SAC Enhanced Bond Forms - 2021 Versions

The Surety Association of Canada (SAC) is pleased to introduce updated and improved bond forms for immediate use by owners and contractors across the country.

CLICK HERE to access a Primer for Non-Ontario SAC Members (log-in is required).

Background

The industry standard surety bonds have always been those published by the Canadian Construction Documents Committee (CCDC). These instruments have the advantage of having the buy-in and support of various sectors of the industry. Unfortunately, the current CCDC bond forms have become hopelessly out of date. The template documents were last modified in 2002 and while CCDC is working on updates, there is currently no target date for publication of these revisions.

From our perspective, working with industry standards that are almost 20 years old was simply unacceptable and SAC believes that it is essential to provide the marketplace with updated options that reflected the new realities of the Canadian construction and surety industries as we move into the third decade of the 21st century.

In fact, this is not the first time that SAC has acted independently to publish updates/improvements to the standard CCDC bond documents. In 2012 we released what became known as the SAC Process Enhanced Performance Bond. This instrument was the first to include expanded clarification and responsiveness provisions and introduced the concepts of a pre-default meeting, emergency work and mitigation work, among other additions. More details about the 2012 SAC Performance Bond can be found on the SAC website HERE.

In early 2018, as SAC was working with the province of Ontario to draft the prescribed performance bond form for its newly passed Construction Act, we began with the SAC bond as the starting template and added additional enhancements around clarity, responsiveness, and communication. We also created a companion Labour & Material Payment Bond with similar enhancements that provided claimants and owners with more certainty around the claims process. These new Ontario-specific forms are the current state-of-the-art and are prescribed for all public work in the province with a contract value greater than $500,000. Additional information about these Ontario Act instruments can be found on the SAC website HERE.

The new 2021 SAC bond forms represent the 3rd generation in the evolution of leading-edge surety instruments. They attempt to build on the standards established by their predecessors and introduce a few more innovations and updates. The new Bid Bond begins with the existing CCDC standard and brings in a few changes, mostly of a clarifying nature. The Performance and Payment bonds are based on the more up-to-date Ontario bond templates and include several key changes. The objective here was two-fold:

1. Remove those references that are specific to Ontario or its governing legislation and ensure that the documents are generic and can be used in any jurisdiction across the country; and,
2. Incorporate provisions that respond to developments in the construction and surety industries since the publication of the Ontario bonds in 2018 (e.g., the Supreme Court decision in Bird v Valard).

Note that all of the changes to all three bonds were being contemplated by CCDC as part of its update process. It is anticipated that once CCDC finalizes its changes, these will once again become the industry standard.

SAC Bid Bond – 2021 Version

Unlike the Performance and Payment bonds, the Bid Bond has not undergone any changes or updates since the last publication of CCDC 220 in 2002. Hence the new SAC document has used the existing CCDC standard as its starting template. Among the key changes introduced:

• Elimination of Tender Date: Under the current version of CCDC 220, a space was left for insertion of the “Tender Date”. Over the years, this has created a great deal of confusion among users of the bond across the country as to whether this is synonymous with “closing date”. This confusion has led some owners to demand that the surety issue an addendum to the bond each time the tender closing was extended, and, in some cases, it resulted in tenders being disqualified. To address this concern, the revised bond follows the approach taken in the U.S. where the requirement to enter a Tender Date has been simply eliminated.
  
  During the discussions, it was pointed out that problems could arise should there be more than one tender submitted to the same Obligee at the same time; a not uncommon occurrence. In order to remove this ambiguity, the revision now includes parenthetical instructions around the blank for the job description that reminds users to enter the project name, full project description, location, and any other distinguishing details of that particular tender.
   
• Bonds vs Security: The binding condition of the 2002 Bid Bond obligates the Principal to “… (enter) into a formal contract and (give) the specified security…” (emphasis added). The problem with this language is that a surety would not be in a position to provide such a guarantee in instances where alternative forms of security were required (e.g., a bank ILOC). The new wording calls for the Principal to “(Give) such bond or bonds as may be specified in the Obligee’ s bid documents …“.
   
• Validity Period: The proposed bond introduces the concept of the “Validity Period” to clarify the length of time a bond would remain enforceable after tender closing. Members had complained that the concept was somewhat ambiguous in the current form and the revised draft has attempted to provide some clarification.
  
