Whitby Landmark Development Inc. v. Mollenhauer Construction Limited

67 O.R. (3d) 628

[2003] O.J. No. 4000

Docket No. C35318

Court of Appeal for Ontario

Weiler, Rosenberg and Feldman JJ.A.

October 17, 2003

Construction law -- Performance Bond -- Interpretation -- Construction contract incorporated by reference into Performance bond -- Construction contract providing for owner and contractor to share costs savings -- Contractor defaulting under construction contract -- Owner claiming share of costs saving under performance bond -- Performance bond covering claim for costs saving -- However, claim under the bond dismissed because owner failing to declare contractor in default and failing to notify surety of the default -- Surety prejudiced by owner's failure to give notice.

In 1990, Whitby Landmark Development Inc. ("Landmark") entered into a construction contract with Mollenhauer Construction Limited ("Mollenhauer") for the construction of a condominium in Whitby, Ontario. The construction contract included a provision whereby Landmark and Mollenhauer would share any costs savings on the project: 75 per cent to the owner and 25 per cent to the contractor. The construction contract also required Mollenhauer to provide Landmark with a performance bond. The bond, which was in a standard form used in the construction industry (CCDC-2"), was obtained from Zurich Indemnity Company of Canada ("Zurich").

On or about February 3, 1993, Mollenhauer ceased carrying on business. It did not complete the work under the contract. Landmark completed the work itself, then made a claim under the bond, demanding payment of the balance of its share of the costs savings under the construction contract, ultimately fixed at [page629] $601,972. Zurich refused to pay. Its position was that the bond was only intended to cover the costs of completing the physical construction work but did not extend to collateral obligations such as the contractor's obligation to share the cost savings it achieved.

Landmark sued to enforce the bond. Its action was dismissed. The trial judge held that although the bond would cover the claim for the costs savings, the claim failed because, upon Mollenhauer's default, Landmark did not immediately declare Mollenhauer in default and call on the bond. The trial judge further found that Zurich suffered prejudice because it was deprived of a reasonable opportunity to protect its position before Mollenhauer's financial demise. Landmark appealed. Zurich cross-appealed the trial judge's finding that the bond would have covered the claim for costs savings under the construction contract.

Held, the appeal and the cross-appeal should be dismissed.

In interpreting a bond, the intention of the parties as to the obligations of the surety is found in the language of the bond. Where, as did the bond in the immediate case, the bond incorporates by reference the construction contract, the terms of the construction contract also form part of the bond. If there is ambiguity in the bond, the form having been chosen by the bonding company, the contra proferentem rule of interpretation applies.

In the immediate case, the cost of completion language in the bond necessarily included the costs saving owed by the contractor as part of the calculation of the balance of the contract price. There was no basis in the language of the bond or in the circumstances surrounding its negotiation or completion to suggest that the costs sharing provisions of the contract were not included as bonded losses. However, Landmark breached its obligations under the bond by failing to declare Mollenhauer in default and to notify Zurich of the default. In this case, the owner failed to make a timely declaration of the very default to which it relied in calling on the bond. As found by the trial judge, Zurich suffered prejudice by Landmark's failure to provide notice of default. Without palpable and overriding error, the finding was unassailable on appeal. The trial judge's conclusion that Zurich would have had at least the opportunity to call on Mollenhauer to pay Landmark while it still had funds was reasonable. The trial judge's conclusion that Zurich was not given a timely opportunity to take advantage of whatever leverage may have been available to it could not be said to be an error. Accordingly, the appeal and the cross-appeal should be dismissed.

APPEAL and CROSS-APPEAL of a judgment of Lamek J., [2000] O.J. No. 3838, 4 C.L.R. (3d) 1 (S.C.J.) dismissing an action to enforce a construction bond.

