In a previous article[1] we wrote about the decision in High Tech Power Inc. v. BDA Inc., where it was determined that the amounts awarded to the successful claimant in an adjudication, High Tech, could not be used by the unsuccessful party, BDA, to reduce the quantum of the bond it had posted to vacate High Tech’s lien in a parallel lien action.[2]
In that case, a portion of the amount awarded to High Tech [the “Disputed Funds”] had been placed in the trust account of BDA’s lawyers because of a demand by High Tech’s surety, Westport. The Court had found that, as the Disputed Funds were still subject to the direction and control of BDA while in the hands of its lawyers and at the risk of being dealt with contrary to High Tech’s interests, they could not be used to reduce the quantum of the lien bond.
In the sequel, Westport Insurance v. BDA Inc., the parties now included Westport, the surety, which was seeking a summary determination directing that the Disputed Funds be paid immediately to it, or that they be paid into court. [3] High Tech (the subcontractor and the principal under the performance bond issued by Westport) resisted the motion, asserting its priority entitlement pursuant to the adjudication award. The general contractor, BDA, did not participate in the motion, but agreed to abide by the result.[4]
In Westport, the central issue was whether Westport, as surety, could assert a security interest over the Disputed Funds.[5] The Court held that the surety could assert that security interest. However, on the facts of the case, the Court declined to order immediate payment of the funds to Westport as a final order, directing instead that the funds be paid into court. The Court’s main reason for declining the final order was the continuing litigation in respect of the funds and an insufficient record before the Court to support a final determination.[6]
The key takeaways from the Westport decision are that sureties will be entitled to assert priority against a wide range of funds, including those awarded in construction adjudications, as long as their indemnity agreements are drafted broadly. While ensuring the flow of funds through adjudication is important, a competing and equally important consideration is not disturbing the construction bonding regime. Westport agreed to act as surety, but only on the basis that there was an indemnity agreement and security given by High Tech. The Court reasoned that there could be a chilling effect if parties are able to gain the benefit and protection of surety bonds to secure public contracts but are then permitted to circumvent their indemnity obligations when a claim is made.[7]
We review and discuss the Westport decision below.