Case Overview

This case involves a construction project in Ontario. BDA was the general contractor. BDA hired High Tech as an electrical subcontractor, with a requirement that High Tech provide a performance bond.  Westport was the surety on this performance bond, BDA was obligee, and High Tech was principal. Consistent with standard surety practice, High Tech also executed a general indemnity agreement (GIA) in favour of Westport, containing standard language indemnifying Westport for all losses, damages, charges, expenses, claims, judgments, demands and liabilities.

BDA and High Tech had a dispute, leading to BDA making a performance bond claim. In response to that bond claim, Westport paid advances to BDA of $340,000 and entered into a Mitigation Agreement. The Mitigation Agreement specified that Westport was entering into the agreement having not completed its investigation and that the Mitigation Agreement was subject to a full reservation of rights under the Bonds and law. The Mitigation Agreement provided that if Westport denied liability at any time, BDA would not be entitled to any further advances and would have to reimburse and indemnify Westport for any amounts paid.

As a result of the dispute, High Tech commenced an adjudication, which the Ontario Dispute Adjudication for Construction Contracts (ODACC) heard. In the adjudication, BDA was ordered to pay High Tech $316,960. When Westport learned of the ODACC decision, it advised BDA that:

1. High Tech was not in default under the subcontract, and therefore BDA was not entitled to make a claim under the bond.
2. No further payments to BDA would be made, and Westport asked to be reimbursed for all payments made thus far.
3. BDA should not release the adjudication award to High Tech, based on the GIA terms granting Westport priority over any funds owed to High Tech.

BDA’s counsel agreed to hold the funds owed to High Tech in trust, due to the competing claims to entitlement to those funds as between High Tech and Westport. Westport sought a summary determination directing the adjudication funds to be paid to it immediately, or alternatively paid into court.

The Court’s Decision

The court found there was an Event of Default by High Tech (as defined in the bond), such that Westport accordingly had a security interest over the adjudication funds and priority to those funds over High Tech due to provisions in the GIA. However, Westport had not proven an indemnity loss large enough to entitle it to immediate payment of the funds. Due to the multiple ongoing litigation matters between the parties, with an uncertain outcome, the funds were ordered to be held in court until a final determination could be made between all parties. The court went through the following analysis to reach this conclusion.

1. The GIA:

The GIA between High Tech and Westport stated that an Event of Default includes any alleged breach of a bonded contract. BDA claimed High Tech failed to complete certain demolition work, among other things, in accordance with the contract schedule. As a result, BDA sent a Notice of Breach to Westport. BDA's Notice of Breach constituted an Event of Default under the GIA, because it was an alleged breach that could "expose Westport to loss, cost or expense”. The court held that the GIA was sound and unambiguous.

2. Westport’s Security Interest

Similarly, the Court noted that the GIA was clear that any funds owed to High Tech were subject to a security interest and impressed with a trust in favour of Westport. Any such funds included funds owed to High Tech pursuant to an adjudication award.

3. The ODACC Determination

Even though the ODACC determination held that funds were owed and payable to High Tech, the policy underlying these provisions of the Construction Act does not mean that a subcontractor (such as High Tech) who is awarded amounts via adjudication does not need to comply with the underlying GIA that it entered into in order to obtain a bond and be awarded the bonded subcontract. Otherwise, sureties may be unwilling to issue bonds if the underlying security they are granted cannot be enforced.

4. Westport’s Immediate Payment

While Westport has a security interest over the adjudication funds, as well as priority over High Tech to those funds, there was not yet finality in the various proceedings among the parties. This would impact both the entitlement of Westport to enforce its security, as well as the quantum of any loss. Westport, BDA and High Tech were involved in litigation concerning who had breached the BDA/High Tech subcontract, with the parties seeking damages from each other on a number of different bases. The court held that there were triable issues in that litigation, such that the ultimate liability of BDA and High Tech to each other was uncertain. By extension, the extent to which Westport was owed money was also uncertain. As such, the court directed that the adjudication funds be held in court until those proceedings are finalized.

Takeaways

This case highlights the importance of understanding and complying with indemnity agreements. When such an agreement is in place, the surety's rights are strongly protected, even if the surety’s claim is with respect to priority over an adjudication award. Surety bonding allows subcontractors to obtain high value work, but the underlying indemnity agreements needed to obtain that bonding will be upheld by a court.

As surety bonding and priority over disputed funds is a nuanced legal area, it is always best to consult a lawyer for assistance. Please contact Anthony Burden in Calgary, Ryan Krushelnitzky in Edmonton, or any member of Field Law’s Litigation Group for guidance and assistance in this area.  

Link to decision: Westport Insurance v. BDA Inc., 2024 ONSC 5450