Cases referred to American Home Assurance Company v. Larkin General Hospital Ltd., 593 So. 2d 195, 17 Fla. L. Weekly S. 2, 1992 Fla. LEXIS 14 (1992); Amerson v. Christman, 261 Cal. App. 2d 811, 825, 68 Cal. Rptr. 378, 1968 Cal. App. LEXIS 1809 (1968); Cates Construction Inc. v. Talbot Partners, 21 Cal. 4th 28, 980 P.2d 407, 86 Cal. Rptr. 2d 855, 1999 Cal. LEXIS 4847, 99 Cal. Daily Op. Service 6021, 99 Daily Journal DAR 7725 (1999), revg on other grounds, 53 Cal. App. 4th 1420, 1462, 62 Cal. Rptr. 2d 548, 1997 Cal. App. LEXIS 252, 97 Cal. Daily Op. Service 2385, 97 Daily Journal DAR 4201 (1997); Citadel General Assurance Co. v. Johns-Manville Canada Inc., [1983] 1 S.C.R. 513, 147 D.L.R. (3d) 593, 47 N.R. 280, 46 C.B.R. (N.S.) 177, [1983] I.L.R. Â1-1661 (sub nom. Johns-Manville Canada Inc. et al. v. John Carlo Ltd. et al., Canadian Johns-Manville Co. Inc. et al. v. John Carlo Ltd. et al.); Downingtown Area School District v. International Fidelity Insurance Co., 769 A.2d 560 (Pa. Cmmw. Ct. 2001); Pacific Employers Insurance Co. v. City of Berkeley, 158 Cal. App. 3d 145, 204 Cal. Rptr. 387, 1984 Cal. App. LEXIS 2296 (1984); [page630] R.J. Griffin & Co. v. Continental Insurance Co., 497 S.E. 2d 586, 230 Ga. App. 822, 1998 Ga. App. LEXIS 219, Fulton County D. Rep. 830 (Ct. App. 1998); Riva Ridge Apartments v. Robert G. Fisher Co., 745 P.2d 1034, 1987 Colo. App. LEXIS 77 (Ct. App. 1987); Thomas Fuller Construction Co. (1958) Ltd. v. Continental Insurance Co., [1973] 3 O.R. 202, 36 D.L.R. (3d) 336 (H.C.J.) Authorities referred to Scott, K.W., and R.B. Reynolds, Scott and Reynolds on Surety Bonds (Toronto: Carswell, 1993)

W. Andrew McLauchlin and Robert J. Kennaley, for appellant, respondent by way of cross-appeal. Roger J. Gillott, for respondent, appellant by way of cross-appeal.

The judgment of the court was delivered by

[1] FELDMAN J.A.: -- The appellant, Whitby Landmark Development Inc., is the owner of a condominium project constructed by Mollenhauer Construction Limited. Performance of the project was bonded by the respondent, Zurich Indemnity Company of Canada, as surety. Mollenhauer became insolvent at a point when it had substantially completed the project, but owed Landmark moneys under the construction contract in respect of cost savings it had achieved and that it had contracted to share with Landmark. The trial judge held that although the bond would cover a claim by Landmark for cost savings under the construction contract, Landmark's claim under the bond failed because, upon Mollenhauer's default, Landmark did not immediately declare the contractor in default and call on the bond. The trial judge further found that because of Landmark's failure, Zurich suffered prejudice because it was deprived of a reasonable opportunity to protect its position before Mollenhauer's financial demise.

[2] Landmark appeals the finding that its failure to declare Mollenhauer in default was fatal to its claim on the bond. Zurich cross-appeals the trial judge's finding that the bond would provide coverage for cost savings. For the reasons that follow, I would affirm the decision of the trial judge. I conclude that while the bond would provide coverage for the contracted cost savings, in the circumstances, Zurich was not required to respond to Landmark's claim. [page631]

Facts

[3] On September 7, 1990, Landmark entered into a contract with Mollenhauer to construct a 12-storey multi-unit condominium building on its land in Whitby, Ontario. The contract required Mollenhauer to provide Landmark with a performance bond, which it obtained from Zurich.

