Court Decision Could Alter Construction Performance Bond

The Ontario Court of Appeal released a decision, on October 17, 2003, that could cause bonding companies to alter the standard form performance bond used in the North American construction industry. The action was commenced by Whitby Landmark Development Inc., for payment under a performance bond of the cost savings achieved and owing by its general contractor, but not paid before Mollenhauer Construction Ltd. went out of business. The trial judge held that the performance bond guaranteed the payment of “collateral” financial obligations of the contractor, such as the payment of cost savings achieved, and this decision was upheld by the court. As a result, it is likely that bonding companies will revise the standard form of performance bond to exclude liability for the collateral obligations of the contractor. On the facts of the case under appeal, the trial judge’s decision to dismiss the action because of Whitby Landmark’s more than one-year delay on the bond was also upheld on appeal, which resulted in Whitby Landmark’s claim being dismissed at trial and on appeal. Justices Karen Weiler, Kathryn Feldman and Marc Rosenberg heard the appeal.

Zurich Indemnity Co., the bonding company, was represented on the appeal by Roger Gillott of Osler, Hoskin & Harcourt LLP; and by Harvey Kirsh and Roger Gillott also of Osler, Hoskin & Harcourt, on the trial. Whitby Landmark was represented by Andrew McLauchlin and Robert Kennaley of McLauchlin & Associates LLP on the trial and the appeal.