Suretyship - Some Questions and Answers on the New Indemnity and Security Agreement

October 1, 1994

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December 5, 2022

Construction: An unwarranted contestation may be considered an abuse of procedure

In the decision in 9058-4004 Québec inc. c. 9337-9907 Québec inc.1 rendered on October 21, 2022, the court granted compensation to a subcontractor for its extrajudicial fees further to a general contractor’s unfounded contestation of its claim as part of a hypothecary action. The facts In May 2019, Portes de garage Citadelle Ltée (“Citadelle”) and general contractor 9337-9907 Québec inc. (“AllConstructions”) concluded a contract for the provision of services and materials needed to install unloading docks in a building under construction. On May 16, 2019, notice of the contract was given to the building owner, 9058-4004 Québec inc. (“Transport Pouliot”). The first two phases of Citadelle’s work were completed between June and August 2019. In late September 2019, AllConstructions allegedly vacated the worksite after a dispute with Transport Pouliot. The third phase of Citadelle’s work was completed in October 2019. On November 25, 2019, Citadelle sent a statement of account to AllConstructions and registered a legal hypothec on the building two days later. On December 23, 2019, after registering a prior notice of the exercise of a hypothecary right, AllConstructions brought a hypothecary action against Transport Pouliot in the Superior Court, claiming the sums it was owed. For its part, Citadelle brought a hypothecary action against the owner, Transport Pouliot, and instituted legal proceedings against AllConstructions in April 2020. It is important to note that during the proceedings, AllConstructions admitted that it had received payment from Transport Pouliot for the sums invoiced by Citadelle. To justify its refusal to pay its subcontractor Citadelle, AllConstructions argued summarily that the services and materials provided were inadequate and did not meet standards. Despite its weak position and the lack of compelling evidence, AllConstructions maintained its argument. Citadelle had no choice but to pursue its legal proceedings and apply to have AllConstructions’ action declared abusive in order to recover its extrajudicial fees. AllConstructions’ abuse of procedure Citadelle claimed that AllConstructions’ defence was unfounded, frivolous and intended to delay. AllConstructions only had testimonial evidence to support its allegations, and it failed to file any expert opinions or exhibits. The contract did not contain a “pay when paid” clause, and AllConstructions admitted in the proceedings that it had received payment from Transport Pouliot for the sums invoiced by Citadelle. AllConstructions claimed that it had serious arguments to make in response to the application to have its action declared abusive. It stated that the work performed by Citadelle was inadequate and that the materials and services provided were not up to standards. It maintained its position, despite the fact that it had vacated the worksite a month before Citadelle’s work was completed and, therefore, could not have verified the actual quality of the work performed. In March 2022, AllConstructions ultimately abandoned its contestation of Citadelle’s claim a few days before the trial and nearly a year and a half after the proceedings began. The judge allowed Citadelle’s application to have AllConstructions’ action declared abusive. AllConstructions’ defence was unfounded, frivolous and intended to delay. It had no solid factual or legal basis. The allegation that Citadelle failed to comply with standards in the performance of its contract is mere speculation, as AllConstructions left the worksite in September 2019. Citadelle incurred unnecessary extrajudicial fees as a result of AllConstructions’ unfounded contestation of its claim. The judge awarded Citadelle a sum of $9,000.00 as compensation for the legal fees that it had paid. What it means A general contractor that cannot justify a deduction from its subcontractor’s claims after the work is completed but does so anyway risks having its contestation declared abusive. Jurisprudence has established that abuse of procedure may consist of légèreté blâmable [blameworthy conduct]2 or témérité [recklessness] resulting from allegations that do not stand up to careful analysis or are exaggerated beyond the scope of the dispute between the parties.3 A manifestly unfounded action is a civil fault that may be subject to legal proceedings and sanctions in accordance with article 51 of the Code of Civil Procedure.4 A party that considers itself the victim of abusive proceedings may, in addition to applying to have the proceedings declared abusive, claim the reimbursement of reasonable legal fees it has paid.5 This is precisely what Citadelle did and what it obtained. AllConstructions irresponsibly managed its dispute with its subcontractor. It made arguments based only on unverified assumptions, even though the evidence set out in the application was relatively solid and complete. As a victim of abuse of procedure, Citadelle was granted a reimbursement of its legal fees in addition to the sums that it was owed by AllConstructions. Court file No. 760-22-011912-204 Royal Lepage commercial inc. c. 109650 Canada ltd., 2007 QCCA 915 El-Hachem c. Décary, 2012 QCCA 2071 2741-8854 Québec inc. c. Restaurant King Ouest, 2018 QCCA 1807 (CanLII) Only extrajudicial fees deemed reasonable are reimbursed in full. The factors considered in establishing a total reasonable amount are summarized in paragraph 32 of the case at hand and are cited from Groupe Van Houtte inc. c. Développements industriels et commerciaux de Montréal inc., 2010 QCCA 1970, and Iris Le Groupe visuel (1990) inc. c. 9105-1862 Québec inc., 2021 QCCA 1208