  As a condition precedent, the bond requires the Principal’s bid to be accepted within the Validity Period which is defined as “…the time period prescribed in the Obligee’s bid documents for acceptance of the bid, or, if no time period is specified in the Obligee’s bid documents, sixty (60) calendar days from the closing date of the bid.”. The bond allows for extensions of the Validity Period, provided that the Surety’s consent is acquired for any such extensions exceeding 60 days.
  
  
• Contact Details: The signature provisions require the contact coordinates of the three parties to the bond to be included. This is the same approach found in the performance and payment bond forms and brings the instrument into conformity with these two documents.
  
  
• Québec Coverage Clause: In the second last paragraph which deals with suit limitation, a sentence has been added to ensure that the “coverage period” of one year is set out. This ensures compliance with the Québec Civil Code.

SAC Performance Bond – 2021 Version

The SAC 2021 Performance Bond is based upon the Form 32 instrument that is prescribed under the Construction Act of Ontario. The new bond incorporates most of characteristics and enhancements found in Form 32 and seeks to retain the key features of clarity, responsiveness and enhanced communication between the Surety and the Obligee.

Again, more details on the Ontario bond form can be found on the SAC website, but the new SAC instrument incorporates the essential components that document, including:

• Provisions allowing more and better communication and collaboration between the Owner and the Surety. For example:
  • A Pre-Notice Meeting to address potential issues that could lead to a default. This is convened only at the request of the Owner and must take place within 7 business days of the Owners’ request to the Surety (Section 2).
  • A Post-Notice Conference to determine what action needs to be taken to ensure continuity of the project and mitigation of costs during the Surety’s investigation (Section 5).
     
• Enhanced flexibility for Owners as they seek to address time-sensitive priority issues that can not wait for the conclusion of the Surety’s investigation:
  • Necessary Interim Work (formerly known as “Emergency Remedial Work’) which allows an Owner to address urgent issues surrounding public safety and to prevent damage to, or deterioration of the work (Section 4).
  • Mitigation Work (formerly known as “Remedial Work”) which allows an Owner to undertake non-emergency remedial work required to minimize or eliminate work stoppages and keep the job going without losing their rights under the bond (Section 5).
    
    
• Strict timelines for the Surety to acknowledge receipt of Notice of Claim and respond to that Notice with its position regarding the acceptance of liability (Sections 3.2 and 3.3).
  
  
• More clarity around what is covered by the bond and what is not (Paragraph 7).
  
  
• Features designed to expedite and streamline the handling of claims by prescribing a specific format for Claims Notices and Surety’s responses. This is intended to bring uniformity to the exercise and minimize or eliminate the need to prolong the claims process by asking for additional or more complete information. (Schedules A, B and C).

Along with those key features that have been retained in the new bond forms, there have also been several important changes that attempt to respond to changing market conditions and ensure that the bond is suitable for use outside of Ontario.

• Removal of Ontario-specific References: The Form 32 template was created for use strictly in the province of Ontario and, more specifically, to respond to the legislative environment created by that province’s Construction Act. The SAC 2021 Performance Bond has removed the Ontario-specific references and replaced them with language that would be more generally applicable in other jurisdictions across the country. These changes include:
  • The addition of language in Section 9.2 which allows for the possibility that a Labour & Material Payment Bond may not be in place on the bonded contract.
  • Removal of various references to “The Construction Act” or “The Act” in the text of the bond and schedules.
  • Changes in Sections 12.1, 12.2 and 14 which reference Ontario specific circumstances.
    
    
• Ensuring Compliance in Québec: The addition of Section 12.3 (the “Québec Clause”), attempts to address the coverage period issue as set out in the Québec Civil Code and ensures the bond’s applicability in that province.
  
  
• Nullifying the Impact of HOOPP v The Guarantee: In November 2019, the Alberta Court of Appeal handed down its ruling in HOOPP Reality Inc. v The Guarantee Company of North America. The ruling effectively cast doubt onto one of the key principles of suretyship: That a surety is a secondary guarantor, and its liability only arises from primary liability of our Principal. More information on this case and its implications can be found HERE.
  
  The SAC 2021 Performance Bond has added language to address the impact of HOOPP v Guarantee and re-establish the principle that the Surety’s liability under the bond is secondary to that of its Principal. These changes are found in two places:
  • In the opening paragraph which has been reworded to strengthen the joint and several nature of the obligation.
  • Section 10.2 where language has been added to clarify the secondary obligation principle.

