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Ontario law set to expand surety business in Canada

Ontario law set to expand surety business in Canada

Legislation passed late last year in Ontario that requires surety bonds for municipal contracts will likely expand the surety market in both the public and public-private sectors in Canada, industry sources say.

The legislation may also have a knock-on effect on other provinces, they add. In British Columbia, the B.C. Law Institute is currently undertaking a review of the Builders Lien Act to generate a report containing balanced recommendations for reform.

The Construction Lien Amendment Act, Bill 142, was passed on Dec. 5. Regulations for the legislation are being written, and one part of the law provides for the furnishing of surety bonds.

“A new Part XI.1 (Surety Bonds) is added to the Act,” the law reads. “Section 85.1 of the Act creates requirements for a contractor who enters into a contract with an owner that is the Crown, a municipality or a broader public sector organization (a ‘public contract’) to furnish the owner with a labour and material payment bond, and with a performance bond, if the contract price is above the amount set out in the regulations.”

Surety bonds, which are widely used for public contracts in the United States, provide a financial guarantee that construction projects will be completed on time and in accordance with the terms agreed in the contract.

Passage of the law will “definitely” change the market dynamics for surety bonds in Ontario, said Paul McIntyre, Toronto-based vice president of surety and bonding for trade credit insurer Euler Hermes Canada.

“Passing of the law should result in an uptick for the surety business in Ontario,” said Toronto-based Shane Sinclair, Marsh Canada Ltd.’s national surety leader.

Both cited the province’s Ministry of Transportation as one example of a potential new customer.

“Generally, the purchasers of our bonds, as an industry, is the public sector,” Mr. McIntyre said. “So, the provincial public sector was already a large purchaser of our bonds.” There were segments, however, such as the ministry of transportation, which did their own pre-qualifications and were not purchasers of bonds, he said.

“Understanding the legislation as I do, I think it’s safe to say that the Ministry of Transportation will be a purchaser of bonds in some capacity in the future, whereas they were not, so that would be an uptick in the Canadian marketplace as far as the available premium for the surety industry.”

In the past some public entities did not buy surety bonds for construction projects, he said.

“The biggest example I could give you is the Ministry of Transportation in the province of Ontario, which has historically done its own prequalifications of contractors without using bonds,” Mr. Sinclair said. “That’s probably the best example of an owner that’s now going to require bonds on its public works.”

Large infrastructure projects undertaken by public-private consortiums could also be involved.

“They have a habit of going the way of a letter of credit for performance security. I think there’s a strong possibility that may change as well,” Mr. McIntyre said. 

“There’s been some traction with the P3 bond within the industry, but this may help to increase that traction and increase our percentage of that P3 financial performance security,” he added.

The legislation calls for the drafting of a bond form that will be acceptable to principals, sureties and obligees, and the Surety Association of Canada is now involved in industry consultations for the project, Mr. McIntyre said.

As the process moves forward, there is some indication it may serve as a harbinger of things to come for other provinces.

“I believe and have been told by others that the other provinces are watching very closely the developments of the prompt payment legislation in Ontario,” Mr. McIntyre said.

“What we’ve found is that a lot of the provinces are watching the Ontario experience closely,” Mr. Sinclair said. “I certainly believe the other provinces are likely to follow down a similar path.”

The changes in the Canadian surety business also help align it more closely with that in the U.S.

“As we see the changes in Canada, some of those changes bring the Canadian surety business more into line with the way the business has historically been operated in the U.S.,” said David Hewett, Marsh L.L.C.’s U.S. surety practice leader, referring to the requirement that bonds be put in place on public works.



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