Hackney Empire Ltd v Aviva Insurance UK Ltd

A surety is discharged by a variation of the guaranteed contract unless the variation is plainly immaterial, beneficial, or protected by the guarantee. An agreement merely connected with the guaranteed contract is not enough. The court must determine whether it varies the guaranteed obligations and whether the resulting obligations remain within the general purview of the guarantee. A separate advance agreement may create obligations outside the bond. A payment on account is not necessarily prejudicial to the surety: prejudice must be prima facie likely, having regard to the contractor’s financial position and the commercial purpose of the payment.

Hackney Empire Ltd engaged Sunley Turriff Construction Ltd to refurbish the Hackney Empire Theatre. Aviva Insurance UK Ltd provided a performance bond securing the contractor’s obligations under the building contract. During prolonged delay, Hackney Empire paid £750,000 on account of the contractor’s unsubstantiated claims and entered into a related side agreement requiring repayment if its conditions were breached.

The contractor entered administration and failed to complete the works. Hackney Empire claimed under the bond, including repayment of the advance and losses arising from non-completion. Aviva argued that the payments and side agreement discharged it, or that the repayment obligation was outside the bond’s scope. It also argued that Hackney Empire’s contractual determination of the contractor’s employment excluded common-law damages.

1. Bond not discharged. The payment of £500,000, the Side Agreement and the later payment of £250,000 did not discharge Aviva. The agreement preceding the first payment did not materially vary the building contract. Any variation concerning liquidated damages or dispute resolution was beneficial or of minimal consequence and was in any event protected by the indulgence clause (paras [111]–[145]).
2. Scope of the guarantee. The Side Agreement was a separate arrangement imposing a new obligation to repay the advances. That obligation was not within the general purview of the building contract or the obligations guaranteed by Aviva. Aviva therefore had no liability for the contractor’s failure to repay the £750,000 (paras [114]–[120], [155]–[156]).
3. Prejudice from payments. The court tentatively treated General Steam Navigation Company v Rolt (1858) 6 CB (NS) 556 as supporting a distinct rule concerning conduct that is prima facie prejudicial to a surety without varying the guaranteed contract. The payments were not prima facie likely to prejudice Aviva. They were intended to maintain resources on site and were made against claims which might have substantial value (paras [121]–[134], [136]–[142]).
4. Recovery of damages. The contractor was already in breach before administration. The employer’s right to recover common-law damages was preserved by clause 27.8 of the building contract, notwithstanding its determination of the contractor’s employment. The claim was not limited to accrued liquidated damages, although individual heads of loss remained subject to proof and causation (paras [162]–[171]).

The court answered the agreed issues accordingly. Quantification and interest were deferred.

First-instance decision. No prior appellate decision is stated in the judgment.