SAC Labour & Material Payment Bond – 2021 Version

The new SAC 2021 Labour & Material Payment Bond, like its companion Performance Bond, was created using the Ontario bond wording (Form 31) as its template. Form 31 also introduces new features designed to bring more clarity and responsiveness to the claims process and these additions have been brought into the new SAC standard instrument.

Again, the details of the Ontario Payment Bond are provided on the SAC website. Some of these mirror those on the Performance Bond (e.g., Schedules to standardize Claims Notices, Surety’s acknowledgement, and response) but there are also a couple of interesting and innovative components.

In order to make a claim, a Claimant must provide notice to the Surety using the prescribed form. While this is similar to the requirement set out in the performance bond, it is a departure from the existing standard CCDC 222 Payment Bond which requires the Claimant to initiate an action under the bond.

A second key feature is found in the timelines imposed on the Surety under Paragraph 8 the bond. As in the Performance Bond, the Surety has a fixed time within which to acknowledge a notice of Claim (4 days) and to deliver its response (10 days after receiving supporting documentation). However, an added provision calls for the surety, in its response, to provide the details on any amounts that are in dispute and reasons for that dispute. Paragraph 9 then requires the Surety to pay any undisputed amounts within 10 days.

As is the case with the Performance Bond, it is extremely important to note the changes/additions/deletions that were made to the Ontario bond forms when crafting the new SAC 2021 standard. Some of these changes are simple, such as the removal of the Ontario-specific provisions and the addition of a Québec Clause (Paragraph 13).

However, the nature of the obligation and some of the recent developments in surety jurisprudence have necessitated several more substantive changes.

• One Tier Only: The Ontario Act bond extended partial protection to second-tier sub-contactors and suppliers by a provision that restricted this protection to “…such amounts as the Contractor would have been obligated to pay the Sub-subcontractor under the Construction Act…”. The specifics of the lien and holdback provisions under the Ontario Act made this workable and allowed for some protection for Claimants. Unfortunately, this does not work in other jurisdictions where the legislation may have different approaches to lien/holdback rights. Indeed, trying to export this model to other provinces would likely have required a different wording for each jurisdiction.
  
  The new SAC bond follows the CCDC model and restricts coverage to first-tier Claimants only. Specifically:
  • All references to “sub-subcontracts” and “sub-subcontractors” have been removed in Paragraphs 1, 2, 7 (a), 8 and 12.
  • Section 7 of the Ontario Bond dealing with response to a sub-subcontractors’ claim has been removed.
  • Schedule B of the Ontario Bond has been removed.
    
    
• The Trust vs Non-Trust Jurisdictions: The current CCDC bond which has been in common use for almost half a century is set up as a “Trustee Form” that requires the Obligee to assume the role of trustee on behalf of the subcontractor/supplier Claimants. This is due to a legal principle known as the “third party beneficiary rule”, which holds that no one can bring action under a contract or agreement that they are not a party to. By assuming the role of trustee under the bond, the Obligee can bring action on behalf of the unpaid claimants.
  
  The Construction Act of Ontario gets around the third-party beneficiary rule by including language (Section 85.2) which explicitly allows a Claimant to claim against the bond directly, thereby negating the necessity for trust language.
  
  The SAC 2021 Payment Bond is designed to be used in all jurisdictions, most of which will not permit claims from third party Claimants. It incorporates a work-around found in a new Paragraph 3 which has been added to bring back trust provisions in those jurisdictions where the third-party beneficiary rule applies.
  
  
• The Valard Effect: Related to the issue of trustees in payment bonds is the impact of the February 2018, Supreme Court of Canada decision in Valard Construction Ltd. v Bird Construction Company. The ruling held that under a trustee bond form, the designated trustee would assume all the responsibilities of a traditional trustee; with its obligations not limited to the more narrowly defined duty of acting as a Claimant’s proxy; as was intended under the bond.
  
  In the SAC 2021 payment bond, a new Paragraph 4 has been added to nullify the fallout from the Valard decision. This seeks to re-establish the principle that any trust created under the bond will be a “bare” trust and not include the traditionally onerous trust obligations.
  
  
• Adjudication: Paragraphs 9 and 10 of the Ontario Bond have been removed as these apply to the adjudication provisions in the Ontario Act.