Legislation

After mining, a coal company is required to restore the land it disturbed, e.g., by regrading or replanting. The federal government requires coal companies to get bonds to assure their payment for these activities. Federal law permits coal mine operators in some cases to guarantee these costs on the basis of their own finances, a practice known as self-bonding, rather than by securing a bond through another company or providing collateral. Some stakeholders told us that self-bonds are riskier now than before, citing industry bankruptcies and lower coal demand. We recommended that Congress consider amending the law to eliminate self-bonding. https://www.gao.gov/products/GAO-18-305

An argument from a group of insurers and brokers – that construction contractors should not have a duty to inform subcontractors of the existence of a surety bond – has been rejected by the Supreme Court of Canada. In Valard Construction Ltd. v. Bird Construction Co., released Thursday, Canada’s highest court overturned an Alberta court of Appeal ruling, released in 2016, in favour of Bird, a general contractor on a Suncor oilsands construction project in 2009. One of Bird’s subcontractors – Langford Electric Ltd. – failed to pay Valard (one of Langford’s subcontractors) in full. Langford had a labour and material payment bond, worth nearly $660,000, written by The Guarantee Company of North America, naming Bird as an obligee. Essentially, The Guarantee was insuring Bird’s risk that Langford would fail to pay one of its contractors. Valard tried to make a claim on that surety bond but failed to provide notice within 120 days of not being paid, as stipulated by the wording of the bond. Valard did not learn of the bond’s existence until about seven months after the 120-day notice period expired. Valard sued Bird, arguing Bird had an obligation to tell Valard that the bond existed, without being prompted to do so. Bird argued it would have told Valard about the bond if Bird had been asked. An Alberta Court of Queen’s Bench ruling in favour of Bird was initially upheld on appeal but overturned – in the Feb. 15, 2018 ruling – by the Supreme Court of Canada. The Surety Association of Canada – who members include a number of brokers, claims professionals and insurers – had intervenor status in favour of Bird. The Surety Association of Canada argued that an obligee should not have a duty to notify claimants about the existence of a payment bond, unless it is asked. A payment bond “in a sense protects subcontractors because it assures that they will be paid,” but claimants do not pay premiums for payment bonds and ultimately the obligee is the “intended beneficiary,” SAC contended. Making general contractors legally obligated to tell all potential claimants that a payment bond exists could discourage them “from requiring a payment bond on construction projects in order to avoid a potential liability arising from the duty to notify,” lawyers for SAC argued. “A reduction in the use of payment bonds would consequently reduce the possible recoveries by unpaid claimants. The Supreme Court of Canada had a different take. “Labour and material payment bonds serve the purpose of protecting owners and general contractors such as Bird from the risk of work stoppages, liens and litigation over payment,” Justice Russell Brown wrote on behalf of the majority. “For that purpose to be properly realized, however, a beneficiary such as Valard must be capable of enforcing the bond by claiming against the surety to recover for unpaid invoices. Put another way, where a beneficiary is unaware of its right to claim under the bond within the notice period, the bond’s trustee is susceptible to the very risks which Bird says the bond was intended to avoid.” Concurring with Justice Brown were Justices Rosalie Silberman Abella, Michael Moldaver, Malcolm Rowe and Beverly McLachlin (Chief Justice of Canada at the time that Valard’s appeal was heard). Justice Suzanne Côté wrote separate concurring reasons while Justice Andromache Karakatsanis dissented. https://www.canadianunderwriter.ca/insurance/surety-providers-argument-rejected-supreme-court-canada-1004127516/

