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Lionel Smith
Fri, 11 Apr 1997 12:06:41


For the subrogation buffs, there is a recent case from the British Columbia Court of Appeal called Commercial Union Assurance Co of Canada v. Surrey (City), 19 March 1997. It is not reported yet but will be soon I am sure.

The fact pattern has been litigated many times and, I think, settled in the US, but I guess it was a case of first impression in Canada or at least BC. The main contractor posts a performance bond for a contract and then defaults on the contract, leaving subcontractors unpaid and the contract unperformed. The performance bond surety completes the contract and gets paid by the owner. The question is whether the surety can be subrogated to the right which the owner would have had, to hold back money otherwise payable to the contractor but which was required to remedy the contractor's default. I understand that it is settled in the US that the answer is "yes." If the answer is "no" then the surety still has a claim for the costs of remedying the default, but it would not rank ahead of the subcontractors' claims. In fact it is likely to rank behind, where, as in BC and I think all Canadian provinces, there is a statutory trust imposed on contract payments received by the contractor, the beneficiaries of which trust are the subcontractors.

In this case it was held by a 2-1 majority that the subrogation claim failed (without the benefit of the US cases). The majority's reasoning appears to be that the surety takes the payment from the owner subject to the statutory trust. I suspect that at least some of the US cases were decided in the context of a similar statutory trust. Indeed I think in some states a trust for the benefit of subcontractors is seen to arise even in the absence of a statute.

Note however the argument in S Walt and E Sherwin, "Contribution Arguments in Commercial Law" [1993] Emory LJ 897, which suggests that the standard result giving priority to the surety is wrong, as are priority for beneficiaries of constructive trusts and priority for holders of purchase money security interests.

If anyone would like a copy, please let me know. If there is a lot of interest I can make it available via the "get" function.


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