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October 29, 2019

Bill 37: What changes can be expected for Public Contracts?

On September 18, 2019, the Minister Responsible for Government Administration and Chair of the Conseil du trésor introduced Bill 37, An Act mainly to establish the Centre d’acquisitions gouvernementales et Infrastructures technologiques Québec1 As its name suggests, this bill is intended to implement the restructuring of government procurement announced in the 2019–2020 budget2. If the bill is passed, the Centre de services partagés du Québec (CSPQ), as well as some other procurement organizations, will be replaced by two bodies: the Centre d’acquisitions gouvernementales will be the organization responsible for meeting the government’s general procurement needs, and Infrastructures technologiques Québec will handle its digital procurement. In 2017–2018, information technology contracts accounted for 17% of public body contracts3. Some administrative functions of the CSPQ would also be transferred to the Agence du revenu du Québec and the Conseil du trésor. Bill 37 also makes a number of amendments to the Act respecting contracting by public bodies, CQLR c. C-65.1, and its regulations, two of which are noteworthy. It is planned that, as of April 1, 2020, information relating to contracts involving an expenditure of more than $10,000, whether reached by mutual agreement or following a call for tenders, will have to be published in the electronic tendering system. The current limit is $25,0004. The bill also provides that, as of the date its assent (currently scheduled for the end of 2019), the imposition of a penalty for a final reassessment under the general anti-avoidance rule regarding an abusive tax avoidance transaction5 on the part of a company or related person will be recorded in the Register of Enterprises Ineligible for Public Contracts for five years. Such penalties will also be considered by the Autorité des marchés publics in its decision to authorize a contract with a public body. A 60-day transitional period is provided for in Bill 37, during which a taxpayer may make a late preventive disclosure to the Minister of Revenue6 by filing the form Mandatory or preventive disclosure of tax planning (TP-1079.DI-V). However, this type of disclosure will not be accepted if an audit by the Agence du revenu du Québec or the Canada Revenue Agency is already ongoing with respect to such a transaction. This measure is part of the current fight against aggressive tax planning7. Quebec (National Assembly), Bill 37, An Act mainly to establish the Centre d’acquisitionsgouvernementales and Infrastructures technologiques Québec, 42nd Legislature, 1st Session. Quebec (Conseil du trésor), 2019–2020 Budget Plan (Quebec, Off. Publ., March 2019), p. H.61. Québec (Conseil du trésor), Statistiques sur les contrats des organismes publics 2017–2018 (Québec, Direction de la reddition de comptes et du soutien à l’encadrement des contrats publics, March 2019), p. 1. Sections 22 and 23 of the Act respecting contracting by public bodies, CQLR c. C-65.1; sections 39 and 39.2 of the Regulation respecting supply contracts of public bodies, CQLR c. C-65.1, r. 2; sections 52 and 52.2 of the Regulation respecting service contracts of public bodies, CQLR c. C-65.1, r. 4; sections 42 and 42.2 of the Regulation respecting construction contracts of public bodies, CQLR c. C-65.1, r. 5; sections 73 and 75 of the Regulation respecting contracting by public bodies in the field of information technologies, CQLR c. C-65.1, r. 5.1. Sections 1079.13.1 and 1079.13.2 of the Taxation Act, CQLR c. I-3. Section 1079.8.7.1 of the Taxation Act, CQLR c. I-3. See, in particular, Quebec (Conseil du trésor), 2019–2020 Budget Plan (Quebec, Off. Publ., March 2019), p. D.81.

