting damages for value of unreturned equipment.
On the second issue the Court of Appeal held that the trial judge did not err in finding that the rental contract and the Settlement constituted two distinct sources of obligations. The Settlement did not have the effect of triggering novation and while the claim was settled, the Surety was not released for additional claims covered by the Bond.
On the third issue the Surety argued that the amendment constituted an entirely new claim and, consequently, must meet the notice obligations outlined in the Bond. In considering whether EPL Inc. met the formalities of the Bond, the Court considered the specifics of this case, and held that the trial judge did not err in concluding that the original request for payment to the Surety was sufficient. The Court of Appeal also noted that the Settlement reserved EPL Inc.’s right to pursue additional recovery, which put the Surety on notice.
Finally, the Court held that the trial judge did not err in finding that the Contractor had used the equipment in the relevant period. In the Settlement, the Contractor acknowledged that the equipment rented by EPL Inc. was still on site, so the equipment was used and the equipment would continue to be used until the completion of the Project.
III. COMMENTARY: While this decision is based on the Québec Civil Code, the principles the Court invokes strongly resemble common law principles with respect to labour and material payment bonds. The Court must look at the wording of such bonds when determining the scope of the obligations of a surety. The language found in a typical labour and material payment bond used in the common law provinces would likely lead to the same result. In the normal course, a surety does not become liable for damages arising from the breach of contract on the part of the principal which are beyond the express undertakings found in the bond wording (e.g. damages for delay or damages from equipment not being returned).