[4] The bond is dated September 17, 1990. It is a one-page document in a standard form commonly used in the construction industry, identified as CCDC 221-1979 ("CCDC-2"). Under the bond, Mollenhauer is named as "Principal", Landmark as "Obligee", and Zurich as "Surety". The bond is in the amount of $8,831,102.50, known as the "penal amount" and provides:

WHEREAS, the Principal has entered into a written contract with the Obligee, dated the 7th day of SEPTEMBER 1990, for 12 STOREY RESIDENTIAL WITH 2 LEVELS OF UNDERGROUND PARKING, WHITBY, ONTARIO in accordance with the Contract Documents submitted therefore which are by reference made part hereof and are hereinafter referred as the Contract.

NOW, THEREFORE, THE CONDITION OF THIS OBLIGATION is such that if the Principal shall promptly and faithfully perform the contract then this obligation shall be null and void; otherwise it shall remain in full force and effect.

Whenever the Principal shall be, and declared by the Obligee to be, in default under the Contract, the Obligee having performed the Obligee's obligations thereunder, the surety may promptly remedy the default, or shall promptly

(1) complete the Contract in accordance with its terms and conditions or

(2) obtain a bid or bids for submission to the Obligee for completing the Contract in accordance with its terms and conditions, and upon determination by the Obligee and the Surety of the lowest responsible bidder, arrange for a contract between such bidder and the 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 the cost of completion less the balance of the Contract price; but not exceeding, including other costs and damages for which the Surety may be liable hereunder, the amount set forth in the first paragraph hereof. The term "balance of the Contract price", as used in this paragraph, shall mean the total amount payable by the Obligee to the Principal under the Contract, less the amount properly paid by the Obligee to the Principal.

[5] The construction contract between Landmark and Mollenhauer provided for a guaranteed maximum price for the project of $17,640,969. It also included a provision whereby the owner and contractor would share any cost savings on the project in the following proportion: 75 per cent to the owner and 25 per cent to the contractor, but the contract contained no method for payment [page632] of the cost savings to the owner. Because of the timing of the project, it transpired that subtrades were tendering low bids to obtain work, resulting in substantial cost savings. In order to implement a method for sharing the cost savings, Landmark and Mollenhauer agreed on a Monthly Deduction System whereby Landmark's share of each month's estimated savings would be deducted from its monthly progress payments to Mollenhauer.

[6] The work was substantially completed by February 1, 1992, and a Certificate of Substantial Completion was published. Because no liens were registered against the project in the 45 days following the publication of the Certificate, the holdback moneys in the amount of $1,812,923 could be released by Landmark. Before that date, representatives of Landmark and Mollenhauer met to negotiate a reduction in the amount to be released to Mollenhauer in order to protect Landmark for the balance of its share of the overall cost savings, the exact amount of which was yet to be determined. However, Mollenhauer insisted on release of the full holdback and Landmark complied. In fact, Landmark made an overpayment of over $35,000.

[7] Appendix A to the construction contract dealt with the contract price, together with the mechanism for payment of that price to Mollenhauer, and the cost sharing agreement between Landmark and Mollenhauer. Clause 6 of Appendix A obliged Mollenhauer to provide Landmark with "a certificate setting out the total Cost of the Work in sufficient detail to permit a general evaluation [of that cost] . . . as soon as possible but no later than 150 days after the date of substantial completion." Pursuant to clause 7, Landmark then had the right to audit the supporting accounting records, with final payment under the contract to reflect the cost adjustments generated by the audit.

[8] Despite the terms of the construction contract outlined above, Mollenhauer never delivered (and Landmark never requested) a Certificate of the Total Cost of the Work, although according to the contract, Mollenhauer was required to provide that Certificate by June 30, 1992. On or about February 3, 1993, Mollenhauer ceased carrying on business and never finally completed the work under the contract.

[9] Landmark completed the work itself, then made its claim under the bond on May 6, 1993, demanding payment by Zurich of the balance of its share of the cost savings under the contract, ultimately fixed at $601,972.

[10] The trial judge was required to address four issues in order to determine whether Landmark was entitled to recover its claim from Zurich under the bond: [page633]

(1) whether the bond is answerable for a claim for Mollenhauer's monetary obligation to Landmark, as opposed to Mollenhauer's construction obligation;

(2) whether the bond was vitiated by a material change to the construction contract, i.e. the introduction of the Monthly Deduction System;

(3) whether Landmark's failure to declare Mollenhauer in default under the contract relieved Zurich from responding to a claim under the bond;

(4) whether Zurich suffered any prejudice as a result of Landmark's failure to declare Mollenhauer in default for failure to deliver a Certificate of Total Cost and to provide the surety with timely notice of the default.