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September 26, 2018

How subcontractors or materials supplier can use the surety bond contract

That is what material suppliers want to know when general contractors with which they have contracted default on payment, particularly in bankruptcy cases. It is common practice for clients to require that the general contractor provide a surety bond to cover a significant breach of this nature. Generally speaking, the purpose of a surety bond contract to cover payment for labour and materials is to guarantee that the workers, suppliers and subcontractors used by the general contractor are paid.1 In order to benefit from the protection provided by the surety bond, a claimant must disclose its contract to the surety, usually within 60 days from the date on which the claimant commences work or on which the materials are delivered. When a claimant has not been paid or anticipates not being paid, it must send the surety a notice of claim within the time specified in the contract, which is generally 120 days from the date on which the services were completed or the materials were delivered. THE DECISION IN PANFAB On June 26, 2018, the Court of Appeal again examined the principle that requires disclosure to the surety in order to obtain payment for labour and materials, in Industries Panfab inc. v. Axa Assurances inc., 2018 QCCA 1066. In 2010, the Local Housing Bureau (the “Bureau”) retained Groupe Geyser inc. (“Geyser”) to construct three buildings in Longueuil with a total of 180 units. As stipulated in the construction contract, Geyser obtained a surety bond from Axa Insurance (“Axa”) to guarantee payment for labour and materials. Geyser subcontracted with Les Revêtements RMDL (“RMDL”) for the exterior cladding of the three buildings it was constructing. RMDL then signed a $330,000 contract with Industries Panfab inc. (“Panfab”) for it to supply metal sheathing boards. A few days before making its first delivery, Panfab informed Geyser, Axa and the Bureau of its contract to supply RMDL. A few months after the first delivery, RMDL ordered additional sheathing boards that were not part of RMDL’s initial order from Panfab. Panfab made an additional disclosure to the surety and upped the total cost of its contract. Panfab made two additional disclosures, in each of which it stated the new, higher total cost of its contract. Panfab’s total invoice for all of the materials came to $446,328.24, but it received only $321,121.84. Its claim was therefore for $125,206.40. RMDL declared bankruptcy in 2012 and, given the situation, Panfab sought to claim under the surety bond for payment for its materials. Decision at trial At trial, the Court found that Axa’s surety bond contract contained a stipulation for the benefit of third parties, based on which Panfab could characterize itself as a creditor under the contract and thus benefit from the guarantee provided by the surety bond. However, the Court concluded that there was only one contract between the parties and that the increase in the value of the contract had been disclosed more than 60 days after the first delivery of materials. In fact, it characterized the amount claimed as an overpayment and limited the amount that it ordered Geyser and Axa to pay to $54,830.66, since the effect of a judgment for the overpayment would have been to alter the terms of the surety bond contract and add to the respondents’ contractual obligations.2 Appeal In this specific case, the Court of Appeal found that the obligation of Geyser and Axa to jointly and severally pay the amount claimed for the materials to be used in the construction arose at the point when Panfab characterized itself as a creditor by making its first