The states of Virginia and Oregon adopted new legislation in 2017 that introduced surety bond requirements for contractors. In Virginia, the new bond legislation reduced financial burdens on contractors which were otherwise required to demonstrate a certain amount of net worth. In Oregon, a surety bond requirement was introduced for all contractors and subcontractors working on public works projects above $100,000. Read on for an overview of both legislative changes, and what these mean for contractors in these states. Virginia Class A and B Contractors Can Now Post a Surety Bond As of July 1, 2017, Class A and B contractors in Virginia have been allowed to obtain a $50,000 contractor license bond, instead of having to satisfy minimum net worth requirement. Previously, Class A contractors were required to maintain a minimum net worth of $45,000, and Class B contractors a net worth of $15,000. Under Senate Bill 1113 contractors in both classes can satisfy the requirement by posting a bond. The bond is conditioned upon the faithful and honest performance of contractor and their compliance with the bill’s provisions. If a contractor violates those provisions and causes any monetary losses, the issue can be brought to court. The bond can provide compensation for any monetary losses that result from such violations, as well as any court costs, and attorney fees assessed against the contractor when they are order to compensate for monetary losses. If you are new to bonds, you may be wondering what the advantage of obtaining a bond instead of maintaining net worth is. Read on below about the cost of the bond to understand why this option helps contractors. Oregon Public Works Bond Required for Projects Over $100,000 In Oregon, contractors and subcontractors working on public works projects with a total cost over $100,000 have been required to post a $30,000 surety bond with the Construction Contractors Board as of June 14, 2017. The bond requirement was introduced with Senate Bill 416 earlier this year. This bond is intended to guarantee that such contractors and subcontractors will pay any outstanding wages to laborers who perform work on their projects. According to the Bill, only one such bond is required for all projects, once the above limit is reached, instead of a separate bond for each. In addition, the bill also requires contractors to verify that any subcontractor they work with has also filed such a bond, has obtained a waiver of the bond requirement, or is exempt from such a requirement, as specified in the bill. This bond is conditioned upon the compliance of contractors with the Oregon Revised Statutes (ORS) Chapter 279C, Chapter 360, and the Oregon Administrative Rules (OAR) Chapter 839. A claim can be filed against this bond by the Oregon Bureau of Labor and Industries (BOLI) if a contractor or subcontractor do not pay the required wages to laborers who have performed work on a contract. Explanation of Bonding Costs To obtain either of these bonds, contractors do not need to pay the full amount of the bond but only an yearly premium. Premiums on bonds, also called bond rates, are determined by sureties when a contractor applies for their bond. Sureties typically take into a account a variety of personal financial information about applicants, though personal credit score is the most important factor. Typically, the higher an applicant’s credit score – the better their rate. For this reason, obtaining a surety bond can be a relief to contractors such as those in Virginia because instead of requiring them to maintain a high net worth, contractors can obtain a bond at a much lower cost and still get a license. Are you a contractor in Oregon or Virginia? What do you think of these new bonding requirements? Leave us a comment below, we’d like to hear from you! http://www.builderonline.com/building/trades-subcontractors/two-states-adopt-new-contractor-legislation_o

Ms. Zuk provided a personal guarantee for the business her husband founded (“Silverado”). Ms. Zuk was also an accountant, and was Silverado’s sometime bookkeeper and shareholder prior to her divorce from Mr. Zuk, Silverado’s principal. When Silverado defaulted on its loans, RBC called on the guarantee. Ms. Zuk argued that there had been material alterations to the credit advanced to Silverado, which absolved her of liability under the guarantee in respect of those later advances. In considering this defence, the Court provided a comprehensive restatement of the law on the defence of material alteration. The Court applied a two-step test: are the challenged alterations to the underlying loan arrangement material? and does the language of the guarantee permit the material alterations? When discussing how to apply this test, the Court set out the law on the duty of disclosure to a guarantor, specific vs. continuing/all accounts guarantees, and compensated vs. accommodation sureties. Each of these three factors influences the Court’s interpretation of the guarantee and the level of scrutiny the Court will capply to the language of the guarantee. In this case, the Court found it relevant that Ms. Zuk had an interest in Silverado, which the Court found made her a compensated guarantor – similar to a bond company. She was not an accommodation surety, like a spouse who receives no compensation for his or her guarantee. These latter types of sureties receive more protection from the Court and the terms of such guarantees will be construed more strictly. The Court found that the guarantee was a continuing/all accounts guarantee that had explicitly contemplated the type of alteration that in fact occurred. This case is notable for all guarantors as a restatement of the law on the defence of material alteration, and it is also helpful when drafting guarantees that the parties contemplate might evolve over time. http://www.mondaq.com/canada/x/653964/Insolvency+Bankruptcy/Court+Restates+Law+On+The+Defence+Of+Material+Alteration+To+Guarantees

