Availability of Bond Rescission Shakes the Construction Industry

  • November 10, 2022
  • Sahil Shoor, Jeramie Gallichan, and Fabiola Alvarez

The Ontario Court of Appeal sent ripples through the construction industry when it recently ruled in Urban Mechanical Contracting Ltd v Zurich, 2022 ONCA 589, that a bond issuer may rescind a bond agreement on the basis of fraudulent misrepresentations and collusion, even if rescinding the bond agreement would affect the rights of innocent third parties. In determining whether to rescind, the court will determine what is “practically just” in the circumstances, no matter how large or complex the project.

Rescission is an equitable remedy that is meant to put the contracting parties back to the positions they were in before entering into the contract (restitutio in integrum). Rescission is available where a party has been improperly induced to enter a contract.

Surety bonds are financial instruments that transfer project risk to a third-party insurer, providing assurances to lenders, sub-contractors, and suppliers. This decision reduces the reliability of surety bonds in an industry that depends on these assurances.