Hackney Empire Limited v Aviva Insurance UK Limited [2011] EWHC 2378 (TCC)

Hackney Empire entered into an agreement with Sunley Turriff Construction to refurbish the Hackney Empire Theatre. There was a long sequence of contractual events, during which Aviva issued a performance bond for the obligations of the contractor under the contract. The parties then entered into a side agreement under which a previous oral agreement to make certain payments in respect of the contractor's claims for losses and to target a new completion date was formalised. The target date was later than that in the contract, but the side letter did not purport to grant an extension of the time under the building contract. The contractor went into administration and the employer demanded repayment of sums paid under the side agreement. When these and other payments were not made, the employer made a claim against Aviva under the bond. Aviva rejected the claim. The bond contained the usual "indulgence clause" stating that no alteration in the terms of the building contract or the extent of the works and no allowance of time would in any way release the surety from liability under the bond. Aviva relied on the rule in Holme v Brunskill, namely that a variation to a contract will discharge a guarantor's liability unless the guarantor consents to the variation or the variation is patently insubstantial or incapable of adversely affecting the guarantor.

The Technology and Construction Court (Edwards-Stuart J) made various findings, of which the following are relevant to this bulletin: The Technology and Construction Court (Edwards-Stuart J) made various findings, of which the following are relevant to this bulletin:

  • The bond remained valid and was not affected by variations made by the side letter. Although the side letter did vary the building contract, it did so in only two minor ways, both of which fell within the exceptions in Holme v Brunskill. One variation in the side letter was that the amount of liquidated damages was to be reduced, a provision which was to the benefit of the surety. The second was that neither party would refer a dispute to adjudication for a period, something that was of minimal consequence to the surety.
  • The bond did not extend to the contractor's obligations under the side agreement.
  • Conduct that does not actually vary the principal contract (e.g. entering into the side letter in this case) can only discharge a surety if it is prima facie prejudicial to the surety. Here, the courts followed the case of General Steam Navigation v Rolt. Here, the making of the payments under the side letter was not prejudicial conduct.
  • As an obiter remark on the indulgence clause, the court said that the payment of money in advance under the side letter could not be an "allowance of time" and did not fall within the provisions of the indulgence clause.

This case shows the importance of ensuring that the precise legal status of a side letter is clear. It is also a reminder of the need to consider the position of guarantees if a contract is varied.

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