Aviva Insurance Ltd v Hackney Empire Ltd

A surety may be discharged by an unconsented variation of the guaranteed contract or by advance payment of the agreed contract price that prejudices the surety. The rule does not extend to additional sums paid under a separate agreement, whether characterised as a loan or payment on account. Such payments leave the surety liable on the original contract, but not for repayment of the separate sums. Consent or a properly drafted indulgence clause can preserve liability. A contractual provision preserving other rights does not require an employer to elect between a contractual accounting procedure and damages, although double recovery is prohibited.

Hackney Empire Limited engaged Sunley Turriff Construction Ltd to renovate its theatre. Aviva Insurance Ltd provided a performance bond. During serious delay and financial difficulty, Hackney paid the contractor £750,000 under a separate side agreement concerning unsubstantiated claims. The contractor later entered administration, its employment was terminated, and Hackney claimed under the bond.

Mr Justice Edwards-Stuart held that the side agreement did not vary the construction contract, that Aviva was not discharged, and that liability was not limited to liquidated damages. Aviva appealed, challenging the legal test for discharge and the construction of the termination provisions. The central issues were whether the additional payments discharged the surety and whether termination limited Hackney to the contractual accounting machinery.

1. Appeal dismissed. The judge below had applied the wrong legal test, but his conclusion that Aviva remained liable was correct.
2. The rule in Holme v Brunskill (1878) 3 QB 495 applies to an unconsented variation of the original contract guaranteed by the surety. It does not extend to a separate agreement affecting performance of that contract. The authorities cited in support of that narrower construction included Taylor v Bank of New South Wales (1886) 11 App Cases 591, The Wardens and Commonality of the Mystery of Mercers of the City of London v New Hampshire Insurance Company Limited (1992) 60 BLR 26, Skipton Building Society v Stott [2001] QB 261 and ST Microelectronics NV v Condor Insurance Limited [2006] EWHC 977 (Comm).
3. Advance payments of the agreed contract price may discharge a surety because they can reduce the contractor’s incentive to perform and diminish the fund available to complete the works. That was the reasoning in Calvert v The London Dock Company (1838) 2 Keen 638 and The General Steam-Navigation Company v Rolt (1858) 6 CB (NS) 550. By contrast, Trade Indemnity Company Limited v Workington Harbour and Dock Board [1937] AC 1 established that additional loans or payments under an independent agreement do not discharge the surety, though the surety is not liable for those separate sums.
4. The side agreement was a loan or conditional payment arrangement. The £750,000 was neither part of the contract sum nor certified or otherwise payable under the construction contract. It therefore did not discharge Aviva, although Aviva had no liability for the contractor’s failure to repay that sum.
5. The termination provisions did not require Hackney to elect between the contractual accounting procedure and damages. Clause 27.8 preserved other rights and remedies. It did not permit double recovery.
6. Perar BV v General Surety and Guarantee Co (1994) 66 BLR 72 was distinguishable because it concerned a materially different edition of the JCT form. Direct payments to subcontractors and suppliers did not create an unlawful preference in the circumstances, applying the reasoning in Revenue and Customs Commissioners v Football League Limited [2012] EWHC 1372 (Ch). Hackney could therefore recover damages under the bond, subject to its limit.

1. Court of Appeal (Civil Division): In [2012] EWCA Civ 1716, the court dismissed Aviva’s appeal.
2. High Court of Justice, Queen’s Bench Division, Technology and Construction Court: Mr Justice Edwards-Stuart gave judgment on 21 September 2011. He held that the side agreement did not vary the construction contract, that Aviva was not discharged from the bond, and that liability was not limited to liquidated and ascertained damages.