REALWorld Law


Security documents

Apart from the contract are any other documents commonly entered into by way of security – such as a guarantee from a building contractor's parent or ultimate holding company or a bond from a third-party surety?



In relation to the construction activities comprised within a development project, the financier will usually require the benefit of all of the material contracts to which the employer is a party to be assigned to it by way of security. In this context, the employer is, of course, the borrower of finance from the financier. The type of security which the employer will usually obtain from a contractor (and which may then be assigned to the financier) includes the construction contract itself, the guarantee to the employer of the building contractor’s obligations under the construction contract (which is given by one of its parent companies or – exceptionally for large contractors – the ultimate holding company in the group) and the performance security from a third party surety to the employer.

It is fairly common in Canada for contractors to provide a performance bond and a labour and materials bond. These bonds are issued by licensed surety companies. Under the performance bond, the surety has the right to complete the construction work following a default by the contractor or to pay a fixed amount to the owner. The labour and materials bond is designed for the protection of subcontractors and allows subcontractors to claim payment from the surety if the contractor fails to pay or becomes insolvent. In Ontario, both types of bonds are now mandatory for contracts on public projects that exceed $500,000 in value.

On larger projects, it is also common for major subcontractors to be required to procure both performance and labour and material payment bonds.

Performance security can be either ‘on demand’ in nature (meaning that the surety would release bond monies on written demand from the employer) or ‘on default’ in nature (meaning that, broadly, a court judgement or adjudicator’s decision would be required to be presented by the “obligee” under the bond before the surety would release bond monies).  The latter is typical for both performance and labour and material payment bonds. Other types of security include letters of credit and retention monies, that is, monies which are deducted from a payment made to the contractor.

On large projects it is also reasonably common to require the parent company of the contractor to provide a guarantee of performance. These guarantees often contain some type of limitation clause or financial cap limiting the guarantor’s liability.