Aviva Insurance Ltd v Hackney Empire Ltd

This appeal concerned whether a bondsman was discharged from liability where the employer made substantial extra-contractual payments to the contractor and whether the employer’s termination and post-termination accounting under clause 27 of the JCT contract limited the employer to the clause 27 procedure. The Court of Appeal held that the two payments of £750,000 were made under a separate side agreement and were loans or payments outside the original JCT contract; they did not operate as advance payments under the contract and therefore did not discharge the surety. The court applied established principles from Holme v Brunskill and related authorities: variations of the guaranteed contract without the surety’s consent can discharge a surety, and advance payments due under the contract may discharge a surety, but separate loans or payments outside the contract do not. The court further held that clause 27.8 of the JCT 1998 form did not force the employer to elect between operating the clause 27 machinery and claiming damages; the employer could pursue contractual remedies including damages, subject to avoiding double recovery. As a result Aviva remained liable under the bond for losses arising under the original contract up to the bond limit, but was not liable for repayment of the separate £750,000 side agreement.

Background and parties:

• HEL (Hackney Empire Ltd) was the employer under a JCT Standard Form 1998 construction contract with STC (Sunley Turriff Construction Ltd) as contractor. Aviva Insurance Ltd was the bondsman under a performance bond dated 6 August 2001 in the sum of £1,106,852.
• STC fell into delay and advanced claims for loss and expense. HEL negotiated a side agreement (an oral agreement of 16 December 2002, later recorded in letters) by which HEL paid £1,000,000 on account of those claims; £750,000 was paid in December 2002 and February 2003 and held under the side agreement subject to repayment if the contractor failed to substantiate claims.

Procedural history and relief sought:

• HEL claimed on the bond after STC’s default and HEL’s determination of STC’s employment. Aviva denied liability, asserting that HEL’s extra-contractual payments discharged the bond or, alternatively, that HEL’s remedies were limited to the clause 27 accounting (so liability was limited to £205,000 liquidated and ascertained damages). The High Court (Edwards‑Stuart J) tried preliminary issues and held that Aviva was not discharged; HEL could recover damages up to the bond limit. Aviva appealed to the Court of Appeal.

Issues framed by the court:

1. Whether the conduct of HEL in making the two payments of £750,000 discharged Aviva from liability under the bond.
2. Whether the rule in Holme v Brunskill applied (i.e. whether there had been a variation of the guaranteed contract without the surety’s consent).
3. Whether payments made under a separate side agreement counted as advance payments of the contract price and thus could discharge the surety.
4. Construction and effect of clause 27 (in particular clause 27.8) of the JCT 1998 contract: whether termination under clause 27 precluded a claim for general damages or limited the employer to the clause 27 accounting procedure.

Court’s reasoning and conclusions:

• The Court reviewed nineteenth- and twentieth-century authorities (including Calvert; General Steam‑Navigation Co v Rolt; Holme v Brunskill; and Trade Indemnity Co v Workington Harbour and Dock Board). It distilled principles: (a) Holme v Brunskill applies to variations of the guaranteed contract without the surety’s consent; (b) advance payments of the agreed contract price may discharge a surety; but (c) separate loans or payments made outside the contract do not discharge the surety.
• The Court accepted the trial judge’s finding (uncontested on appeal) that the side agreement did not alter the construction contract. The £750,000 consisted of sums paid under the side agreement and were not certified or payable under the JCT contract; they were effectively loans or payments outside the contract and therefore did not discharge Aviva under the bond (Trade Indemnity was directly analogous).
• On quantum the Court construed clause 27.8 as permissive rather than putting the employer to an election: the employer could pursue the clause 27 procedure and could also claim damages for breach provided there was no double recovery. HEL was therefore entitled to damages for non-completion, including liquidated and ascertained damages of £205,000 as at the date of determination, and Aviva remained liable up to the bond limit for losses arising under the original contract. Aviva was not liable for the separate side agreement debt.

Subsidiary findings:

• The indulgence clause in the bond was considered but did not cover the side agreement payments.
• The termination provisions and post-termination payments to subcontractors did not create an unlawful preference where the contractor was in administration and no distribution notice had been given.

Appeal dismissed. The Court of Appeal held that the two payments totalling £750,000 had been made under a separate side agreement and therefore were payments outside the JCT contract; they did not amount to advance payments under the contract that would discharge the surety. The rule in Holme v Brunskill did not apply because the construction contract was not varied. Clause 27.8 of the JCT 1998 contract did not force the employer to elect between the clause 27 accounting procedure and a claim for damages; HEL could seek damages (subject to avoiding double recovery). Consequently Aviva remained liable under the bond up to its limit for losses properly arising under the original contract, but Aviva had no liability in respect of the separate side agreement repayment obligation.

Appeal from the High Court of Justice, Queen’s Bench Division, Technology and Construction Court (Edwards‑Stuart J; HT‑10‑360; reserved judgment 21 September 2011) to the Court of Appeal ([2012] EWCA Civ 1716).