In a recently decided case by the Supreme Court of Canada, Justice Brown clarified what duty a trustee owes to a beneficiary with respect to notifying them of the existence of a trust. In specific, this case established that trustees, in a commercial setting, may be liable to beneficiaries should they fail to take steps to ensure that the beneficiaries are aware of the trust if the failure to do so would cause unreasonable disadvantage to the beneficiary.
Facts
This case arose out of a construction dispute between Valard Construction, who acted as a sub-subcontractor to Langford Electric, and Bird Construction, who had subcontracted some of its work to Langford in the scope of acting as the general contractor for Suncor. As a standard term of Bird's contract with its subcontractors, Bird required its subcontractors to post a labour and material payment bond to cover nonpayment. By virtue of the fact that Bird held the right to claim against the bond fund in trust for all potential claimants against the bond and because the bond itself specifically contemplated Bird as trustee, Bird found itself in a fiduciary relationship with respect to all contractors further down the chain from Langford.
In the course of the construction project, Langford became insolvent and was unable to pay certain invoices for work completed on the construction site. Valard sued Langford and obtained default judgment for the amount outstanding.
On a subsequent oilfield construction project, Valard learned that Bird had been requiring its subcontractors to post L&M bonds. When Valard inquired about the existence of a bond on the previous project, Bird confirmed the existence of Langford's L&M bond; but when Valard attempted to recover the amount of the judgment from the issuer, Guarantee Company, they were denied recovery because notice of the claim had been issued outside the 120 day limitation period. Valard commenced a second action, this time against Bird, for breach of trust and Valard's case before the Court turned on whether Bird, as the trustee, had an obligation to inform Valard, as beneficiary, of the bond's existence.
A critical finding of fact for the Court was how common the issuance of labour and material nonpayment bonds were in the industry and for the projects that the parties were engaged in. To Justice Brown, the fact that these type of bonds were uncommon in the oilfield industry was fatal to Bird's defense, while to Justice Karakatsanis the fact that labour and material bonds were ubiquitous in the construction industry meant that Valard should have played a more active role in confirming the existence of the bond.
Analysis
This is the first time the Supreme Court of Canada has been asked to decide the obligations of trustees to notify beneficiaries of a trust. Reading Waters' Law of Trusts (3rd Edition), before Valard there was no defined rule on whether a trustee owed a duty of disclosure of the existence of the trust to beneficiaries. Waters' admits that there may be recent some development in this area throughout the commonwealth, but that the silence of the courts generally has led many to believe that there was no positive obligation on trustees to seek out and supply knowledge to beneficiaries. Waters' further expands on this that the emerging test could be whether the beneficiary would suffer "unreasonable disadvantage" if uninformed of the existence of the trust. This is the exact language adopted by Justice Brown and will likely now be the yardstick for determining whether a trustee owes a duty to disclose a trust to a beneficiary. Justice Brown limits the application of the rule to cases where the beneficiary interest is too remote from the trust. He states that a beneficiary would rarely be able to prove that it suffered from unreasonable disadvantage if uniformed of the trust if: the likelihood of vesting is "most unlikely" or if the potential abuse of the discretion on the part of the trustee is "equally unlikely".
Having given birth to this new duty by trustees, Justice Brown puts flesh on its bones and outlines the content of the duty. Firstly, the standard by which trustees must be measured is that of honesty, and reasonable skill and prudence. In the context this rule, whether a trustee has met that obligation will depend on the factual circumstances of each case, and what the trustee ought to have known. Factors which play upon the trustee's obligation are: (1) terms of the trust, (2) identity of the trustee and beneficiaries, (3) the size of the class of beneficiaries, and (4) pertinent practices within the industry. Justice Brown is careful to note that these factors should be applied with respect to the particular circumstances of the case. He also reins in the obligation by acknowledging that pragmatic factors associated with fulfilling the obligation such as actual or constructive knowledge of the trust by the beneficiaries or practical impossibilities of notice may limit or extinguish the duty.
Applying the test to the case at bar was quite simple, since Bird had taken zero steps to notify Valard of the existence of the bond before the rights had already been extinguished by the passage of time. Sadly, the ease with which Justice Brown disposed of the appeal provides little guidance for future trustees, since the only hypothetical advanced by the Court was that Bird could have simply given notice to the majority of the beneficiaries by posting notice of the bond in the site trailer where the beneficiaries were required to attend compulsory meetings.
In her dissent, Justice Karakatsanis rejected the obligation to notify potential beneficiaries of a trust in the commercial context because equity was a flexible tool that imposed different obligations depending on the context. In the first instance, she implies that everybody knows or ought to know that a labour and material bond is posted for a construction project, such was the penetration of their use in the industry. While in the second instance, she stated that the interpretation of commercial sureties so as to impose obligations on the trustees where the trust relationship is merely a coincident of the contractual relationship undoes its primary purpose. As already admitted by the majority, the issuance of L&M bonds was primarily for the benefit of the general contractor and the owner who would suffer losses resulting from liens, work stoppages, and litigation (see para 22), so by imposing an obligation on the general contractor to notify claimants of the bond, liability has shifted back to the party who sought to reduce their liability in the first place.
I can see why this was not a convincing argument to the majority of justices of the Supreme Court, since in the first case, the evidence was that labour and materials bonds were rare on oil sands projects. In the second case, that the liability imposed by an obligation to notify subcontractor beneficiaries by way of a posted notice is not so onerous that the general contractor would suffer any serious prejudice or cost by meeting the obligation. Thinking of the great many tests and rules of equity, I could only see the balance of fairness falling on requiring notice by the general contractor instead of allowing a subtrade to go unpaid for hundreds of thousands of dollars. The cost to cost ratio of a creating piece of paper and expending ten minutes of work versus thousands of dollars of materials and hundreds of hours labour is unfathomably in favour of requiring the notice.
I should note however, that Justice Karakatsanis had stare decisis on her side. Bird could point to a case with arguably the exact facts of this case that was decided in their favour, but that case was rejected by the majority.
Future Impact
What issues this case raises and how it will play out seems uncertain. The standard form of surety form was drafted well before the ruling in London Drugs/Fraser River, wherein the Supreme Court of Canada established that third party beneficiaries may sue on a contract they were not a party to so long as it conferred some benefit to them. In response to this case, astute issuers of labour and materials bonds might simply alter the language of their contracts to not explicitly appoint general contractors and obligees as trustees of the right to claim against the bond. This may be sufficient to shift the onus onto claimants to inquire as to the placement of bonds before the expiration of the notice period for labour and material bonds, or it might simply change the express trustee relationship of the general contractor to an implied relationship which would require the same degree of notice.
On the other hand, perhaps this will actually encourage general contractors to make genuine efforts to give notice to their subcontractors where a labour and materials bond in place, even if it is commonplace in the industry. As new players enter industries and virtual marketplaces become increasingly commonplace, it remains to be seen what impact this case will have on commercial trustee relationships in an evolving workplace.
Reading through the case, it seems that the commercial relationship between the parties was a significant diluting factor and not at all a factor which increased the duty of Bird as trustee to notify Valard, the beneficiary of the rights held in trust. I would expect to see more citations of this case in the personal trust sphere, especially estate litigation, where the class of beneficiaries is significantly smaller, the terms of the trust likely to be more severe, and the identities of the trustee(s) and beneficiary (ies) more readily apparent.
One thing that is certain is that Canada, like other commonwealth countries, now has a clear test for the trustee obligation to provide notice to beneficiaries of the existence of a trust, that of the "unreasonable disadvantage".
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