19731
NOTES
Labour and Material Payment Bonds
In a 1963 Meredith Lecture,’ Me A.J. De Grandpr6, then a prac-
tising member of the Montreal Bar, spoke on claims under perfor-
mance, fidelity and other bonds. He stated that:
… generally speaking a fidelity bond is a contract of insurance, while
a guarantee policy is not a contract of insurance but one of suretyship.
… The surety bonds are not insurance contracts but are purely and
simply contracts of suretyship subject of course to the terms of the agree-
ment but also governed by articles 1929 and following of the Civil Code.
For instance, contractors’ bonds whether bid, performance of labour and
material payment bonds, automobile dealers’ bonds should not be regarded
as insurance policies.2
As part of his lecture Me De Grandpr6 discussed the performance
bond.3 The principal obligation of this kind of bond, he pointed out,
is to guarantee to the owner that his building will be finished for
the price of the construction contract should the general contractor
not complete it. In elaborating on this kind of bond, Me De Grandpr6
remarked:
Another aspect of performance bonds which is important to bear in mind
is that, without a labour and material payment bond, the Surety Company
is not always obligated to pay the outstanding accounts once the contract
has been properly performed. The obligation to pay for labour and material
will persist, under a performance bond, only if there are privileges
entered against the property. Under a performance bond, the Surety
Company is not obliged to indemnify the workmen or suppliers of mater-
ials who have not registered a lien against the property, either because they
have not fulfilled the obligations of the Civil Code relating to the registra-
tion of privileges or because the property is not susceptible of being
affected by privileges. 4
The question to be discussed in this note is whether a labour
and material payment bond is really a contract of suretyship which
permits the application of the principles of articles 1950 and 1959
of the Civil Code.
The question of what a labour and material payment bond is was
recently considered in La Rivi~re Inc. v. The Canadian Surety Co.5
The plaintiff, a hardware supplier, sold certain goods to Goldberg
Inc., a plumbing contractor. Goldberg Inc. had a plumbing sub-
“‘Claims Under Performance, Fidelity and Other Bonds”, The W.C.J.
Meredith Memorial Lectures (1963), 64.
2 Ibid.
3 Ibid., 65-66.
4 Ibid., 67.
5 S.C.M. 755193, Ocober 30 1969.
McGILL LAW JOURNAL
[Vol. 19, No. 3
contract with a general contractor who had itself been engaged to
erect a building for an owner. The plaintiff did not notify the
owner in writing of its undertaking to supply Goldberg Inc. in order
to protect its right of privilege against the owner’s property6 At the
insistence of the general contractor, Goldberg Inc. issued the labour
and material payment bond. With the bankruptcy of its co-
contractant, the plaintiff *sued the bonding company for its unpaid
account.
The bonding company contested the plaintiff’s claim, stating that
it did not come within the terms of the bond. It maintained that the
plaintiff could not enforce the bond because of its failure to give
notice to the owner. The bond in question was in the standard form
in current usage, and provided:
a)
c)
b)
that the subcontractor and the bonding company bound
themselves to the general contractor for the benefit of the
suppliers of the subcontractor to the payment of monies due
by the subcontractor;
that the subcontractor and the bonding company bound
themselves jointly and severally to fulfil the foregoing
obligation;
that if the subcontractor paid its suppliers for all labour
and materials used in the performance of its contract with
the general contractor, then the bonding company’s obliga-
tion would be null and void, otherwise its obligation would
remain in full force subject to certain technical conditions.
The plaintiff maintained that even without a privilege the bond
was operative, it being intended that this kind of bond was to apply
whether or not a privilege existed. The plaintiff further argued that
a bond would have no meaning if the claimant thereunder would
have to subrogate the bonding company in any privilege it might
have, since the very purpose of the bond was to avoid the necessity
of having to enforce a privilege as security. The Superior Court
upheld the bonding company’s position by deciding that a labour
and material payment bond was a contract of suretyship. Put simply,
it held that the plaintiff in this case had a right to be paid the
amount due by enforcing its privilege against the property to which
its materials were supplied. Since it did not do so its contract of
suretyship contained in the bond was deemed to have been termin-
ated and the plaintiff could not be paid under it. The trial judge
added that “even if the bond as it is presently written proves to be
6 Art. 2013(e) C.C.
19731
NOTES
an ineffective device to achieve the practical needs of the construc-
tion trade, that is a matter that is not relevant to this litigation”.7
BatshawJ. reasoned that since the plaintiff had not given the
notice to the owner required by article 2013e C.C., and therefore had
no privileged claim against the owner’s property, it was unable to
subrogate the bonding company in all of its rights accruing to the
supplier against the debtor and the property of the third party to
which it had supplied its materials. Failure on the part of the plain-
tiff to take the necessary steps to preserve its right of privilege thus
caused the suretyship to come to an end.8 This rule was considered
a corollary to that enunciated by article 1950 C.C., which provides
that the surety who has paid the debt is subrogated in all of the
rights which the creditor had against the debtor.
