The 20 Minute Bond Lecture

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The 20 Minute Bond Lecture

• Duncan W. Glaholt
• Glaholt LLP

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Q. What is a Bond?
But It has real sticking power
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Q. What is a Bond?
But It is a sophisticated instrument
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Q. What is a Bond?
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A Bond is

• A piece of paper
• issued under the seal of a surety company
• used in the construction industry
• required by project financiers
• that most people think is worthless

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Five Key Cases

• 1. Citadel General Assurance Co. v.
  Johns-Manville Canada Inc., 1983 1 S.C.R. 513
• 2. Thomas Fuller Construction Co. (1958) v.
  Continental Insurance Co., 1973 3 O.R. 202
  (H.C.)
• 3. Elance Steel Fabricating Co. v. Falk Bros.
  Ind. Ltd., 1989 2 S.C.R. 778
• 4. Paul DAoust Construction Ltd. v. Markel
  Insurance Co. of Canada, 2001 3 S.C.R. 744
• 5. Whitby Landmark Development Inc. v.
  Mollenhauer Construction Ltd., 2003 O.J. No.
  4000 (C.A.)

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Two Key Books

• Scott and Reynolds on Surety Bonds (Toronto
  Carswell, 2003)
• Rowlatt on Principal and Surety, 5th edition
  (London Sweet Maxwell, 1999)

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Q. Is a Bond Just a Piece of Paper?

• A. No, it is much more than just a piece of
  paper.

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Paul DAoust Construction Ltd. v. Markel
Insurance Co. of Canada (1999), 45 C.L.R. (2d) 65
(Ont. C.A.), affd 2001 3 S.C.R. 744

• A bond is simply a deed (a deed being a
  document in writing on paper which is signed,
  sealed, and delivered) whereby one person
  undertakes to pay a specified sum of money to
  another, either immediately or at a future date.

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Paul DAoust

• If a deed is not delivered, it is not
  effective. In Re Sammon, at p. 724, Morden J.A.
  held as follows
• In order that a deed shall be effective it
  must be "delivered", that is to say the party
  whose deed the document is expressed to be,
  having first sealed it, must by words or conduct
  expressly or impliedly acknowledge his intention
  to be immediately and unconditionally bound by
  the expressions contained.
• To be effective a deed, and thus a bond, must be
  delivered.  I can see no reason to depart from
  this settled law.

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Q. Used in the Construction Industry?
Contracts
ss. 4 5
Performance Payment
HB
Bonds
Liens
Lien Bonds
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Q. Required by Project Financiers?

• Uniquely North-American phenomenon
• Thought to be a smart risk management tool
• Like all guarantees, gives stakeholders a warm,
  fuzzy feeling

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• Cheaper rate than letter of credit, more
  expensive absolute cost
• Call on letter of credit is cheap, produces cash.
  Call on surety bond is expensive, produces
  litigation
• Cheaper than credit insurance?

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Q That Most People Think is Worthless?

• A Wrong

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• What People Get
• Filter function of underwriting process
• Activities of skilled adjusters
• Surety-financed recoveries and resolutions
• Calls on indemnitors, pressures to settle
• Mediation function formally, informally
• Redistribution of wealth, nationally

• What People See
• Demands for Information
• Delay
• Denial
• Litigation

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The Future

• New CCDC
• Bond Forms

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CCDC 220 Bid Bond

• 1979 60 days to award contract
• 2002 Whatever time is in bid document

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CCDC 220 Bid Bond

• 1979 Had to sue within 6 months of bond date
• 2002 7 months

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CCDC 221 Performance Bond

• 1979 - Usual options
• Rectify default
• Pay penal sum
• Completion by surety
• Completion by new contractor at expense of surety
  as work progresses

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CCDC 221 Performance Bond

• 2002 New Option
• Pay difference between contract price and
  proposed cost of completion less balance of
  contract price

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CCDC 221 Performance Bond

• 1979 Limitation 2 years from final payment
  falling due
• (i.e. never)

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CCDC 221 Performance Bond

• 2002 Limitation 2 years from earlier of
• -substantial performance
• - declaration of default
• (i.e. consistent with new Limitations Act)

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CCDC 222 Payment Bond

• 1979 CCA Rental Rates applied
• 2002 Whatever
• (i.e. prevailing market rates in place of work)

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Surety Statistics

• Year Intake Output Loss Ratio
• ,000 ,000 ,000
• 2000 195,895 43,821 22
• 2001 215,189 91,541 43
• 2002 238,068 92,084 39
• (Courtesy of Robert Dempsey, P.Eng., The
  Guarantee Co. of North America)

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The End