On July 1, 2018, the modernization provisions of the Construction Act came into effect. In addition to various changes to the Construction Act which include Prompt Payment, section 85.1 introduced mandatory surety bonds for “public contracts” if the contract price is $500,000 or more. Subsections 85.1(4) and (5) provide a prescribed form for labour and material payment bonds and performance bonds.
Form 32 – Performance Bond
A performance bond is a form of guarantee that the bonded contractor will perform its obligations under the contract. The Form 32 Performance Bond was drafted to standardize and speed up the Surety Claims handling process.
Before an owner can proceed to make a claim under a Form 32 Performance Bond the following four conditions must be met:
- the contractor is, and is declared by the owner to be, in default under the contract;
- the owner has given notice to the contractor of a default;
- the owner has performed its obligations under the contract; and
- the owner has agreed to pay the balance of contract price to the surety or as directed by the surety.
The process for making a claim on a Form 32 performance bond is as follows (note – this process is the main difference between the Form 32 bond and the standard CCDC Performance bond):
- An owner may request a pre-notice meeting with the surety.
- This does not constitute a notice under the bond or under the contract and is not a precondition to the giving a notice. Upon receipt of a request for a pre-notice meeting, the surety must propose a mutually convenient time for a meeting between the contractor, owner and the surety.
- This meeting must take place within 7 business days of the surety’s receipt of the owner’s request, unless otherwise agreed to by all parties. Importantly, the pre-notice meeting is without prejudice and no information provided by a party at this meeting will constitute a waiver or compromise of its rights and obligations.
- An owner may make a demand on a surety by giving written notice to the surety.
- Schedule A to Form 32 provides the form of notice to be given by the owner to the surety. Several notable statements are included in the form of notice, including a representation that the owner has honoured its obligations under the bonded contract.
- In addition, Schedule A includes a list of documents and information which the owner may include with the notice, including, amongst others, a copy of the bonded contract, original and latest schedule, specifications and drawings, reconciliation of all invoices, accounting of all payments made and holdback retained, copies of claims for lien or legal proceeding received on the contract. Although the owner’s provision of these documents is optional, the owner is encouraged to provide any information or material that may expedite the investigation.
- Post-notice conference is convened to discuss mitigation work.
- Upon receipt of a notice, the surety must propose a face-to-face meeting, telephone call or meeting with the owner within 5 business days. The post-notice conference is convened to discuss what work must be done while the surety is conducting the investigation in order to effectively mitigate the costs the owner will seek to recover under the performance bond (defined as mitigation work).
- The owner must allow the surety reasonable access to the work for the purpose of monitoring its progress. Any such mitigation work must be undertaken without prejudice to the rights of the owner, the contractor or the surety under the contract, the bond, or the applicable law. Costs for mitigation work are to be borne by the owner. The owner may seek to recover this cost from the surety, but must keep separate records of all amounts related to mitigation work.
- The surety acknowledges, investigates and responds.
- If the owner delivers a notice prior to a pre-notice meeting, the pre-notice meeting is deemed to be retracted. The surety must promptly initiate an investigation, using its best efforts to determine if the conditions precedent have been satisfied and to determine liability under the bond.
- Unlike the previous forms used by the surety industry, Form 32 requires the surety to acknowledge the notice within 4 business days following receipt. To help sureties meet the short deadline, Schedule B of Form 32 includes a template acknowledgement.
- The surety must provide the owner its written response within 20 business days after receipt of a notice, unless otherwise agreed to between the surety and the owner. The surety’s response must indicate whether the surety accepts liability under the bond or, if the surety is unable to determine whether one or more of the conditions precedent has been satisfied, the surety may propose a process for collaborating with the owner to complete the work.
- If the owner requests a meeting to discuss the status of the investigation, the surety must meet with the owner within 5 days following the receipt of the request.
- The owner has a right to do necessary interim work.
- During the investigation, the owner may undertake “necessary interim work”, which is defined as actions necessary to 1) ensure public or worker safety, 2) preserve or protect the work under the contract from deterioration or damage; and 3) comply with applicable law.
- The owner must give written notice to the surety within 3 business days of the commencement of the necessary interim work.
- The owner must allow the surety reasonable access to the work for the purpose of monitoring its progress. Any such necessary interim work must be undertaken without prejudice to the rights of the owner, the contractor or the surety under the contract, the bond, or the applicable law.
- Lastly, the surety must reimburse the owner for the reasonable costs incurred in undertaking such necessary interim work.
If the surety accepts liability, the surety may select one of the following options:
- remedy the default;
- complete the contract in accordance with terms and conditions;
- obtain a bid for submission to the owner for completing the contract; or
- pay the owner the lesser of the bond amount, or without duplication, the owner’s direct expenses plus the cost of completion of the contract less the balance of contract price (discussed in greater detail below).
In the event a surety is liable, the surety must pay the owner’s direct expenses, which is broadly defined by Form 32 to include “reasonable professional fees”, “reasonable external legal fees”, and “reasonable, miscellaneous and out-of-pocket expenses” incurred by the owner to complete the contract which would not have been incurred but for the default of the contractor. In addition, “direct costs” incurred as a result of extended duration of the contract, reasonable costs of necessary interim work and mitigation work, as well as any additional fees agreed to by the obligee, the principal, and the surety, all fall into the definition of “Owner’s Direct Expenses”.
Form 32 does clarify, however, that subject to an agreement to the contrary, the surety will not be liable under the bond for liquidated damages under the contract, any damages caused by delayed performance or non-performance of the contractor (except as provided for in Form 32), or any indirect or consequential damages.
With any questions about the Form 32 Performance Bond or surety bonds in general please do not hesitate to Contact FCA Surety.