The issue of whether the surety is entitled to exercise this remedy and rescind its bonds cannot be disposed of summarily by way of application but rather must be decided at trial, having regard to all the facts.
In 2011,
The appellants are a group of subcontractors (the "Trades") hired by Bondfield, and
The Trades brought two applications centered on the question of whether rescission is available as a matter of law on a construction bond where there has been fraud and collusion in the procurement process.
Rescission is a common law equitable remedy designed to put the parties back to their pre-contractual positions. It allows a party to cancel, or "unwind" the contract when they have been improperly induced to enter the contract through vitiating means such as fraudulent misrepresentation, mistake, or undue influence. Zurich claimed this remedy.
Zurich alleged that in
The Trades sought a declaration that Zurich could not rescind the Payment Bond because that would interfere with the Trades' rights as innocent third parties. BMO sought a declaration that Zurich could not rescind the Performance Bond.
The Trades argued that section 69 of the Construction Lien Act (CLA), as it was then called, barred Zurich from rescinding the Payment Bond. They claimed their statutory rights could not be undermined by equitable remedies such as rescission, seeing as legislation supersedes a common law remedy where it is clear and unambiguous. Zurich claimed the Trades were potentially parties to the alleged fraud which, if proven, would taint their statutory rights.
Section 69 of the CLA provides that:
(1) Where a labour and material payment bond is in effect in respect of an improvement, any person whose payment is guaranteed by that bond has a right of action to recover the amount of the person's claim, in accordance with the terms and conditions of the bond, against the surety on the bond, where the principal on the bond defaults in making the payment guaranteed by the bond.
.
(3) The surety, upon satisfaction of its obligation to any person whose payment is guaranteed by the bond, shall be subrogated to all the rights of that person.1
The Court of Appeal analyzed the legislative intent of section 69, determining that it was designed to replace common law actions based on trust bonds with a direct statutory action between the surety and the trades. At common law, tradespeople were not able to sue on a payment bond because they lacked privity of contract with the surety.
In enacting the CLA, the legislature would not have intended for a surety to have absolute liability. The application judge wrote in her reasons that "common law and equitable remedies are still available; otherwise, the section would stipulate that the surety's liability arose upon execution rather than when the Bond is 'in effect.'"2 The legislation did not address situations of fraud. "If it is established that the Trades were party to the fraud, it would be difficult to envisage that the legislature intended with 'irresistible clearness' to protect the Trades who participated in fraud".3
The appellants further argued that rescission is not available as a matter of law whenever the rights of innocent third parties are engaged. The Court of Appeal addressed two concerns regarding third party rights in rescission cases: 1) the impossibility of restoring the parties to their pre-contractual positions when third parties have acquired a superior interest in some of the property subject to the contract, and 2) unavoidable prejudice/adverse effect on third parties when rescission is granted. While they are legitimate concerns, the
The Court of Appeal reiterated that judges have discretionary power to order rescission depending on the facts of the case and are more likely to do so in cases of fraud than innocent misrepresentation.4 The Court of Appeal concluded that the bars to rescission are flexible, and given the appropriate factual matrix, rescission may be ordered despite prejudice to third parties. Therefore, Zurich was allowed to continue to seek rescission as a remedy. Whether Zurich is ultimately successful will be up to the trial judge.
Footnotes
1. Construction Lien Act, RSO 1990, c. C.30, s. 69
2.
3. Ibid, at para 51
4. Ibid, at para 63
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