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 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.) 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 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 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.) 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) Scott and Reynolds on Surety Bonds (Toronto: Carswell, 2003) Rowlatt on Principal and Surety, 5 th edition (London: Sweet & Maxwell, 1999) Rowlatt on Principal and Surety, 5 th 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. 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. ss. 4 & 5 Performance & Payment Bonds Lien Bonds Liens Contracts HB Q.: Used in the Construction Industry?

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

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

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

15. What People See 1. Demands for Information 2. Delay 3. Denial 4. Litigation What People Get 1. Filter function of underwriting process 2. Activities of skilled adjusters 3. Surety-financed recoveries and resolutions 4. Calls on indemnitors, pressures to settle 5. Mediation function formally, informally 6. Redistribution of wealth, nationally

16. The Future New CCDC Bond Forms

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

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

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

20. CCDC 221 – Performance Bond 2002 – New Option 2002 – New Option Pay difference between contract price and proposed cost of completion less balance of contract price 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 YearIntakeOutputLoss Ratio $,000$,000$,000 2000195,89543,82122% 2001215,18991,54143% 2002238,06892,08439% (Courtesy of Robert Dempsey, P.Eng., The Guarantee Co. of North America)

25. The End