Post on 01-Apr-2015
transcript
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