Performance Bonds + Limitation Periods: Courts Mean What the Bond Says

VanMar was the general contractor for a residential condominium project in Ontario. It subcontracted Global to perform the mechanical work. As part of that subcontract, Global was required to obtain a performance bond. Travelers, as surety, issued the bond, naming Global as the principal and VanMar as the obligee.

The bond set out when Travelers’ obligations were triggered. Before Travelers was required to take any action, VanMar had to first declare Global to be in default under the subcontract and confirm that it had complied with its own contractual obligations. Once these conditions were met, Travelers was required to respond and elect one of the remedies available under the bond to address the default.

More importantly, the bond itself contains a limitation period, set out as follows:

It is a condition of this Bond that any suit or action must be commenced before the expiration of two years from the earlier of (1) the date of substantial performance…, or (2) the date on which the Principal [Global] is declared in default by the Obligee [VanMar].

In this context, “declared in default” refers to the specific preconditions that trigger Travelers’ obligations under the bond, namely that VanMar formally declare Global in default under the subcontract and confirm that VanMar has complied with its own contractual obligations.

Throughout 2021, VanMar repeatedly advised Global that it was in default under the subcontract. VanMar also kept Travelers informed, advising that Global’s performance was deficient and that it was in default. Most notably, in a letter dated March 14, 2022, VanMar formally advised Travelers that the bond’s preconditions had been met, thereby triggering Travelers’ contractual obligations and commencing the two-year limitation period:

“We write to advise that the Principal pursuant to the above-noted Performance Bond, [Global], is and continues to be in significant default of its contractual obligations to the Obligee, [VanMar], and has been declared as such by VanMar on many occasions. Further, VanMar has performed all of its obligations under its contract with Global to date.”

Travelers received the letter on the same day and wrote back: “If VanMar decides to make a claim pursuant to the Bond in the future, you may provide written notice to the writer at the email address noted below.”

Issue

The key issue was whether the limitation period began on March 14, 2022, and consequently expired two years later on March 14, 2024. If so, VanMar’s claim, filed on April 1, 2024, would be out of time.

Travelers argued that the required preconditions under the bond were met by March 14, 2022, and that the bond’s limitation period therefore expired on March 14, 2024. In the alternative, Travelers relied on section 4 of the Limitations Act, which requires any claim to be commenced within two years of the date the claim was discovered.

VanMar argued that the limitation period did not begin merely because it declared Global in default. Instead, VanMar maintained that Travelers’ obligations were triggered only when VanMar formally notified Travelers that it was relying on Global’s default and was calling on Travelers to perform its obligations under the bond.

What the Court Said

The Court held that the limitation period began on March 14, 2022.

To trigger Travelers’ obligations under the bond, three conditions had to be met:

1. Global was in default under the subcontract;

2. VanMar declared Global to be in default; and

3. VanMar itself was not in default.

The Court found that all three conditions were satisfied. There was no dispute regarding the first and third requirements. With respect to the second condition, the Court concluded that VanMar’s March 14, 2022 letter clearly constituted a declaration of default. As a result, all preconditions under the bond were met by that date, and the limitation period began on March 14, 2022.

The Court rejected VanMar’s argument that additional notice requirements should be implied into the bond. VanMar argued that the bond should be interpreted to require a separate notice to Travelers formally calling on it to perform before Travelers’ obligations were triggered, on the basis that a general contractor does not always rely on a bond for every subcontractor default. The Court disagreed. It held that Travelers’ obligations were triggered once the three express preconditions set out in the bond were satisfied. Interpreting the bond to require a further, discretionary notice from VanMar would allow VanMar to delay making a claim indefinitely, which would undermine both the purpose of the bond and the contractual limitation period.

The Court emphasized that contractual limitation periods exist to provide certainty and finality. Allowing VanMar to postpone notice of its intention to claim would leave Travelers exposed to ongoing uncertainty, with no clear indication of whether or when a claim might be pursued. For these reasons, the Court concluded that it would be commercially unreasonable to interpret the bond in a way that permits claims to be brought without a clear end point.

The Court also held that it is not the role of the courts to rewrite the parties’ contract. It found that the bond was clear and unambiguous and that the parties’ intentions were fully and effectively expressed in its terms. As a result, there was no basis to imply additional terms into the bond.

Takeaways

This decision is a cautionary reminder that obligees, whether owners or contractors, must treat performance bond limitation periods as running strictly according to the bond’s wording. Once a principal is declared in default in a manner that satisfies the bond’s express preconditions, the clock may begin running, even if the obligee continues working with the principal or hopes to resolve the issue without involving the surety. Informal correspondence, status updates, or holding off on formally calling the bond will not pause or delay the limitation period.

Obligees should carefully diarize limitation dates as soon as a default is declared, involve legal counsel early, and make a deliberate decision about whether to pursue a bond claim within the contractual timeline, rather than assuming they can wait until the project fallout is fully known.

Interpreting performance bonds can be complex, and timely legal advice is critical to ensuring limitation periods are properly identified and potential claims are not inadvertently lost. Contact Anthony Burden in Calgary, Ryan Krushelnitzky in Edmonton, or any member of Field Law’s Construction Group for advice.

Link to Decision: VanMar Constructors ON 1028 Inc. v. Travelers Insurance Company of Canada, 2025 ONSC 6959