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Lionel Smith
Mon, 21 Apr 1997 15:16:09
form and substance


1. Form.

I note that the posting which displayed an intimate familiarity with the workings of the construction industry was from David Percy of the Faculty of Law, University of Alberta, even though it showed my name in the From line. The reason for this is that the original posting was "bounced" to me as list owner. When this happens there is a way for me to approve it so that it is not only posted but is posted transparently so that there is no sign of my involvement. In this case I made a mistake and so it appeared as a posting from me.

The reason I mention this is not only to tell you that the message was from David but to explain why messages get bounced to me. There are two main reasons. The first is a rather crude system that majordomo has for identifying cases where someone has sent an administrative request (eg a "who" or "get" command) to the posting address rather than the majordomo address. The system wants to bounce these to avoid replicating the misdirected command to all subscribers. The system is however crude in that it has a list of command words (eg "approve", "subscribe", "unsubscribe", "help") and if any such word appears in the subject line or about the first five lines of the message, it gets bounced. This is rare and I do not mind redirecting the odd one of these so do not trouble to try to word your thoughts so as to avoid this.

The other reason is more common, which is that majordomo identifies the message as from a non-member. This often happens because your email address has changed. Thus it might have changed from ‹lsmith@law.university.uk› to ‹lionel.smith@university.uk›, due to some internal reorganization of your email system. Usually the techs who do this can set it up so that mail sent to your old address still comes to you. You thus get other peoples' postings without noticing a problem. But majordomo simply has a list of members' addresses so that when you try to post a message you do not match an entry on the list and your message is bounced to me.

The reason I am telling everyone this is that you might have an experience like David's, which is (1) your posting does not appear right away, then (possibly) (2) when it does it does appear, it does not have your name on it, then (3) you mysteriously get a "welcome to the restitution list" message. The reason is that after trying to repost your message, I will usually try to prevent recurrence by subscribing your new address (which means you get a "welcome"), and, to prevent your getting two of everything, I then unsubscribe your old address.

If you are not sure whether this type of change has affected you, you can always test it by sending a "who restitution" to ‹majordomo@maillist.ox.ac.uk›. If the address you are sending from is not on the list, your request will be rejected. You can then send a "subscribe restitution" to the same address. If you then find you are getting duplicates, let me know and I will unsubscribe the old one. (You cannot unsubscribe except from the old address, which of course you can no longer send from ...)


2. Substance

David wrote:

... it seems to me that the issue is clouded by the words of the standard Canadian performance bonds, which allows the surety to offset against its liability for up to the principal amount of the bond the balance of the contract price. Unencumbered by minor details such as the facts of the case, it seems to me that the assumption of the surety industry is that the surety gets everything which the properly completing contractor would have received from the owner.

Surely though the surety needs to rely on subrogation or some such general doctrine in order to have rights which prevail against the subcontractors who are not parties to the bond?

Andrew Tettenborn wrote:

Indeed, I find it difficult to understand the idea of being subrogated to a right of set-off. Set-off is a right not to pay a debt one would otherwise owe; how this right can be transferred to, vested by law in, or allowed to be exercised by, someone who doesn't owe a penny in the first place is beyond me.

The thinking, as I understand it, is this: the contractor owes the subcontractors when the subcontractor defaults. Leaving out a surety, the owner would complete. It owes the contractor money for what *was* done, but has a right to set off the costs of completion. The subcontractors, who are not in privity with the owner, want to see money get to the contractor somehow; but less money gets the contractor because of the set off. Effectively, the set off has priority over the subcontractors' claims.

Now add the surety. Upon the contractor's default, the owner calls on the surety to complete, and it does. The contract gets completed and the owner owes the price to the contractor. It pays the contractor. Without subrogation, the situation is that the surety is a creditor of the contractor, as the bond of course provides for a right in the surety to recover from the contractor its outlay in completing the contract. The subcontractors are also creditors of the contractor. Thus we will apply the relevant priority rules to the claims. The surety might be a secured creditor, but then the subcontractors might be too; and if they are protected by a statutory trust (as in CU) they are ahead of the surety.

The surety invokes subrogation to say that, having met an obligation owed to the owner, it takes over the position formerly held by the owner. That includes a prior claim to the funds paid on completion. I agree with Andrew Tettenborn that it is hard to see the surety taking over a right of set off when it did not owe a debt, but the surety did owe a debt in the form of its obligation to complete. The court in CU cited an earlier BCCA case where it was held (as in the US jurisprudence, I think) that the surety gets priority over a secured creditor of the contractor on this basis. The dissenting judge in CU would have applied this, with the result that the funds in question were never subject to the statutory trust. They are not subject to the trust before the owner pays them, and subrogation allows the surety to put itself in that position, ie to take the funds as if they had never been paid by the owner.

If this argument works then the surety gets priority even if the owner pays the contractor, so the owner might as well pay directly to the surety. In CU the owner simply kept the money pending resolution of the dispute.

The claim which succeeded in CU was that the statutory trust in favour of the subcontractors would attach (in priority to the surety's claim) when the contractor got the funds from the owner; hence, the trust should also attach even if the surety received the funds directly from the owner. The success of this argument appears to be inconsistent with the earlier holding that the surety prevails against a secured creditor of the contractor.



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