Batshaw,J. began his analysis of labour and material payment
bonds by citing the definition of the contract of suretyship contain-
ed in article 1929(1) C.C. It provides that “[s]uretyship is the act
by which a person engages to fulfil the obligation of another in case
of its non-fulfilment by the latter”. The main provision of the bond
upon which the plaintiff based its case was, as mentioned earlier,
that if the subcontractor had paid its suppliers then the bonding
company’s obligation would be null; if, however, it had not, then the
bond was in force. Batshaw,I. agreed that this was clearly an under-
taking to pay, subject to certain formalities, in the event that the
debtor failed to meet its obligations. He went on to say:
It is difficult to see, therefore, where any valid distinction can be made
between the definition of suretyship contained in the Code and the under-
taking of the Defendant Company in its bond .. .9
and
Bonds of this kind have been called “surety” bonds precisely because
that is the function they fulfil and, as in the present instance, the issuer
has been referred to as “the surety”o
He therefore concluded in dismissing the plaintiff’s action:
… that the contract of suretyship contained in the Defendant’s bond must
be deemed to have been terminated because of the Plaintiff’s inability to
subrogate the Defendant in the legal privilege to which it was entitled in
order to recover payment of the amount due by its debtor.”
While the appeal from this judgment was pending, it caused much
turmoil in the Quebec construction industry. Its effect was to force
7La Rivigre Inc. v. The Canadian Surety Co., S.C.M. 755193, October 30
1969, 6 per BatshawJ.
8sArt. 1959 C.C.
9 Cf. f.n.7, 4.
10 Ibid., 5.
“Ibid., 6.
McGILL LAW JOURNAL
[Vol. 19, No. 3
a supplier or subcontractor to do all that was necessary to preserve
his right of privilege under the Civil Code 12 in order to make a claim
against a bonding company. This in turn caused several problems.
Firstly, if rights of privilege had to be conserved by the requisite
notice to the owner and registration within the legal delays, what
useful purpose did a bond serve? The tradesmen would in all likeli-
hood be paid by the owner of the property subject to the privilege.
Secondly, what would happen if the subcontractor’s contract con-
tained a renunciation of his right of privilege, as is frequently the
case in practice? Similarly, what would be the case if he had signed
a grant of priority of hypothec or a renunciation in favour of the
first mortgage creditor, which he is almost invariably called upon
to do? All branches of government in awarding contracts usually
insist that the general contractor furnish a labour and material
payment bond, since the Crown or Municipal public property is not
subject to the right of privilege. Did this mean that if the contractor
became insolvent the suppliers and subcontractors would have no
claim against the bonding company because they originally had no
right of privilege against the property on which they worked? Finally,
it was usually at the owner’s insistence that his general contractor
obtained a bond, in that the owner did not wish to have his property
burdened with privileges should the contractor meet with financial
difficulties. In the present case the contractor clearly obliged his
subcontractor to issue a bond in order to protect his owner-cus-
tomer’s property from the registration of privileges which would ne-
cessarily result in money being held back from him. Therefore, if in
order to claim under a bond a privilege must still be registered, the
value of the bond would be illusory.
Prior to the La Rivire case, there had been only one judgment
in Quebec on this question. Mr Justice Marcel Crete, then of the
Superior Court, held in Demontigny v. Genial Construction Inc.1 3
_
contrary to La Rivikre –
that a claim lies against a bonding company
even though one has no privilege. He wrote:
Que dire maintenant du recours exercg par les demandeurs contre la
d~fenderesse The Canadian Surety Company?
