A Surety’s Delay in Responding to a Bond Claim Can Lead to Liability: A Cautionary Tale

A demolition project at an industrial facility was governed by strict timelines under Québec environmental regulations. To secure the general contractor’s obligations, the project required a performance bond, which was issued by Talisman Casualty Insurance Company as surety.

The contractor fell into serious default that the Court described as a “complete failure to honour its contractual commitments.” The owner gave notice of default in accordance with the bond and the underlying construction contract. The owner then called on the surety to respond under the bond.

Rather than promptly selecting one of the options set out in the bond and taking steps to complete the project or otherwise satisfy its obligations, the surety delayed:

• it questioned the default;

• sought additional information; and

• failed to commit to a course of action within the timelines contemplated by the bond.

What followed was not just a dispute about the contractor’s failure, but a detailed judicial examination of what a surety is required to do under a performance bond, and what happens when the surety fails to live up to those obligations.

The owner applied for summary judgment against the contractor for expenses incurred to complete the work, as well as against the surety for breach of the performance bond.

What the Court Said

The Court began by explaining that although a performance bond is a contract, it is not an insurance contract. As such, courts are not required to construe a bond strictly or leniently in favour of one party or another. The Court noted that an owner must first notify the surety of its intention to declare default and then formally declare default, giving the surety an opportunity to address the default before further action is taken.

Here, the surety guaranteed the contractor’s performance of its demolition obligations. Although courts traditionally construe guarantees narrowly, performance bonds issued by sureties in the construction context are not interpreted in a way that would defeat their commercial purpose. The surety must accept some degree of risk in exchange for the receipt of premium payments. A surety cannot rely on technicalities to avoid liability where the bond’s conditions have been met. On the other hand, an owner cannot require a surety to act unless it complies with the bond’s notice and default provisions.

The surety advanced several defences to the owner’s summary judgment application, each of which the Court dismissed.

First, the Court found that the owner complied with the bond’s conditions precedent. The first two of the three requirements were that the owner provide notice of its intention to declare default by the contractor, and then declare default and notify the surety. These requirements were easily satisfied.

The third requirement was more complex and required the owner to agree to pay the balance of the contract price to the surety or another contractor before the surety would step in. At the time, there was significant regulatory pressure for the owner and or the contractor to complete the demolition. The owner notified the contractor and the surety that it was dissatisfied with the lack of progress and had retained a demolition contractor. The Court considered this to be satisfactory.

Second, the Court rejected the surety’s argument that the owner’s conduct prejudiced its rights under the performance bond. These allegations included complaints about delays in providing information, hiring contractors without consent, obtaining injunctions, extending time for performance, and removing salvageable materials. The Court found that the bond did not grant the surety the rights it claimed, such as the right to obtain specific documents from the owner. Further, the owner acted reasonably under regulatory pressure and did not impede the surety from fulfilling its obligations under the bond.

Third, the Court found that the owner and the contractor did not vary the bonded contract without the surety’s knowledge. Relying on authority that material variations of a construction contract can discharge a surety’s obligation, the surety argued that the owner provided grace periods to the contractor and at one point accepted a commitment letter from the contractor to complete the work. However, the Court held that providing a contractor additional time does not prejudice the surety.

At this point, the Court’s decision was clear, as evidenced by the following passage:

“[The owner] exhibited extraordinary reserve by not suing [the contractor] and [the surety] right after it served notice following the 24-month period of [the contractor]’s failure even to start the work and [the surety] did nothing to intervene.” (para 135)

The Court held that the proper measure of damages in a breach of contract case is the amount spent by the innocent party to complete the work the defaulting party failed to perform. Neither the contractor nor the surety introduced evidence disputing the reasonableness or accuracy of the demolition invoices, which supported total completion costs of $6,672,713.45. As a result, there was no genuine issue requiring a trial on damages for the purposes of summary judgment.

The Court concluded that the contractor was liable to the owner for $6,672,713.45, plus repayment of $750,000 in holdback that the contractor had wrongfully withheld. The surety’s liability was concurrent but capped at $2,000,000, the penal sum of the performance bond.

Takeaways

This case highlights that a surety cannot treat a performance bond as flexible or open-ended. Once default is properly declared, the surety is required to act, and to act promptly. Courts expect sureties to understand their role. When they fail to perform it, liability is likely to follow.

Further, performance bonds will be enforced as written. Sureties must strictly comply with notice provisions and timelines. Delay also creates risk. A surety that fails to promptly elect an option may be found in breach of its obligations and exposed to liability up to the penal sum of the bond. A performance bond requires action, not investigation alone. Once bond requirements are satisfied, including notice requirements, the surety must step in.

Lastly, obligees are not required to wait indefinitely. An obligee’s reasonable mitigation to advance its project and prevent further delay does not necessarily defeat bond recovery, particularly where there is regulatory pressure to complete the work.

Surety disputes and claims can become complex very quickly, so it is advisable to consult a lawyer without delay. Contact Anthony Burden in Calgary, Ryan Krushelnitzky in Edmonton, or any member of Field Law’s Construction Group for advice.

Link to decision: Graphic Packaging International Canada, ULC v 2477621 Ontario Inc et al, 2025 ONSC 7210