Protecting your Rights: Form 31 Labor and Material Payment Bond
What is a Labour & Material Payment Bond?
A Labour and Material Payment bond is issued in conjunction with a Performance Bond on construction projects. Both of these bonds are construction surety bonds that are required on the majority of publicly funded construction projects and some private construction projects as well. In Ontario all publicly funded construction projects over $500,000 require these two construction bonds in an amount equal to 50% of the contract price.
The Labour and Material Payment bond, in conjunction with the Performance Bond, is to be provided by the prime contractor to the construction project owner, such as a municipality. The Labour and Material Payment bond is then held in trust by the owner for the benefit of the sub trades and suppliers on the project. The bond is there to ensure payment for works and the supply of materials on the project.
How Can You Use a Labour & Material Payment Bond to Protect Your Rights?
Every contractor should hope for the best and plan for the worst. One of the areas contractors get into trouble is not taking the right steps, at the right times, to protect their rights when there is a case of non-payment. With the implementation of the new Construction Act in Ontario over in 2018, the amendment to the labor and material payment bond was one of the ways to provide protection to those that have provided a valid invoice and still go unpaid.
This article will not cover lien rights but lien rights in conjunction with your rights under the labor and material payment bond are some of the best ways to protect yourself in the case of non-payment. The story too often goes that a contractor is convinced to wait on promises of payment while timelines to place a lien or file an L&M bond claim pass. Below are some of the key points to remember when looking to place a claim against an L&M bond.
1) The new Form 31 labor and material bond is what we call a “broad form” bond. This means that the definition of claimant is expanded to include not only 1st tier sub-trades and suppliers but also 2nd tier sub-trades to the extent they would be protected under the lien provisions of the Act.
2) The bond provides two notice requirements for placing a claim under the Form 31 L&M Bond.
a. With respect to holdback, a notice of claim must be received within 120 calendar days after the claimant should have been paid in full under its contract.
b. With respect to amounts other than holdback, a notice of claim must be received within 120 calendar days after that date on which the claimant last performed labor or provided materials for which the notice of claim was given.
As a result, under b) it is critically important that a contractor be able to provide evidence as to when labor was last performed or materials last provided on their projects.
3) Once a notice of claim is provided to the surety they are now required to adhere to strict timelines. Within these timelines they will be investigating the claim, requesting documents from the claimant and principal and determining if they have liability under the bond. At this stage, it is very important to be able to provide contract documents, change orders, schedules and correspondence that would support your position. In many cases, it is those with the best paperwork that will be successful. This will become even more important if there is also an ongoing adjudication.
a. Within 3 business days of receiving a notice of claim under the Form 31 labor and material payment bond, the surety must acknowledge receipt of the claim and request documentation.
b. For a subcontractor claim, the surety’s position must be delivered either 10 business days from receipt of the information or 25 days from receipt of the notice of claim.
c. For a 2nd tier subcontract the surety’s position must be delivered within 15 days of receipt of information or 35 days from receipt of the notice of claim.
4) From here, if the surety acknowledges liability, undisputed amounts must be paid within 10 days of the surety providing their position.
5) It should be noted that under the new Construction Act there is an option to adjudicate certain disputes. This provides for a speedy, binding resolution to a dispute during the project which can then be litigated at project completion. The idea here being that it resolves disputes during the project and keeps things moving. It should be noted that once a notice of adjudication is received it will stop the clock on the surety’s obligations under the bond until the adjudicators binding decision is delivered. Ontario Dispute Adjudication for Construction Contracts (“ODACC”) is the body responsible for training and qualifying adjudicators. These individuals will typically have previous experience as a construction lawyer, cost consultant, construction accountant or project manager.
Ultimately, on any project site when there is a conflict, business owners must always weigh the value of relationships against following the steps to protect their right to payment. The answer on whether to wait and accept those promises of payment is one we cannot answer, however, the first step to making an informed decision is to know the process and timelines you need to take to protect those rights under a Form 31 labor and material payment bond.