disclosure. The Court of Appeal held that the surety bond contract did not require that the value of the contract for the supply of materials be disclosed. The mandatory information to be provided was the type of work, the nature of the contract, and the name of the subcontractor. Panfab disclosed its contract with RMDL, the subcontractor, within the 60 days allowed and thus complied with the time requirements. The obligation to pay Panfab arose at that point. Given that the surety bond contract did not require that the value of the contract be stated in the notice of disclosure, the Court was of the opinion that Panfab had demonstrated good faith and transparency in informing Geyser and Axa of the changes to the value of its contract with RMDL, by providing amended notices of disclosure. The claim could therefore not be limited on the ground that Panfab had stated the value of its contract in its notice of disclosure, when there was nothing that required it to do so. The Court of Appeal therefore reiterated the principle that there is only one contract and thus only one notice of disclosure, notwithstanding the fact that Panfab sent the surety amended notices.3 An order for reimbursement for the full amount to be paid does not alter the terms of the surety bond contract. The Court therefore concluded that the trial judge had erred by holding that the amended notices of disclosure sent by Panfab were time-barred and were necessary in order for the total claim to be allowed. The Court of Appeal took the opportunity to reiterate the scope of the duty to inform on the part of a materials supplier or subcontractor. Geyser submitted that Panfab had breached its duty to inform and that its breach was the reason for the shortfall in the amounts withheld for paying all of the subcontractors and suppliers. The Court did not accept that argument; it relied on Banque canadienne nationale v. Soucisse (1981),4 which set out the foundation for a creditor’s duty to inform, and on article 2345 C.C.Q., reiterating that a creditor is required to provide any useful information to the surety at the request of the surety. In this case, Geyser and Axa had never asked Panfab for additional information under that article. To summarize, Panfab clarifies the already settled law regarding notices of disclosure to sureties, as stated in Fireman’s Fund (1989)5 and Tapis Ouellet inc. (1991), in particular: when a contract for the supply of materials is shown to exist between the parties and the materials have been incorporated into a construction project, the subcontractor may claim the amounts owed under the surety bond contract after sending a notice of disclosure that meets the requirements set out in that contract. It must be kept in mind that any surety bond contract may contain specific clauses and that reference must be made to those clauses. That is why the Court in Panfab concluded that the information relating to the value of the contract was not mandatory in the notice to the surety, since, in that case, the surety bond contract did not require that the value of the contract be included in the notice of disclosure. Vigilance is therefore the order of the day when it comes to the terms of surety bond contracts. MONDOUX, Hélène, François BEAUCHAMP, “Les cautionnements de contrats de construction” in Collection de droits 2017-2018, École du Barreau du Québec, vol. 7, Contrats, sûretés, publicité des droits et droit international privé, Cowansville, Éditions Yvon Blais, 2017, p. 59. Industries Panfab inc. v. Axa Assurances inc., 2018 QCCA 1066, para. 14. Ibid. para. 22. National Bank of Canada v. Soucisse, [1981] 2 S.C.R. 339. Fireman’s Fund du Canada, cie d’assurances v. Frenette et frères Itée, 1989 CanLII 815 (QC CA).

