The 20 Minute The 20 Minute Bond LectureBond Lecture

Duncan W. GlaholtDuncan W. Glaholt

Glaholt LLPGlaholt LLP

Q.: What is a Bond?Q.: What is a Bond?

But:

It has real sticking power

Q.: What is a Bond?Q.: What is a Bond?

But: It is a sophisticated instrument

Q.: What is a Bond?Q.: What is a Bond?

A Bond is:A Bond is:

A piece of paper A piece of paper

issued under the seal of a surety issued under the seal of a surety companycompany

used in the construction industry used in the construction industry

required by project financiers required by project financiers

that most people think is that most people think is worthlessworthless

Five Key CasesFive Key Cases

1. 1. Citadel General Assurance Co. v. Johns-Citadel General Assurance Co. v. Johns-Manville Canada IncManville Canada Inc., [1983] 1 S.C.R. 513., [1983] 1 S.C.R. 513

2. 2. Thomas Fuller Construction Co. (1958) v. Thomas Fuller Construction Co. (1958) v. Continental Insurance CoContinental Insurance Co., [1973] 3 O.R. 202 ., [1973] 3 O.R. 202 (H.C.)(H.C.)

3. 3. Elance Steel Fabricating Co. v. Falk Bros. Elance Steel Fabricating Co. v. Falk Bros. Ind. LtdInd. Ltd., [1989] 2 S.C.R. 778., [1989] 2 S.C.R. 778

4. 4. Paul D’Aoust Construction Ltd. v. Markel Paul D’Aoust Construction Ltd. v. Markel Insurance Co. of CanadaInsurance Co. of Canada, [2001] 3 S.C.R. 744, [2001] 3 S.C.R. 744

5. 5. Whitby Landmark Development Inc. v. Whitby Landmark Development Inc. v. Mollenhauer Construction LtdMollenhauer Construction Ltd., [2003] O.J. No. ., [2003] O.J. No. 4000 (C.A.)4000 (C.A.)

Two Key BooksTwo Key Books

Scott and Reynolds on Surety Scott and Reynolds on Surety Bonds (Toronto: Carswell, 2003)Bonds (Toronto: Carswell, 2003)

Rowlatt on Principal and Surety, Rowlatt on Principal and Surety, 55thth edition (London: Sweet & edition (London: Sweet & Maxwell, 1999)Maxwell, 1999)

Q.: Is a Bond Just a Q.: Is a Bond Just a Piece Piece of Paper?of Paper?

A.: No, it is A.: No, it is muchmuch more than just a more than just a piece of paper.piece of paper.

Paul D’Aoust Construction Paul D’Aoust Construction Ltd. v. Markel Insurance Co. Ltd. v. Markel Insurance Co. of Canada of Canada (1999), 45 C.L.R. (1999), 45 C.L.R. (2d) 65 (Ont. C.A.), aff’d (2d) 65 (Ont. C.A.), aff’d [2001] 3 S.C.R. 744:[2001] 3 S.C.R. 744:

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

Paul D’Aoust :Paul D’Aoust :

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

ss. 4 & 5Performance

& Payment

Bonds Lien Bonds Liens

Contracts

HB

Q.: Used in the Construction Q.: Used in the Construction Industry?Industry?

Q.: Required by Project Q.: Required by Project Financiers?Financiers? Uniquely North-American Uniquely North-American

phenomenonphenomenon Thought to be a smart risk Thought to be a smart risk

management toolmanagement tool Like all “guarantees”, gives Like all “guarantees”, gives

stakeholders a warm, fuzzy stakeholders a warm, fuzzy feelingfeeling

Cheaper rateCheaper rate than letter of credit, than letter of credit, more more expensive absoluteexpensive absolute cost cost

Call on letter of credit is Call on letter of credit is cheapcheap, , produces cash. Call on surety produces cash. Call on surety bond is bond is expensiveexpensive, produces , produces litigationlitigation

Cheaper than credit insurance?Cheaper than credit insurance?

Q: That Most People Q: That Most People Think is Worthless?Think is Worthless?

A: WrongA: Wrong

What People SeeWhat People See

1.1. Demands for Demands for InformationInformation

2.2. DelayDelay

3.3. DenialDenial

4.4. LitigationLitigation

What People GetWhat People Get

1.1. Filter function of Filter function of underwriting processunderwriting process

2.2. Activities of skilled Activities of skilled adjustersadjusters

3.3. Surety-financed Surety-financed recoveries and recoveries and resolutionsresolutions

4.4. Calls on indemnitors, Calls on indemnitors, pressures to settlepressures to settle

5.5. Mediation function Mediation function formally, informallyformally, informally

6.6. Redistribution of Redistribution of wealth, nationallywealth, nationally

The FutureThe Future

New CCDC New CCDC Bond FormsBond Forms

CCDC 220 – Bid BondCCDC 220 – Bid Bond

1979 – 60 days to award contract1979 – 60 days to award contract

2002 – Whatever time is in bid 2002 – Whatever time is in bid documentdocument

CCDC 220 – Bid BondCCDC 220 – Bid Bond

1979 – Had to sue within 6 1979 – Had to sue within 6 months of bond datemonths of bond date

2002 – 7 months2002 – 7 months

CCDC 221 – CCDC 221 – Performance BondPerformance Bond

1979 - Usual options:1979 - Usual options: Rectify defaultRectify default Pay penal sumPay penal sum Completion by suretyCompletion by surety Completion by new contractor at Completion by new contractor at

expense of surety as work expense of surety as work progressesprogresses

CCDC 221 – CCDC 221 – Performance BondPerformance Bond

2002 – New Option2002 – New Option Pay difference between contract Pay difference between contract

price and price and proposedproposed cost of cost of completion completion lessless balance of balance of contract pricecontract price

CCDC 221 – CCDC 221 – Performance BondPerformance Bond

1979 – Limitation = 2 years from 1979 – Limitation = 2 years from “final payment falling due“final payment falling due

(i.e. never)(i.e. never)

CCDC 221 – CCDC 221 – Performance BondPerformance Bond

2002 – Limitation = 2 years from 2002 – Limitation = 2 years from earlier of:earlier of:

-substantial performance-substantial performance

- declaration of default- declaration of default

(i.e. consistent with new (i.e. consistent with new Limitations ActLimitations Act))

CCDC 222 – Payment CCDC 222 – Payment BondBond

1979 – CCA “Rental Rates” 1979 – CCA “Rental Rates” appliedapplied

2002 – Whatever2002 – Whatever

(i.e. prevailing market rates in (i.e. prevailing market rates in place of work)place of work)

Surety StatisticsSurety StatisticsYearYear IntakeIntake OutputOutput Loss Loss

RatioRatio$,000$,000 $,000$,000 $,000$,000

20002000 195,895195,895 43,82143,821 22%22%20012001 215,189215,189 91,54191,541 43%43%20022002 238,068238,068 92,08492,084 39%39%

(Courtesy of Robert Dempsey, P.Eng., (Courtesy of Robert Dempsey, P.Eng., The Guarantee Co. of North America)The Guarantee Co. of North America)

The EndThe End