Entre autres moyens, celle-ci a plaidg que, comme caution, ele dtait libdrde
parce que les demandeurs rdclamants avaient laissd perdre leurs privileges;
& cet 9gard, la ddfenderesse s’est appuyde sur l’article 1959 C.C. lequel se
lit ainsi:
La caution est dichargge lorsque la subrogation aux droits, hypotha-
ques et privieges du crgancier, s’oparer en faveur de la caution.
12 Arts. 2013 ff. C.C.
13 [1970] C.S. 459.
1973]
NOTES
Dans le cas sous dtude, le crgancier ddsignd au contrat du cautionnement
souscrit par The Canadian Surety Company, c’est la commission scolaire;
cette derni~re n’a renoncd & aucun des droits qu’elle pouvait avoir contre
le ddbiteur principal, Genial Construction Inc.; la commission scolaire a
mgme combattu la demande de privilages exercde contre elle de sorte que
la caution ne peut invoquer les dispositions dudit article 1959 C.C. pour
se ddcharger; d’ailleurs, il serait dtrange que ladite d~fenderesse puisse
prdtendre pouvoir exercer, par voie de subrogation, un recours en indem-
nitd contre la commission scolaire, qu’elle s’est prdcisdment engagde a
tenir indemne de reclamations pour I’exdcution des travaux et la fourni-
ture des matdriaux.14
While the La Rivi~re judgment was awaiting hearing before the
Court of Appeal, a number of similar cases came to trial before
various judges of the Superior Court. The first of these was C.
Howard Simpkin Ltd. v. Prudential Assurance Co.,’ 5 decided on
August 26, 1971 by Lalande, J. He analysed the decisions in La
Rivire and Demontigny, and came to the conclusion that he shared
the view expressed in the La Rivire judgment. Since a comparative
study had now been made by one of their colleagues, the next series
of judgments followed the reasoning in Simpkin.1 However, Mitchell,
J., in an elaborately reasoned judgment rendered May 3, 1972, came
to the same conclusion as had Cr6te, J. in Demontigny v. Genial.’7
On September 15, 1972 the La Rivire judgment was reversed by
the Court of Appeal.’8 Rinfret, J., supported by Hyde, J., held that
“les droits hypoth~ques et privileges dont il est question en l’article
1959 C.C., doivent s’entendre de droits, etc., & l’encontre du dibiteur
principal”.9 Casey, J. arrived at the same conclusion but without
referring to the articles of the Civil Code on suretyship. It was also
thought that it would be ‘dtrange’ 20 to permit a subrogated surety to
exercise a recourse against an owner which it had undertaken to
hold “indemne de rdclamation pour l’exdcution des travaux et la
fourniture des matdriaux”2′
14 Ibid., 465.
15 S.C.M. 746049, August 26 1971.
16Simard Beaudry Inc. v. The Travelers Indemnity Co., S.C.M. 8099968,
December 2 1971; Philibert Bddard Ltde v. The Travelers Indemnity Co., S.C.M.
791763, April 25 1972; Val Royal Building Materials Ltd. v. The Prudential
Assurance Co. Ltd., P.C.M. 279854, May 1 1972.
1’J.C. Lauzon Ltee v. The Prudential Assurance Co. Ltd., S.C.M. 804523, May
3 1972.
18 [1973] C.A. 150.
19 Ibid., 152.
20 Ibid., 153.
21 Ibid., 153, quoting from Demontigny et al. v. Genial Construction Inc.,
[1970] C.S. 459, 465 per Crte,j.
McGILL LAW JOURNAL
[Vol. 19, No. 3
In subsequent cases the Superior Court had to consider the judg-
ment of the Court of Appeal. While theoretically able to depart from
this judgment if they wished to do so, 22 the judges of the Court of
first instance were unanimous in accepting it.2 3
The technology used in labour and material payment bonds is
unquestionably that of suretyship. It must be remembered that the
contract of suretyship or cautionnement was originally a civil con-
tract where one person guaranteed the performance of the obligation
of another person out of motives of affection or friendship. He was
not paid for exposing himself to the fulfilment of the debtor’s obliga-
tion. He engaged in an act of liberality or generosity. The courts and
the law consequently extended to him the utmost protection. He
could not.be held liable on an implied engagement and his obligation
could not be extended by construction or implication beyond the
precise terms of the instrument by which he obliged himself. Conse-
quently, it was the practice of the courts to free the surety from his
obligation on technical grounds or because of minor changes in the
contract between the creditor and the principal or slight variations
in the performance of the contract, whether prejudical to the surety
or not. This resulted in the belief that the surety was a “favourite of
the law”, and his contract strictissimi juris.