Developers Sur. & Indem. Co. v. Carothers Constr., Inc., 2017 U.S. Dist. LEXIS 111021 (D.S.C. July 18, 2017); Developers Sur. & Indem. Co. v. Carothers Constr., Inc., 2017 U.S. Dist. LEXIS 135948 (D. Kan. Aug. 24, 2017) Two recent decisions from United States District Courts for the District of South Carolina and the District of Kansas, respectively, reached opposite conclusions when presented with the same issue: Is a surety bound to arbitrate claims against it when the surety’s bond incorporates its principal’s contract by reference, and the principal’s contract contains an agreement to arbitrate disputes. The District of South Carolina, applying South Carolina law, held that a surety is bound by the arbitration agreement in the incorporated contract, while the District of Kansas held that a surety is not so bound. These cases both arise from an arbitration demand filed by the general contractor, Carothers Construction, Inc. (“Carothers”) against the surety, Developers Surety and Indemnity Company (“DSI”). DSI issued performance and payment bonds on behalf of subcontractors Liberty Enterprises Specialty Contractor (“Liberty”) and Seven Hills Construction, LLC (“Seven Hills”) in favor of Carothers for their work on Projects located in South Carolina and Kansas, respectively. Each subcontractor defaulted on its contractual obligations. Carothers initiated arbitration against DSI regarding both Projects. According to Carothers, the bonds incorporated by reference the subcontracts’ mandatory arbitration clauses and thus, DSI was subject to binding arbitration. In declaratory judgment actions before Federal District Courts in South Carolina and Kansas, DSI asked the courts to declare that the arbitration clause did not bind it to arbitrate Carothers’ claims. Each court reached the directly opposite conclusion. This article discusses the decision reached by each court in turn. In this action, DSI sought a declaration from the District Court in South Carolina that the arbitration clause in the subcontract between Carothers and Liberty did not bind it to arbitrate Carothers’ claim. DSI argued that the arbitration clause had no application to the claim between it and Carothers because, by its own terms, the clause applied only to claims “between the Contractor and the Subcontractor,” and DSI, as surety, was neither. It similarly argued that Carothers’ claims fell beyond the scope of the arbitration clause, as the claims arose out of the bond, whereas the arbitration clause expressly applied only to claims arising from or relating to the Carothers – Liberty subcontract. Applying South Carolina law, the court held that the subcontract’s arbitration clause bound DSI to arbitrate. The court found that South Carolina cases had previously concluded that a subcontract may incorporate an arbitration agreement in the prime contract by reference, and that the same result should obtain in the case of a bond. The court further found that DSI had guaranteed the performance of all of Liberty’s obligations under the subcontract and had incorporated all of the subcontract’s terms, including the agreement to arbitrate disputes. Reasoning that a bond is to be construed together with the agreement it incorporates in order to ascertain the parties’ intent, and that a surety obligates itself under a bond to the same liability as its principal, the court concluded that the parties intended to submit disputes against DSI under the bond to arbitration. The District Court in Kansas reached the exact opposite result, finding that DSI did not consent to arbitration of Carothers’ claims on the bonds. The court accepted the argument unsuccessfully advanced by DSI in the District Court in South Carolina – that the arbitration agreement expressly applied only to disputes between contractor and subcontractor, and DSI, as surety, was neither. In so finding, the court cited other provisions within the subcontract that supported its interpretation that the subcontract did not intend for “surety” and “subcontractor” to mean the same thing. Thus, the court held that the arbitration clause’s reference to disputes with subcontractor must not have been intended to include disputes with the surety. The court also reasoned that, although the bonds incorporated the subcontract (and its mandatory arbitration provision) by reference, DSI did not agree in the bonds to assume “any or all obligations” of subcontractor. Rather, it only agreed to undertake “certain” obligations in the event of subcontractor’s default. The court said that it “respectfully disagreed” with the decision reached by the District Court in South Carolina, noting that that court had relied on the general principle of South Carolina law that “the liability of a surety is measured precisely by the liability of the principal.” The court noted that Kansas courts have not adopted such a rule. The court further found that even though a surety’s liability may be coextensive with that of the principle as a general rule, DSI’s liability in this case was defined by the terms of the bonds. Reading the plain language of the arbitration provision, other language in the subcontract, and the language in the bonds, the District Court in Kansas elected to disagree with the District Court in South Carolina’s conclusion that the parties clearly intended to submit disputes to binding arbitration. https://www.lexology.com/library/detail.aspx?g=27162bc5-be73-4329-9e4f-c2669812846f

