Note: Proland Corp. (Owner/Developer) provided a standby LC in favor of the City of Edmonton (City) in connection with approvals related to an industrial subdivision. Owner/Developer subsequently contracted with MGN Contractors Inc. (Contractor/Obligee) to build roads, services, and drainage required for the subdivision. Contractor subcontracted some of the work to Sprague-Rosser Contracting Co. (Subcontractor/Obligor). Under the terms of the subcontract, Subcontractor/Obligor provided Contractor/Obligee with a 50% performance bond.

The subcontract was for CAD 6,391,101.50. The parties to the subcontract agreed to a change order, amending the subcontract on 14 April 2008. The change order added an additional CAD 2,432,000 to the contract price and set the completion date before the end of 2008. AXA Pacific Insurance Co. (Surety) was never notified of the amendment to the contract, and issued the 50% performance bond on 12 May 2008, referencing the original subcontract even though that contract contained unfilled blank spaces. No reference in the bond was made to the change order.

On 24 August 2009, Subcontract/Obligor quit the worksite. On 3 September 2009, City drew upon the standby LC provided by Owner/Developer in order to engage a replacement contractor to finish the servicing obligations. This drawing caused a chain reaction, whereby Owner/Developer terminated the general contract between it and the Contractor/ Obligee, who in turn notified Subcontractor/Obligor that the cancellation of the general contract had the effect of canceling the subcontract. Eight days later, on 11 September 2009, Contractor/Obligee sent a notice of default to Surety.

When Surety refused to pay, Contractor/ Obligee sued to collect on the performance bond. Surety moved for summary judgment to dismiss Contractor/Obligee's claim. The trial court Master denied summary judgment. Surety appealed. The Alberta Court of Queen's Bench, Judicial District of Edmonton, Graesser, J., affirmed the decision of the Master's decision.

Terms of the Surety Bond: As set forth in the opinion, the "operative portion of the bond" provided:

"Whenever the [Subcontractor/Obligor] shall be, and declared by the [Contractor/Obligee] to be, in default under the Contract, the [Contractor/ Obligee] having performed the [Contractor/ Obligee]'s obligations thereunder, the Surety shall promptly:

1. remedy the default, or;

2. complete the Contract in accordance with its terms and conditions or;

3. obtain a bid or bids for submission to the [Contractor/Obligee] for completing the Contract in accordance with its terms and conditions and upon determination by the [Contractor/ Obligee] and the Surety of the lowest responsible bidder, arrange for a contract between such bidder and the [Contractor/Obligee] and make available as work progresses (even though there should be a default, or a succession of defaults, under the contract or contracts of completion, arranged under this paragraph) sufficient funds to pay to complete the [Subcontractor/Obligor's] obligations in accordance with the terms and conditions of the Contract and to pay those expenses incurred by the [Contractor/Obligee] as a result of the [Subcontractor/Obligor's] default relating directly to the performance of the work under the Contract, less the balance of the Contract price; but not exceeding the Bond Amount. The balance of the Contract price is the total amount payable by the [Contractor/ Obligee] to the [Subcontractor/Obligor] under the Contract, less the amount properly paid by the [Contractor/Obligee] to the [Subcontractor/ Obligor], or;

4. pay the [Contractor/Obligee] the lesser of (1) the Bond Amount or (2) the [Contractor/ Obligee's] proposal cost of completion, less the balance of Contract price."



The views expressed in this Case Summary are those of the Institute of International Banking Law and Practice and not necessarily those of ICC or the other partners in DC-PRO.