Weilers LLP

Bond Trustees Do Have Duty to Inform

Bond Trustees Do Have Duty to Inform

April 15, 2021

By Brian Babcock

A trustee has a duty to inform beneficiaries of the existence of the trust where failure to do so might result in the beneficiary suffering a loss. Failing to fulfill his duty may result in the trustee being required to make good the beneficiary’s losses.

This principle is noteworthy not only in trusts arising from estates or gifts, but also where trusts arise in business contexts. There is a risk all too frequently that a commercial party who is incidentally in the position of a trustee will lose sight of the nature of this role and focus on contractual matters.

An example is the construction bond trust. Construction bonds are frequently (but not always) required to be obtained to guarantee the performance of work on a project or the payment of labour and materials claims, in order to avoid construction liens holding up a project. Because the parties who benefit from the bond are not in a contractual relationship with the bonding company (usually an insurer), the contractor usually is defined in the bond as a trustee purchasing the bond for the benefit of others. The other parties are then given rights under the bond to make direct claims. Strict time limits and procedural requirements apply.

The Supreme Court of Canada emphasized the duty of the trustee, and the potential liability, in Valard Construction Ltd. v. Bird Construction Co. The facts of the case were a bit unusual, which is what led to the dispute. The contract was in the oil sands area. The evidence was that labour and material payment bonds were unusual in that sector. However, Bird had required its electrical contractor, Langford, to provide a bond, of which Bird was trustee. When Valard’s invoices were not paid by Langford, it did not make a timely claim on the bond because it did not know that the bond existed. Months later, on another project, Valard learned of Bird requiring a bond, and only then did they make inquiries as to the existence of a bond on the Langford project. By that time the notice period to claim under the Langford bond had expired.

The issue was whether Bird had a duty to inform Valard of the bond’s existence.

Bird argued that they were only what is called a “bare trustee”. That is a trustee used only for convenience, which has the duty only to follow the instructions of the beneficiaries. They are often found in commercial or real estate situations.

Bird also argued that the bond only existed to protect it from work stoppages, not for the benefit of the beneficiaries.

At trial, Valard’s claim was dismissed, on the basis that a simple inquiry by Valard would have told them of the bond’s existence. The Alberta Court of Appeal agreed. Their reasoning relied upon the Alberta Builder’s Lien Act, which provides a right to demand information.

The Supreme Court found in favour of Valard. Bird was not a “bare trustee”. Bird was ordered to pay Valard the $659,671 it could have recovered under the bond.

In doing so, the Court relied upon general trust principles, so this decision applies not only to construction bonds, but also to the variety of bonds with trustees in place. It is also a useful reminder of the duty of trustees to inform beneficiaries generally.

 The principles include:

  • even though a trust document does not contain an express duty to inform, the law of trusts governs where the trust document is silent on the duty
  • at its core, a trust exists for the benefit of the beneficiaries
  • the trustee has a duty to hold the trust property for the benefit of the beneficiaries
  • a trustee must act honestly and with that level of skill and prudence which would be expected of the reasonable person of business administering his or her own affairs
  • a trustee cannot delegate the office to another
  • a trustee cannot profit personally from its dealings with the trust property or with the beneficiaries of the trust
  • a beneficiary has a right to require the trustee to enforce the terms of the trust
    • This point is especially important, as enforceability is the essence of what makes a trustee different from an absolute owner of property. This disposes of Bird’s argument that it in effect was the beneficiary of the trust
  • in some cases, the beneficiary’s right can only be meaningful if they are informed of the existence of the trust; in those cases, equity imposes a duty to inform on the trustee

Determining which cases fit in this category requires examining the nature and terms of the trust and the social or business environment in which it operates, and the beneficiary’s entitlement thereunder.

Where the beneficiary would not have knowledge of the trust without being informed by the trustee, the duty to inform applies. A trust cannot be a “bare trust” unless the beneficiary knows about the trust. That disposed of that argument.

The court also decided is also unreasonable to require a beneficiary to demand information about bonds that it does not know exist. This is a pivotal finding that differs from the Alberta Court of Appeal, and thus might be surprising to some.

What made the Valard case different from most cases was that in the particular sector in which they worked, bonds were uncommon. The result likely would have been different if the contract involved a sector where bonds were routinely expected to exist.

It would have been simple for Bird to provide notice of the bond – there was a bulletin board on site where all sorts of important notices were posted, and everybody checked it regularly. Such notice of bonds was required by law on all public construction projects. But Bird did nothing. Something more than nothing is required under the duty to inform.

Bird breached its duties as trustee.

Because Valard suffered a disadvantage as a result of the non-disclosure, Bird was liable.

Each case will depend upon its own facts, but the same principles will apply.  Because the Supreme Court relied upon trust principles, not lien legislation, it also applies in Ontario.

The construction industry is a strange creature, filled with unusual practices. Labour and material payment bonds have a significant role to play in the payment system, so knowledge as to their existence may be important. Being aware of the duties involved is part of avoiding nasty surprises.

Trust issues arise not only in estate situations, but in virtually every area of law. This decision illustrates the importance of understanding trust principles in the business context and being aware of potential liability. It also demonstrates yet again that the courts will favour the protection of vulnerable parties, which is the core value underpinning equity, the branch of law which includes trusts.