Surety Liability Under a Performance Bond
May 24, 2023 - 4 min read
The Court faced a situation where it had to determine whether a surety had any liability under a performance bond. The Court found that even where it could not conclusively determine whether certain damages were due to the principal's error or other factors, the surety was still jointly and severally liable with the principal for the principal's respective apportionment of damages.
Performance bonds in the construction context involve three parties:
- The principal: the person or company providing the work
- The obligee: the party that is paying the principal to perform the work
- The surety: the party that provides the performance bond
A performance bond is issued to the obligee as a guarantee against the failure of the principal to meet its contractual obligations. In the event of default by the principal on its contractual obligations, the obligee can make a claim on the performance bond to cover some of the damages or losses arising from the default.
In Government of Yukon v. Norcope Enterprises Ltd., the Supreme Court of Yukon considered whether a surety had any liability under its performance bond when the principal had already been found partially at fault for the obligee's damages.
Yukon owns the Erik Nielsen Whitehorse International Airport. Norcope, a general contractor, entered an agreement with Yukon to remove and replace the apron at the Airport. Intact provided a performance bond under which it had certain obligations should Norcope default under the agreement with Yukon. Tetra Tech was retained by Norcope to provide quality control and concrete mix design for use in the apron and to provide quality assurance to Yukon.
Norcope commenced its work on the apron in April 2014. In July 2015, Yukon advised Norcope that there were major deficiencies in the work Norcope had done. As a result, Yukon declared that Norcope was in default under the parties' agreement and made a claim under the performance bond. At trial, liability for the apron defects was split:
- Tetra Tech was found 50% liable for its lack of quality control and the problematic cement mix design.
- Norcope was found 35% liable for poor construction practices.
- Yukon was found 15% liable for failing to pay attention to what was happening on the project.
The Court was subsequently tasked with deciding whether Intact had any liability under its performance bond, given the finding of liability against Norcope, as principal under the bond.
Intact's Liability Under Its Bond
Intact challenged its liability under the performance bond based on three arguments, discussed below.
Argument 1: As it was inconclusive which apron panels were damaged by frost heave and which by poor construction, it was not possible to assess Intact's liability. Further, any defects discovered after August 23, 2015, fell outside the period for which Intact was responsible under the bond.
At trial, the Court did not isolate damage to the apron as between frost heave and poor construction. Intact argued that because Yukon failed to provide evidence about which specific apron panels were damaged by frost heave and which by poor construction, Intact was not liable under the bond since the bond would only respond to default by the principal. The Court dismissed this argument, stating that it was impossible to separate the cause of cracking or isolate panels where frost heave may have been the sole cause. The Court found that poor construction was part of the cause for all the damage, and by extension, Intact was liable for all the damaged panels under the bond.
With respect to Intact's claim that the damage fell outside the 12 months following the issuance of the substantial performance certificate of which Intact was responsible for under the bond, the Court stated that it was again impossible to isolate the cracking temporally. It was poor construction exacerbated by frost heave that caused the damage.
Argument 2: Since Yukon was found partially at fault for failing to pay attention to what was happening on the project, and its agent, Tetra Tech, was found at fault for carrying out its quality assurance function for Yukon, Yukon had not met its obligation under the bond.
The language of the bond was such that, should Norcope default under the contract with Yukon, Intact would not be liable if Yukon failed to perform its obligations under the bond. Intact argued that to the extent the principal is not liable, neither is the surety. The Court reiterated that while Yukon was partially at fault, so too was Norcope. Despite a finding of liability on the part of Yukon as obligee, to the extent that Norcope was liable, Intact was liable.
Argument 3: A Tetra Tech report did not provide specificity with respect to the deficiencies. Further, if the Tetra Tech report did constitute sufficient notice, Intact responded under the bond by retaining an expert to prepare a report.
The Court stated that retaining an expert who subsequently provides a report was not a sufficient response by Intact under the bond.
Intact argued that the demand by Yukon was not clear. The Court found that the nature of the deficiencies was clearly identified. Yukon's demand did not request the replacement of the entire apron; it was for Norcope to rectify and make good the work it performed. The Court held that the nature of the notice was sufficient.
In this case, the Court determined that Intact's liability was co-extensive with Norcope's. In other words, under the performance bond, Intact was jointly and severally liable with Norcope for 35% of the damages.
Applicability in Alberta
Performance bonds tend to contain relatively consistent language across Canada. Further, many of the Judges and Justices in the Territories also hear cases in Alberta and British Columbia. As such, although this decision is not binding outside the Yukon, it would be persuasive in other Canadian Provinces and Territories.
This decision confirms the longstanding concept that a surety's liability under a performance bond is co-extensive with the principal's. Even if there may be some additional arguments available to a surety to try to avoid liability under a bond, courts will not lightly release sureties from liability completely.
If you would like advice on the use of performance bonds in construction projects, please contact Anthony Burden or Logan Maddin in Calgary, Ryan Krushelnitzky in Edmonton, or any member of Field Law's Construction Group for guidance and assistance in this area.
Link to decision: Government of Yukon v. Norcope Enterprises Ltd., 2023 YKSC 17