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The 20 Minute Bond Lecture

The 20 Minute Bond Lecture. Duncan W. Glaholt Glaholt LLP. Q.: What is a Bond?. But: It has real sticking power. Q.: What is a Bond?. But: It is a sophisticated instrument. Q.: What is a Bond?. A Bond is:. A piece of paper issued under the seal of a surety company

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The 20 Minute Bond Lecture

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  1. The 20 Minute Bond Lecture Duncan W. Glaholt Glaholt LLP

  2. Q.: What is a Bond? But: It has real sticking power

  3. Q.: What is a Bond? But: It is a sophisticated instrument

  4. Q.: What is a Bond?

  5. A Bond is: A piece of paper issued under the seal of a surety company used in the construction industry required by project financiers that most people think is worthless

  6. Five Key Cases • 1. Citadel General Assurance Co. v. Johns-Manville Canada Inc., [1983] 1 S.C.R. 513 • 2. Thomas Fuller Construction Co. (1958) v. Continental Insurance Co., [1973] 3 O.R. 202 (H.C.) • 3. Elance Steel Fabricating Co. v. Falk Bros. Ind. Ltd., [1989] 2 S.C.R. 778 • 4. Paul D’Aoust Construction Ltd. v. Markel Insurance Co. of Canada, [2001] 3 S.C.R. 744 • 5. Whitby Landmark Development Inc. v. Mollenhauer Construction Ltd., [2003] O.J. No. 4000 (C.A.)

  7. Two Key Books • Scott and Reynolds on Surety Bonds (Toronto: Carswell, 2003) • Rowlatt on Principal and Surety, 5th edition (London: Sweet & Maxwell, 1999)

  8. Q.: Is a Bond Just a Piece of Paper? • A.: No, it is much more than just a piece of paper.

  9. Paul D’Aoust Construction Ltd. v. Markel Insurance Co. of Canada (1999), 45 C.L.R. (2d) 65 (Ont. C.A.), aff’d [2001] 3 S.C.R. 744: “A bond is simply a deed (a deed being a document in writing on paper which is signed, sealed, and delivered…) whereby one person undertakes to pay a specified sum of money to another, either immediately or at a future date.”

  10. Paul D’Aoust : “If a deed is not delivered, it is not effective. In Re Sammon, at p. 724, Morden J.A. held as follows: ‘[…] In order that a deed shall be effective it must be "delivered", that is to say the party whose deed the document is expressed to be, having first sealed it, must by words or conduct expressly or impliedly acknowledge his intention to be immediately and unconditionally bound by the expressions contained. […]’ To be effective a deed, and thus a bond, must be delivered.  I can see no reason to depart from this settled law.”

  11. Q.: Used in the Construction Industry? Contracts ss. 4 & 5 Performance & Payment HB Bonds Liens Lien Bonds

  12. Q.: Required by Project Financiers? • Uniquely North-American phenomenon • Thought to be a smart risk management tool • Like all “guarantees”, gives stakeholders a warm, fuzzy feeling

  13. Cheaper rate than letter of credit, more expensive absolute cost • Call on letter of credit is cheap, produces cash. Call on surety bond is expensive, produces litigation • Cheaper than credit insurance?

  14. Q: That Most People Think is Worthless? A: Wrong

  15. What People See Demands for Information Delay Denial Litigation What People Get Filter function of underwriting process Activities of skilled adjusters Surety-financed recoveries and resolutions Calls on indemnitors, pressures to settle Mediation function formally, informally Redistribution of wealth, nationally

  16. The Future New CCDC Bond Forms

  17. CCDC 220 – Bid Bond • 1979 – 60 days to award contract • 2002 – Whatever time is in bid document

  18. CCDC 220 – Bid Bond • 1979 – Had to sue within 6 months of bond date • 2002 – 7 months

  19. CCDC 221 – Performance Bond • 1979 - Usual options: • Rectify default • Pay penal sum • Completion by surety • Completion by new contractor at expense of surety as work progresses

  20. CCDC 221 – Performance Bond • 2002 – New Option • Pay difference between contract price and proposed cost of completion less balance of contract price

  21. CCDC 221 – Performance Bond 1979 – Limitation = 2 years from “final payment falling due (i.e. never)

  22. CCDC 221 – Performance Bond 2002 – Limitation = 2 years from earlier of: -substantial performance - declaration of default (i.e. consistent with new Limitations Act)

  23. CCDC 222 – Payment Bond 1979 – CCA “Rental Rates” applied 2002 – Whatever (i.e. prevailing market rates in place of work)

  24. Surety Statistics Year Intake Output Loss Ratio $,000 $,000 $,000 2000 195,895 43,821 22% 2001 215,189 91,541 43% 2002 238,068 92,084 39% (Courtesy of Robert Dempsey, P.Eng., The Guarantee Co. of North America)

  25. The End

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