With the summer months behind us, the fall season in the construction industry will include the next steps in passing Bill 142, also known as the Act to Amend the Construction Lien Act. If implemented, Bill 142 will represent the most significant legislative reform seen in the Ontario construction industry since 1983, when the existing Construction Lien Act came into force. The first reading of Bill 142 was carried on May 31, 2017 and it is widely anticipated that the second reading will occur early in the fall. Although consultation on the language of the draft continues, it is almost a certainty that Bill 142 will pass well before the provincial election in the spring of 2018. While the themes giving rise to this legislation have been under discussion for many years, the industry should be prepared for dramatic change with respect to both contract administration and dispute resolution. The hot button terms representing this reform are without a doubt “prompt payment” and “adjudication”. Together with a slew of changes intended to modernize construction liens, and a new requirement for bonding on most public projects, these key concepts are going to impact virtually every player in the construction industry and every type of project – from the largest P3 infrastructure project to the renovation of your kitchen. Indeed, one of the commonly cited challenges with Ontario’s construction legislation has always been that projects sitting at opposite ends of the spectrum with respect to size and contract price are nonetheless governed by the same law. There are many ways that the objectives of this construction law reform can be captured. The following three are salient: creating a statutory mechanism to enforce timely payment for work performed; reducing the prevalence, cost, complexity and duration of construction dispute resolution proceedings; and simplifying the construction lien process. Bill 142 has been modelled, in part, after other jurisdictions. However, the purpose of this article is to focus more on a forward-looking summary of what Bill 142 will mean for the industry, and less on the process that led to it. The scope of the overall changes can be seen even in the title of the legislation. Rather than the Construction Lien Act, Ontario will soon have the Construction Act. Prompt payment A lengthy debate within the construction industry over the need for prompt payment was the primary driver behind the provincial government commissioning a full review of the Construction Lien Act. It is therefore not a surprise that prompt payment features prominently in Bill 142. One of the principal criticisms of past efforts at prompt payment (many readers will recall Bill 69) was that with payment terms imposed by legislation, parties would not have the freedom to customize their contracts for the unique nature of each project. For example, while some contracts contemplate monthly billing and payment, it is quite common on larger projects for payments to be tied to the achievement of specific milestones. The prompt payment structure contemplated by Bill 142 seeks to achieve that balance. The deadline for making a payment will be triggered by the submission of a “proper invoice”. The Bill sets out the minimum information that a proper invoice must include and then allows for “any other requirements that the contract specifies” and any other information that may be prescribed by regulation. In addition to basic information such as the contractor’s contact information and where to send payment, a proper invoice must include the authority (usually the contract) on which the work was supplied, a full description of the work, the amount owing and the payment terms. Importantly, Bill 142 provides that proper invoices shall be submitted monthly unless the contract provides otherwise. Accordingly, it will be more critical than ever for parties to figure out the timing and basis for invoices (including milestone payments) at the time they draft their contract. The decision will otherwise be made for them by the legislation. It is also essential to understand that the statute will prohibit any contract clause that makes the giving of a proper invoice contingent upon payment certification or the prior approval of the invoice by an owner. In other words, if the statutory and contractual requirements for the contents of a proper invoice are met, the deadline for paying it will start to run. This concept may be disappointing to some in the industry who would have preferred to see payment deadlines tied to certification. However, the counterargument to that reaction will be the freedom to negotiate the invoice delivery process at the front end of the job. The key concept in the prompt payment section of Bill 142 is the imposition of statutory payment deadlines. The deadline for payment by an owner to a contractor will be 28 days from the delivery of the proper invoice, unless the owner delivers a prescribed form of notice of non-payment within 14 days of the proper invoice being received. Notably, such a notice must particularize the amount and basis for non-payment and can be tested, at the discretion of the contractor, in the binding adjudication process that is described below. Read The Entire Article:http://www.jdsupra.com/legalnews/dramatic-change-ahead-for-the-ontario-38417/

On Monday, the U.S. District Court for the District of Columbia ruled that bonding companies can be held liable for treble damages under the False Claims Act for issuing surety bonds to construction companies that falsely claim to be a Service-Disabled Veteran-Owned Small Business (SDVOSB). In a novel reverse False Claims Act case, whistleblower Andrew Scollick alleged that the bonding companies “knew or should have known” the construction companies were shell companies acting as a front for larger non-veteran owned entities violating the government’s contracting requirements. A reverse false claim action can occur when defendants knowingly make a false statement in order to avoid having to pay the government when payment is otherwise due in violation of 31 U.S.C. § 3729(a)(1)(G) (reverse false claims). See United States ex. rel. Scollick v. Narula, Case No: 14-cv-01339-RCL (District Court, District of Columbia. July 31, 2017). Under the Miller Act, government construction contractors must post bid bonds, performance bonds, and payment bonds that guarantee that the contractor will perform the work according to the terms of the contract. In this case, the contract terms required that the construction be performed by a SDVOSB entity. Michael Kohn, of Kohn, Kohn & Colapinto, who represents the whistleblower, argued that given their role in providing a surety bond to the contractor the bonding companies would know whether the invoicing being billed against the contract is being performed by a SDVOSB. The district court agreed and found that a “reverse false claims” violation occurred because the bonding company knew or should have known that the construction organization was not a SDVOSB and the act of issuing surety bonds furthered the fraud. As a result, the bonding companies were held legally obligated to return to the government funds the bonding company knew to be paid to contractor firms fraudulently posing as SDVOSBs. Being held liable under the False Claims Act means that treble damages will be awarded for every dollar up to the amount of the bond that the government paid out under each contract Because of the substantial dollar amounts involved, it is not all that uncommon for contractors to falsify service-disabled veteran status. Holding bonding companies liable when they have reason to know of the fraud could have an immense impact on stamping out such contract fraud. “Holding bonding companies liable for treble damages in these types of case will have a huge impact on preventing fraud in government contracts and will help ensure these contracts go to disabled veteran-owned companies as intended,” said Kohn. The Scollick case alleges that two of the largest surety bonding companies, Hanover Insurance Company and Hudson Insurance Company, knowingly bonded dozens of Veteran Administration construction contracts totaling more than $12.5 million with the knowledge that the bonded contractors did not qualify as service-disabled, veteran-owned small businesses. https://www.webwire.com/ViewPressRel.asp?aId=211708