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June 22, 2018

The City of Montreal revises its by-law on contract management

Redefining and expanding the concept of conflict of interest, clarifying situations of “ineligibility to contract”, introducing a principle of supplier rotation, increasing the eligibility threshold for the award of a private contract. These are the main changes that the City of Montreal has made to what is from now on its by-law on contract management. Section 573.3.1.2 of the Cities and Towns Act, CQLR c. C-19, which requires all municipalities to adopt a contract management policy, entered into force on March 1, 2010. There have been several versions of the City of Montreal’s policy, which was first adopted on December 16, 2010, including the most recent version adopted on August 25, 2016.1 On January 1, 2018, the Act mainly to recognize that municipalities are local governments and to increase their autonomy and powers, SQ 2017 c.13 (or “Bill 122”) transformed these contract management policies into by-laws. The City of Montreal took this opportunity to revise its own policy, a new version of which was circulated to various City authorities beginning May 28, 2018 in order to be adopted on June 22 2018. The new by-law enters into force on June 26, 2018. Overview of the main changes Clarifications relating to scope: The policy’s central objective was to “sanction wrongful acts committed in the context of city contracts”,2 whatever these acts may be. The by-law is amended to clarify that it applies not only to contracts entered into by the City of Montreal, but also to subcontracts directly or indirectly connected to those contracts or to the related procedures (s. 3), a point on which the previous wording was ambiguous. The by-law also states that it is deemed to be an integral part of these contracts (s. 3, in fine). Codification of certain practices: As per s. 12, the City of Montreal is now obliged to preserve the personal notes and individual assessment prepared by each member of the selection committee, the composition, deliberations and recommendations of which remain confidential. As per s. 31, the City of Montreal must maintain a register of ineligible persons; this register is separate and distinct from the Register of enterprises ineligible for public contracts held by the secretariat of the Treasury Board in accordance with the Act respecting contracting by public bodies, CQLR c. C-65.01. Changes regarding ineligibility Obligation of all subcontractors to declare not only that they have no conflict of interest, but also that they are not in a situation that confers them an unfair advantage (s. 5), meaning a situation in which they would have had access to information related to a call for tenders which was not publicly available, for any reason whatsoever (s. 1(12)). For example, a subcontractor could be disqualified or have its contract terminated and be declared ineligible if the City of Montreal discovered that one of its former employees was associated in any way with the preparation of a call for tenders for the contract at issue. This new section also recognizes an arbitration award that stated that the twelve-month prohibition on hiring an individual who participated in the preparation of a call for tenders was too broadly worded and amounted to an “an unreasonable hindrance to the employability of scientists;”3 the proposed rewording (ss. 5-7) seeks to limit this prohibition to what is strictly necessary, i.e. situations where this participation confers an unfair advantage or creates a conflict of interest. Prohibition of persons listed in the City of Montreal’s register of ineligible persons from working on or from having an interest in a City of Montreal contract, without a specific authorization from the City (ss. 15-16, 28-30). For example, an architect listed in the register of ineligible persons could not be included on a team of professionals contracted by the City of Montreal, and could not finance this team. Clarification as to the cumulative nature of ineligibility periods for repeat offenders (s. 32) Offenders who, during their first two years of ineligibility, commit another offence which would be punishable by five years of ineligibility, become ineligible for six years from the date of the second offence. Relaxation and tightening of certain rules related to awarding contracts and contract management Increase of the eligibility threshold: the City of Montreal can enter into a private contract if it involves an expenditure that is less than the expenditure threshold for a contract that can be awarded only after a call for public tenders in accordance with section 573 of the Cities and Towns Act, CQLR c. C-19 (s. 33). Fixed by ministerial decree, this threshold is currently set at $101,100. Rotation principle: regarding these private contracts, the City of Montreal may not enter into two similar contracts with the same supplier within 90 days of each other (s. 34). Introduction of rules specific to managing variations in the planned quantity of items for unit price contracts (ss. 1(14), 18) and the use of contingencies in budgeting; these contingencies are from now on specifically defined as “any modification of a contract that is accessory to that contract and that does not change its nature” (ss. 1(4), 19-20, translation). Several of the proposed changes recognize the recommendations resulting from arbitration awards or created by the Office of the Inspector General of Montreal.4 All of these changes are part of the City of Montreal's desire to reinforce the principles of healthy competition, transparency, and fairness that govern public markets in Quebec. City of Montreal, Politique de gestion contractuelle (version finale), telle qu’adoptée par le conseil municipal, à sa séance du 23 août 2016, et par le conseil d’agglomération, à son assemblée du 25 août 2016, [“Contract management policy (final version), as adopted by the City Council in its session on August 23, 2016, and by the agglomeration council at its meeting of August 25, 2016”], online. See the Decision summary for case no. 1184990002 for decision-making documents sent to elected officials in anticipation of the agglomeration council’s regular meeting on May 31, 2018, online, p. 13/35. Le syndicat professionnel des scientifiques à pratique exclusive de Montréal c. Montréal (Ville), 2016 CanLII 68692 (Mr. André Sylvestre) [translation]. See the Decision summary for case no. 1184990002 for decision-making documents sent to elected officials in anticipation of the agglomeration council’s regular meeting on May 31, 2018, online.

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