As a concomitant of the growing complexity of modern business
there has developed a commercial bonding business which has been
carried on principally by insurance companies. These companies
issue labour and material payment bonds, completion bonds and
other types of guarantees which secure for the creditors either the
execution of the obligation of the debtor by the surety or the in-
demnification for damages suffered in the event of default on the
part of the debtor. Such bonds or guarantees are issued in consider-
ation of the payment of a premium.
When litigation arising out of such compensated surety bonds
first came before the Courts, it was dealt with in the same manner
as the traditional accommodation suretyship or cautionnement be-
cause of the similarity in the language and in the obligations of the
parties. However, in the last number of decades a change has taken
place. It has been realized that they are made for the purpose of
22See Friedman, Stare Decisis at Common Law and Under the Civil Code
of Quebec, (1953) Can. Bar Rev. 724, 746.
2 3 La Cie. Canadienne Grandwood de L’est Ltde v. The Travelers Indemnity
Co., S.C. Beauharnois 12065, October 10 1972; Outremont Plumbing and Heating
Co. v. The Aetna Casualty and Surety Co., S.C.M. 05-814147-71, December 211972;
Spancrete Ltd. v. The Travelers Indemnity Co., S.C. Beauharnois 12019, April
4 1973.
1973]
NOTES
gain to the surety in language selected by him, and that consequently
the traditional favoritism accorded the accommodation surety is
neither required nor justifiable. The courts were solicitous for the
accommodation surety because he was overtaken in misfortune re-
sulting from his having accommodated another. A compensated
surety would solicit the sale of its protection for purppses of gain,
and he would assume that losses would occur for which he must pay.
In these circumstances, it has been held consistently that unless an
injury is shown to result, the compensated surety will not be
liberated on technical grounds.
American doctrine and jurisprudence have attempted to deter-
mine the exact nature of the compensated surety contract, and the
conclusion has been reached that it is either a contract sui generis
or a contract in the nature of, or similar to, an insurance policy;
and that the rules to be applied to it are similar to those of insurance
contracts. The contract must therefore be construed most strongly
against the surety or bonding company. In fact, performance bonds
and other contracts of suretyship issued by surety companies having
the right to furnish security for hire or compensation have frequently
been treated in the same manner as contracts of insurance. The
courts have come to construe the obligations of the compensated
surety quite strictly, like those of an insurer.2 4 It is also to be noted
that while a labour and material payment bond has characteristics
of suretyship and of insurance, it also has certain characteristics of
a ‘stipulation pour autrui’.25 This view was accepted in perhaps the
first in the series of Quebec cases in which the argument was raised.2 6
In that case the Court enforced the payment bond in favour of the
owner of a building who had personally paid the claims of a number
of privileged creditors whose accounts had not been looked after
by the general contractor. As has been mentioned, however, this view
was implicitly rejected in La Rivi~re Inc. v. The Canadian Surety Co.
From the foregoing, it appears that the ‘suretyship’ argument
invoked by the bonding companies seems to be settled for the mo-
ment. A number of the cases referred to herein may still be appealed.
In the La Rivire judgment, one of the judges of the Court of Appeal
took the unusual step of commenting on the cases pending before
the court to which opposing counsel had referred. He stated that he
24 Simpson, Handbook on the Law of Suretyship (1950), 101-112. Corpus Juris
Secundum, Vol. 72, 583, 591, 605, 606. Appleman, Insurance Law and Practice
(1943), Vol. 10, 80.
25Art. 1029 C.C.
20Tucker v. The Federation Insurance Co. of Canada, S.C.M. 371161, July 19
1962.
McGILL LAW JOURNAL
[Vol. 19, No. 3
endorsed the view in the Demontigny case but did not accept the
others.
In addition to the reasoning expressed by the Court of Appeal in
La Rivi~re, the position may be taken that a labour and material
payment bond is not a contract of suretyship at all but a contract
sui generis to which the articles of the Civil Code on suretyship
should not be applied. On the practical level, it is interesting to note
that bonding companies seem ready now to rewrite their traditional
bonds so that a valid privilege is no longer a prerequisite to a claim
under a bond.
Nathaniel H. Salomon*
* Of the Montreal Bar, practising with the firm of Chait, Salomon, Gelber
and associates.