[11] The trial judge found:

(1) the bond was answerable for the claim;

(2) the bond was not vitiated by the introduction of the Monthly Deduction System, which was beneficial to the surety;

(3) Landmark's failure to declare Mollenhauer in default for failure to deliver the Certificate of the Total Cost of the Work was a failure of a condition precedent to payment by the surety under the bond; and

(4) Zurich was prejudiced by Landmark's failure to declare a default and to provide it with timely notice of the default.

As a result, Landmark's claim under the bond was dismissed.

Issues on the Appeal

[12] Landmark appealed the finding of the trial judge that it committed any default under the construction contract, or in the alternative, that its default caused any prejudice to Zurich. Zurich cross-appealed on the issue of the interpretation of the bond and whether the bond would respond to the type of monetary claim asserted by Landmark [See Note 1 at end of document]. Landmark objected to the cross-appeal on procedural grounds on the basis that one cannot appeal [page634] or cross-appeal from reasons. However, in order for Landmark to successfully appeal the judgment of the trial judge, the issue of the interpretation of the bond necessarily arises.

Analysis

[13] I propose to deal with the issues in the same order as the trial judge did, as it is the most logical way to conduct the analysis. Consequently, the first issue is the one raised by Zurich on the cross-appeal.

(1) Properly interpreted, does the bond respond to the monetary claim for cost savings under the construction contract?

[14] Zurich's position is that the bond is only intended to cover the costs of completing the physical construction work under the contract, including the cost of correcting defective work, but does not extend to collateral obligations of the contractor such as its obligation to share the cost savings it achieved.

[15] Zurich relies on the evidence given at trial as to the usual practice for making underwriting decisions on performance bonds for construction projects. The underwriter will ask a set of standard questions, including the dollar value of the project, the extent of the work to be performed by subcontractors, the start and end dates for the project and the reputation of the contractor. Where the construction contract is in the standard CCDC-2 form, as in this case, the usual practice in the industry is that the underwriter will not read the construction contract when making its underwriting decision. Furthermore, the calculation of the premium on performance bonds is based on a mathematical equation that does not generally take into account the terms of the construction contract. The penal amount of the bond in this case was calculated as 50 per cent of the guaranteed maximum price of construction. There was no discussion between Mollenhauer and Zurich when the bonding arrangements were made as to whether the bond would respond to claims for cost savings under the construction contract. Zurich submits that this evidence shows that the parties did not intend the bond to cover a monetary claim for cost savings.

[16] It is trite that in interpreting a bond, the intention of the parties as to the obligations of the surety is found in the language of the bond: Thomas Fuller Construction Co. (1958) Ltd. v. Continental Insurance Co., [1973] 3 O.R. 202, 36 D.L.R. (3d) 336 (H.C.J.), at p. 216 O.R. Where the bond incorporates by reference the construction contract, the terms of the construction contract also form part of the bond. To the extent that the bond in any way [page635] qualifies its coverage, the terms of the bond govern: Kenneth W. Scott & R. Bruce Reynolds, Scott and Reynolds on Surety Bonds (Toronto: Carswell, 1993) at 7-1, 2-34. If there is ambiguity in the bond, the form having been chosen by the bonding company, the contra proferentem rule of interpretation applies: Thomas Fuller v. Continental, supra, at p. 218 O.R.

[17] In this case, the bond provides that the construction contract documents are made part of the bond. Furthermore, all benchmarks for action and obligation under the bond are referenced to the construction contract: The bond is void if the principal promptly and faithfully performs the contract; otherwise, the bond remains in full force and effect. It is when the obligee declares the principal in default under the contract, having performed its own obligations under the contract, that the surety is obliged to choose among the following three options under the bond: (1) the surety may promptly remedy the default; if the surety chooses not to do that, then it shall (2) complete the contract in accordance with its terms; or (3) obtain a bid or bids for completing the contract in accordance with its terms and make available sufficient funds to pay the cost of completion less the balance of the contract price up to the penal limit of the bond. There is no language in the bond that limits in any way the references to the construction contract or the obligations to complete that contract or to act on a default under that contract.

