Supreme Court of Canada Expands Trustees’ Duty to Provide Notice

Valard Construction Ltd. v Bird Construction Co., 2018 SCC 8

            The Supreme Court of Canada has recently clarified that wherever it can be said that a beneficiary would be unreasonably disadvantaged not to be informed of a trust’s existence, the trustee’s fiduciary duty includes an obligation to disclose the existence of the trust. 

            In the recent case of Valard Construction Ltd. v Bird Construction Co., Bird Construction Co. (“Bird”) was a general contractor for a construction project in the oil sands.  Bird sub-contracted with Langford Electrical Ltd. (“Langford”) for certain electrical work and, as part of its contract, required Langford to obtain a labor and material payment bond. This bond named Bird as trustee and meant that if a provider of work could not receive payment from Langford, it could recover the unpaid funds from Bird who was acting as a surety for that unpaid sum.  Any such recovery was, however, subject to the condition that notice of the unpaid claim was given within 120 days of the provider’s last day of work. 

Following Langford’s arrangement with Bird, Langford contracted with Valard Construction Ltd. (“Valard”) to provide work on the project.  When Langford became insolvent, some of Valard’s invoices went unpaid.  Valard, however, was not aware of the bond’s existence and it was only after the 120 day notice period had passed that Valard learned that the bond had been obtained for the project.  Upon learning that the bond existed and that Bird had never provided notice to Valard, Valard sued Bird for breach of trust, alleging that Bird should have notified Valard in time to bring a claim.

The trial judge dismissed Valard’s action finding that Bird owed no duty to notify Valard of the existence of the bond. A majority of the Alberta Court of Appeal dismissed Valard’s appeal, agreeing that Bird had no legal duty to inform any potential claimant about the existence of the bond.  Both courts found that Bird’s duty to inform only arose at such time as the potential claimant made an unequivocal request for information about the bond.

            Brown J. writing for the Supreme Court acknowledged that the bond did not expressly impose a duty on Bird as trustee to protect the interest of the beneficiaries by disclosing the bond’s existence to them; however, the Supreme Court held that this was not fatal to Valard’s appeal.  While the main source of a trustee’s duty is the trust instrument, the general law which sets out a trustee’s duties, rights, and obligations continues to govern where the trust instrument is silent. 

Significantly, the “hallmark” characteristic of a trust is the fiduciary relationship existing between the trustee and the beneficiary, by which the trustee is to hold the trust property solely for the beneficiary’s enjoyment.  Beneficiaries necessarily have a right to hold the trustee to account for the administration of the trust property and to enforce the terms of the trust.  In some cases such as this, however, the beneficiary’s right to enforce the terms of the trust can be meaningfully exercised only if the beneficiary is first informed of the trust’s existence. 

For this reason, the Supreme Court clarified that wherever it could be said to unreasonably disadvantage the beneficiary to not be informed of the trust’s existence, the trustee’s fiduciary duty includes an obligation to disclose the existence of the trust.  Whether a particular disadvantage is unreasonable must be considered in light of the nature and terms of the trust and the social or business environment in which it operates.

            Here Valard was unreasonably disadvantaged by Bird’s failure to inform it of the trust’s existence.  Valard’s interest vested 90 days after its final day of work on the project, and in order to enforce the trust, Valard required knowledge of it.  Bird as trustee, therefore, had a duty to disclose the bond’s existence to Valard.  When Bird failed to do so, Valard was effectively prevented from enforcing the trust.

            In response to Bird’s argument that the sole purpose of the bond was to protect the trustee from the risk and expense of liens and work stoppages, the Supreme Court said that where a beneficiary is unaware of its right to claim under the bond within the notice period, the bond’s trustee is susceptible to the very risk which the bond was intended to avoid.

While Karakatsanis J. in her dissent stated that for over 45 years the understanding and practice in the construction industry in Canada was that a trustee of a labor and material payment bond was not required to take steps to notify potential claimants of the existence of the bond and that claimants were expected to inquire as to the bond’s existence, the majority of the Supreme Court disagreed.  The majority based their conclusion on the fact that labor and material payment bonds are uncommon in private oil sands construction projects.

            After having found that Bird, as trustee, had a duty to disclose the existence of the trust to Valard, the Supreme Court considered what action on Bird’s part would have discharged that duty.  In this case, the Court found that simply posting a notice of the bond on Bird’s onsite trailer would have been sufficient.  What is reasonable will depend on the circumstances but, because Bird did nothing here, it clearly had not discharged its duty and had committed a breach of trust.  Therefore, Valard was entitled to compensation for the sum that it could have obtained under the terms of the trust had it been aware of its rights to claim thereunder.

            This case has significant implications for trusts and specifically for the construction industry. What is required of a trustee to discharge its duty will depend on the specific circumstances, but based on this case, it is clear that a failure to notify a beneficiary of a trust’s existence may constitute a breach of trust.