The Impact of Bill 142 on Surety Bonding and Industrial Refrigerated Systems Ltd.

signing a surety bond

The Construction Lien Act, Amendment Act 2017 received Royal Assent and became law on December 12, 2017. However, the law is broken into two stages in order to allow sufficient time to establish and develop a regime for the certification of adjudicators.

Stage 1: all changes to regulations and forms will be proclaimed and come into force on July 1, 2018.

Stage 2: all prompt payments and regulations and forms will be proclaimed and come into force October 1, 2019.

In other words, Bill 142 makes changes relating to labor and material bonds and performance bonds.

What Do These Amendments Change?

The amendment to Bill 142 means that as of July 1, 2018 the general contractor on any public contract of $500,000 or more will need to post a Labour and Materials Bond and Performance Bond.

A public contract is a contract with the Provincial Crown, Municipality or a Broader Public-Sector Organization which includes any:

  • School board
  • Hospital
  • University
  • College of applied arts
  • Children’s aid society
  • Organization receiving $10,000 per year from the Ontario government
  • Community health facility

Industrial Refrigerated Systems Ltd. uses these surety bonds (Labour and Material Bonds and Performance Bonds).

What is a Surety Bond?

A Surety Bond or a Surety, is a promise by a guarantor to pay one party a certain amount if the second party fails to meet an obligation, such as fulfilling the terms of a contract. Essentially, the Surety Bond protects the oblige against losses resulting from the principal’s failures to meet the obligation.

How Do Surety Bonds Work?

A Surety Bond is a contract between three parties.

The Obligee: is the party who is the recipient of the obligation(s)

The Principal: is the primary party who will perform the contractual obligation(s)

The Surety: is the one who assures the obligee that the principal can meet the obligation.

Performance Bond

In a Performance Bond, the surety upholds the contractual obligation(s) made by the principal if the principal fails to uphold their obligations. In this case, the surety bond contracts are formed to motivate the obligee to contract with the principal by demonstrating their credibility and guaranteeing their performance and completion of the agreement.

Labour and Materials Bond

A Labour and Materials Bond on the other hand is a guarantee given by a surety that the subcontractors and suppliers of the general contractor who post the bond will be paid. In this case an unpaid subcontractor or supplier may make a claim upon a Labour and Materials Bond in addition to, or as an alternative to filing a claim or lien.

How Has the Amendment Changed Surety Bonds?

  • Performance Bonds and Labour and Material bonds need to cover 50% of the contract price.
  • The successful bidder carries the cost of a performance bond; however, the buyer actually pays the price. The cost is usually embedded in the construction sellers contract.
  • A surety has 4 business days to acknowledge a claim and 20 days to respond with a position on Labour and Material bond.
  • If the claim is from a subcontractor a surety must acknowledge the claim within 3 business days and provide a formal position within 25 business days. In this case the surety has to pay any undisputed amounts within 10 days providing their position

Holdback Changes

Major changes to Bill 142 allow annual and phased release of holdbacks on large, long term projects valued at $10 million or more. The changes also allow holdbacks in the form of alternative security, such as a letter of credit of bond.

Summary of Bill 142 Construction Lien Amendment Act Changes

The construction lien amendment act now introduces these changes:

  • Requirement to provide surety bonds on all Ontario Public Sector Projects over $500,000
  • Construction dispute interim adjudication to allow a mechanism for dispute resolution without having to stop work
  • Modernizing the leans and hold back procedures currently in place
  • Creating a prompt payment regime to establish more secure payment rules that includes time for payment down and contractor supply chain
  • Added protection for creditors