Massive Devcon and BECC Construction, as obligees, were issued surety bonds by Western Surety, as surety, exceeding $15 million in relation to four construction projects. Non-obligee corporate entities and individuals granted indemnities to Western Surety as a condition of issuing the bonds. Certain owners and subcontractors alleged that Massive Devcon and BECC had defaulted on their obligations in relation to the projects and submitted claims to Western Surety under the bonds.

Western Surety brought an action seeking indemnification under the bonds and a partial summary judgment application seeking to enforce the exoneration obligation against the indemnitors. “Exoneration” (also referred to as “place in funds”) requires an advance of funds to a surety upon demand and before amounts are actually paid on any claims.

At the time of the application, Western Surety had already paid out over $8 million in claims under the bonds, and established reserves for each of the ongoing claims. However, the indemnitors refused to make any advance payments, raising issues of fairness in relation to Western Surety’s implementation of its discretion as surety in the circumstances.

What the Court Said

Western Surety was granted partial summary judgment. The indemnitors were required to provide payment of $3.99 million as security under their exoneration obligations.

The Court confirmed that the purpose of exoneration clauses is to allow the surety to fund any reserve for claims against the bond that the surety, upon investigation, determines exposes the bond to liability. This obligation arises independently and in advance of the surety’s obligation to make payment on a claim and the corresponding indemnity obligations. There is also no prerequisite that a surety actually provide payment on a claim for an exoneration obligation to be enforced. However, the surety has an obligation to account to indemnitors for any security provided under an exoneration obligation that is not ultimately used for a claim.

Partial summary determination was appropriate when seeking to enforce an exoneration obligation, particularly given the surety bonds’ clear requirement of swift dispute resolution and there being no risk of inconsistent fact finding. The court held that to not grant partial summary judgment and deter determination until resolution of the indemnity claims would defeat the purpose of the exoneration provision – to allow the surety to receive funds in advance of paying out claims. Accordingly, the sole issues to be determined were not subject to inconsistent findings in the indemnification action given the distinct obligations. The issues were limited to:

1. whether there was a demand on the bond by the surety to the indemnitors;
2. whether the surety had established a reserve; and
3. whether the surety acted in bad faith in establishing the reserve.

The indemnitors’ argument of expense and delay was rejected, given the significant time and costs already incurred by the parties as well as no previous objections being raised. The court held that partial summary judgment is reserved for a discrete issue that may be readily bifurcated from the remaining issues in the action. The surety’s claim for exoneration met this requirement.

The court also rejected the indemnitors’ argument that the surety had acted in bad faith in determining the reserve funds or that a trial of this issue was warranted. A surety’s duty to exercise such discretion may be breached where it was used unreasonably or in a manner unconnected to the purpose of ensuring sufficient collateral from the indemnitors to respond to its bonded obligations, if and when liability is established.  However, Western Surety had provided clear evidence explaining its calculations and revised the reserve in accordance with the claim proceedings that were not challenged. Therefore, no genuine issue requiring trial was found.  

Takeaways

This decision emphasizes the enforceability of exoneration clauses in surety agreements and confirms a surety’s right to obtain security from indemnitors before payment on bond claims or indemnity liability has been proven. While sureties must exercise their discretion in establishing reserves in good faith and for a proper purpose, the court is likely to afford that discretion deference in upholding exoneration obligations.

In practice, parties agreeing to indemnify sureties should understand that the inclusion of an exoneration clause means that they are not simply backstopping losses, but may be required to post real-time funds or security while disputes are ongoing. This is a strong reminder that indemnity obligations can crystallize well before a formal loss is incurred, and that a failure to respond to exoneration demands may result in prompt court enforcement.

If you would like advice on surety bonds and exoneration clauses respecting construction projects, please contact Anthony Burden or Tristen Pomerance 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: Western Surety Company v. Dali Drywall Ltd. et al, 2025 ONSC 3632