[18] In support of its position that the bond will not respond to a claim for funds representing cost savings owed by the contractor to the owner, Zurich points to the surety's second and third options, which are to complete the contractor's obligations under the contract. However, the first option available to the surety is to remedy the principal's default. There is no qualification on the type of default referred to. Furthermore, the surety's third option does not limit the surety's obligations to funding the completion of the physical construction; instead, the bond makes the surety's obligations inclusive of "other costs and damages for which the Surety may be liable hereunder".

[19] Zurich relies on a line of American authority for the proposition that the intent of the construction performance bond must be gleaned from its purpose, which is to ensure completion of construction, and that the obligation under the bond must be interpreted as so limited. The trial judge did not find these authorities of assistance and concluded: "I am driven back to the language of this bond and it is from that source that I must discern the intention of the parties." In my view, the trial judge made no error in that conclusion. [page636]

[20] The American cases relied on by Zurich are from Florida and Pennsylvania. The leading Florida case is American Home Assurance Company v. Larkin General Hospital Ltd., 593 So. 2d 195, 17 Fla. L. Weekly S.2 (Fla. 1992), where the issue was whether a surety under a performance bond could be held liable for delay damages. The court held that it could not unless the bond specifically provided such coverage (p. 196). The language of the bond in question was substantially the same as in this case. The court in Larkin concluded that the bond's language "merely guaranteed the completion of the construction contract and nothing more" (p. 198). The court focused on the language in the third option that the surety is required to provide "sufficient funds to pay the cost of completion less the balance of the contract price" (p. 197). The court also rejected the argument from a decision in another case that the words "including other costs and damages for which the Surety may be liable" have the effect of extending the obligation of the surety to cover damages caused by delay (p. 197).

[21] The leading authority from Pennsylvania is the case of Downingtown Area School District v. International Fidelity Insurance Co., 769 A.2d 560 (Pa. Cmmw. Ct. 2001). The construction contract in that case contained a liquidated damages clause for damages to the owner caused by delays in construction. When a delay occurred, the owner put the surety on notice and asked it to address the delay. The court interpreted the language of the third option under the bond as limiting the surety's liability to the cost of completion incurred by paying the substitute contractor and nothing more. The court noted that its interpretation conformed to statutory language of the state Public Works Contractors' Bond Law of 1967, 8 Pa. Cons. Stat. 191-203, which required a performance bond for 100 per cent of the contract amount, but did not refer to any consequential or delay damages.

[22] I agree with the trial judge's conclusion that this case law is of little assistance in interpreting the scope of the application of the bond in the case at bar, where the claim is not for damages for delay, but for compensation for default in payment of the cost savings owed to the owner under the contract. As I discuss below, the "cost of completion" language in the bond necessarily includes the cost savings owed by the contractor to the owner (as part of the calculation of the balance of the contract price) so that the analyses of the Florida and Pennsylvania courts are not applicable to coverage for shared cost savings owed by the contractor. In addition, the Pennsylvania statute, for which there is no equivalent in Ontario, also influenced that court's interpretation of the bond in Downingtown. [page637]

[23] Moreover, there is American authority from other state courts that has interpreted the bond language to extend beyond the cost of completion to include delay damages: Amerson v. Christman, 261 Cal. App. 2d 811, 825, 68 Cal. Rptr. 378 (1968); Cates Construction Inc. v. Talbot Partners, 53 Cal. App. 4th 1420, 1462, 62 Cal. Rptr. 2d 548 (1997), revd on other grounds, 21 Cal. 4th 28, 980 P. 2d 407 (1999); and liquidated damages: Pacific Employers Insurance Co. v. City of Berkeley, 158 Cal. App. 3d 145, 204 Cal. Rptr. 387 (1984); Riva Ridge Apartments v. Robert G. Fisher Co., 745 P.2d 1034, 1987 Colo. App. NEXIS 77 (C.A. 1987). In a fact situation somewhat similar to this case in R.J. Griffin & Co. v. Continental Insurance Co., 497 S.E. 2d 586, 230 Ga. App. 822 (C.A. 1998), the Court of Appeals of Georgia held the surety liable to reimburse the contractor for funds that had been overpaid to the subcontractor and that the subcontractor wrongfully refused to return. The language of the bond required the surety "to perform fully and complete the work". The court held that the words "perform fully" obligated the surety to answer for the subcontractor's default in payment (p. 587).

