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Insurance - Bonds. Urban Mechanical Contracting Ltd. v. Zurich
In Urban Mechanical Contracting Ltd. v. Zurich (Ont CA, 2022) the Court of Appeal considered rescission where it may prejudice the rights of third parties. Here the rescission was grounded in fraudulent misrepresentation involving a contractor and surety bonds::[11] Surety bonds, such as the ones in this case, are financial instruments which transfer project risk to a third party insurer, thereby providing assurance to purchasers, lenders, subcontractors and suppliers.
[12] Performance bond is issued by an insurance company and guarantees completion of the project in respect of which the bond is issued in the event the contractor (in the language of the bond, the “principal”) defaults on its obligations: Truro (Town) v. Toronto General Insurance Co., 1973 CanLII 169 (SCC), [1974] S.C.R. 1129. A payment bond protects those supplying services and materials to the general contractor from the risk of non-payment should, for instance, the general contractor become insolvent. In Ontario, such bonds are required to secure a minimum of 50% of the contract price for public contracts exceeding $500,000: Construction Act, R.S.O. 1990, c. C.30, s. 85.1 and O. Reg. 304/18, s. 12.
[13] Surety bonds of both kinds are common in public infrastructure projects. There are at least three parties to a surety bond: (1) the surety (typically the insurance company) that acts as a guarantor and issues the bond; (2) the principal (typically the general contractor) whose contractual obligations are guaranteed by the surety; and (3) the obligee who requires the bond as a condition of its contract with the principal/general contractor and who can make a claim on the bond in the event of default by the principal. A payment bond also contemplates other claimants such as the suppliers of labour and materials to a construction project pursuant to agreements with the bond’s principal.
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