side agreements that vary contracts may not necessarily
discharge a surety's liability under a bond
In the recent case of Hackney Empire v Aviva Insurance UK
Ltd [2011] (TCC), Edwards-Stuart J in the Technology and
Construction Court redefined current case law and held that a
side agreement and advance payments on account of a loss claim did
not discharge the surety’s liability under a bond. As the law
stood, commercial agreements with a bond or guarantee in place were
in danger of discharging that bond or guarantee should any of the
underlying obligations be varied.
the facts of the case
Hackney Empire Ltd (“Hackney”) contracted
Sunley Turriff Construction Ltd (“Sunley”) to carry out extensive
renovations on the Hackney Empire Theatre in East London.
Shortly after the work started, Aviva stepped in to provide a bond
for Sunley in favour of Hackney to secure due performance of
Sunley’s obligations under the contract. During building
works Sunley made numerous claims and so in December 2002 Hackney
agreed to pay £500,000 on account of the claims in return for a
revised earlier completion date. Following a side agreement being
entered into, Hackney payed Sunley another £250,000 in February
2003. In July 2003, prior to the building works being completed,
Sunley went into administration. Hackney sued Aviva to recover the
£750,000 paid in advance to Sunley.
Aviva claimed that the contract under which it
had issued a bond to Sunley had been varied by the side agreement
without their knowledge or consent, they were therefore discharged
from the bond. Hackney claimed the side agreement only varied the
contract in ways in which were acceptable under that contract.
decision
Edwards-Stuart J rejected Aviva’s argument and
held that although the side agreement varied the contract, it did
so in ways that fell within exceptions to the rule in the leading
case law of Holme v Brunskill and General Steam
Navigation v Rolt. The court concluded that:
- under Holme v
Brunskill, an alteration in terms of the principal contract
will discharge the surety unless it is self-evident, without
enquiry, that the alteration is insignificant or
non-prejudicial
- under General Steam
Navigation v Rolt, conduct that does not vary the principal
contract must be prima facie prejudicial in order to discharge the
surety.
The Court held that the payment
of £500,000 did not amount to material alteration of the building
contract and so the rule in Holme v Brunskill did not
apply. The payment of £250,000, although it varied the contract
through the side agreement, was not prima facie prejudicial to
Aviva and in fact was beneficial to them. Again, the
rule in Holme v Brunskill did not apply and for the same
reasons neither did the rule in General Steam Navigation v
Rolt.
future
Looking to the effects this decision will have
in the future, we will need to be certain, when obtaining a bond
that the contract under which it is obtained provides express
wording to ensure it is not invalidated by variations. Unless
this wording is included it may be that insurers or providers of
the bond can succeed in arguing that variations to the terms of a
contract will render the contract discharged.
For further information on the articles contained in this
bulletin, please contact Kath
Shimmin, head of Blake Lapthorn's Finance group
on kath.shimmin@bllaw.co.uk
or call 023 8085 7081.