[24] In interpreting the intent of the parties as to the coverage of the bond and whether it extends beyond funding the cost of completing the physical work to the cost sharing provisions of the construction contract [See Note 2 at end of document], the operation of the surety's third option is, in my view, particularly instructive.

[25] Under the surety's third option, where bids are obtained for a new contractor to complete the work, the surety must "make available . . . sufficient funds to pay the cost of completion less the balance of the Contract price". The phrase "balance of the Contract price" is defined to mean "the total amount payable by the Obligee to the Principal under the Contract, less the amount properly paid by the Obligee to the Principal". Therefore, where there is a cost-sharing arrangement in the contract, the balance of the contract price is reduced by the amount that may be owing by the contractor to the owner at the time of default as a result of cost savings; consequently, the amount that the surety is required to pay to complete the physical work is greater than it would have been had there [page638] been no cost sharing provision in the original contract. As a result, the surety effectively pays for the owner's share of the cost savings.

[26] Following this analysis, the owner will only be able to recover its share of the cost savings if it has "properly paid" the contractor. If the owner has made payments not called for by the contract, or before they were due, and the contractor defaults, there may be an issue to what extent the surety will have to respond. A further issue is how the bond will operate if there is no further construction work left to be done at the time of default. I need not address either of these potential issues in this case because of my disposition of issue number two below.

[27] In summary, subject to the operation of the bond in any particular circumstances, I conclude that there is no basis in the language of the bond or in the circumstances surrounding its negotiation or completion to suggest that the cost-sharing provisions of the construction contract are not included as bonded losses.

(2) Was Landmark in breach of its obligations under the bond by failing to declare Mollenhauer in default and notify Zurich of the default?

[28] Landmark submits that it had no ability under the construction contract to declare Mollenhauer in default. The argument is based on article 5.2 of the contract which provides:

If the Contractor should neglect to prosecute the Work properly or otherwise fails to comply with the requirements of the Contract to a substantial degree and if the Consultant has given a written statement to the Owner and Contractor that sufficient cause exists, the Owner may notify the Contractor in writing that he is in default of his contractual obligations and instruct him to correct the default in the five (5) working days immediately following the receipt of such notice.

[29] Landmark argues first that because work under the contract was ongoing, Mollenhauer's failure to provide the Certificate of the Total Cost of the Work within 150 days following substantial completion was not a failure to comply with the requirements of the contract to a substantial degree, entitling the consultant to issue a written statement of sufficient cause. The consultant did not issue the statement, which is a condition precedent to an owner's declaration of default under the contract. Furthermore, there is no provision in the contract that allows the owner to compel or request the Certificate.

[30] In my view there is no merit to this submission. There is no suggestion that it was because of any failure on the part of the [page639] consultant under the construction contract that Landmark did not declare Mollenhauer in default. In fact, the trial judge found that it was Landmark that "allowed matters to drift" (para. 22).

[31] Landmark also argues that it acted reasonably in not declaring a default under the bond on the basis that its perception at the time was that the default by Mollenhauer in not providing the Certificate was not a serious one. Landmark refers to Thomas Fuller, supra, at p. 218 O.R., where Houlden J. stated that it is up to the obligee under the bond to determine when a default by the principal is so serious that notice of default under the contract must be given to the surety.

[32] Again, this argument does not bear scrutiny. In Thomas Fuller, the issue was whether the owner's failure to declare the contractor in default for smaller defaults that had occurred earlier was a breach of the owner's obligations under the bond. It was in that context that the court held, at p. 217 O.R., that:

[T]he bond negatives any obligation on the part of the obligee to notify the defendant of defaults by Singer unless the default was of so serious a nature that the obligee deemed it proper to make a declaration of default and to call upon the bonding company to perform its obligations under the bond. At this stage, the plaintiff was required to give notice of default to the bonding company, but not otherwise.

In this case, the owner failed to make a timely declaration of the very default on which it relies in calling on the bond: failure of the contractor to pay the owner's share of the cost savings, the amount of which is determined by the Certificate of Total Cost, after audit. This is not a case of the obligee failing to acknowledge and alert the surety to other earlier minor defaults upon which the owner does not rely.

[33] Finally, Landmark submits that, as a compensated surety, Zurich must demonstrate that it was prejudiced by Landmark's failure to declare Mollenhauer in default and to give timely notice of the default: Citadel General Assurance Co. v. Johns- Manville Canada Inc., [1983] 1 S.C.R. 513, 147 D.L.R. (3d) 593. According to Landmark, because Zurich is the bonding company for Mollenhauer on many projects, it was well aware of Mollenhauer's financial circumstances and problems and therefore was not prejudiced by any lack of notice by Landmark.

[34] The trial judge concluded that Zurich did suffer prejudice by Landmark's failure to provide notice of default:

One cannot know what would have been the consequence of a declaration of default and notice to Zurich. It may be that Mollenhauer would have produced the certificate of total cost promptly thereafter, perhaps while it was still in a financial condition to pay the outstanding savings to Landmark. Certainly, at that point, Landmark and Zurich could have been in no worse [page640] position to arrange performance of Mollenhauer's obligations than they were after Mollenhauer had gone out of business.

The provisions of the bond calling for a declaration of default are included for a rational and easily discernible purpose. Zurich is entitled to know when it may be called on under the bond and it must be given every reasonable opportunity to protect not only the obligee but also itself against the consequences of the principal's default. In my view, Landmark, by failing to take timely steps to declare Mollenhauer in default and to give notice to Zurich, failed in its duty to Zurich and cannot now hold Zurich responsible for the loss that it claims.

(Paras. 25 and 26).

[35] Landmark argues that because Zurich knew about Mollenhauer's financial problems earlier, and did nothing, there was nothing Zurich could have done in this case with earlier notice from Landmark, and, therefore, it suffered no prejudice. I also reject this argument. First, the trial judge made a finding of fact on the issue. Without palpable and overriding error, that finding is unassailable on appeal. Clearly one cannot know what would have happened in circumstances that did not occur. The trial judge's conclusion that Zurich would have at least had the opportunity to call on Mollenhauer to pay Landmark while it still had funds is reasonable. Mollenhauer had the holdback funds for some period of time. It also carried on for several months thereafter, and may therefore have been in a position before its insolvency to make good on some, if not all, of its obligation to Landmark. There were also other steps open to Zurich such as taking further security from Mollenhauer. Although these steps would have been less viable with the passage of time, and therefore may not have been available even with timely notice of default, the trial judge's conclusion that Zurich was not given a timely opportunity to take advantage of whatever leverage may have been available to it with Mollenhauer cannot be said to be an error.

Result

[36] I would therefore dismiss the appeal and the cross- appeal. Although Landmark obtained no relief on the appeal, there were two major issues raised on which success was effectively divided. In my view, these are circumstances where it is appropriate that each side bear its own costs.

Appeal and cross-appeal dismissed.

Notes

Note 1: In its notice of cross-appeal Zurich also raised the issue of whether the Montly Deduction System constituted a material change to the construction contract that had the effect of discharging Zurich of its obligations under the bond. However, that issue was not pursued in the factum or in the oral argument.

Note 2: The nature of the provision in issue, a cost-sharing agreement related to the cost of contruction and the contract price, is relevant to the analysis of the parties' intentions. Had the construction contract contained an unusual provision, for example, that obliged the contractor to make a payment to the owner wholly unrelated to the cost of construction, other considerations regarding the intent of the parties under the bond may become relevant.