Hackney Empire Theatre v Aviva Insurance

Hackney Empire Theatre is a fine building and it puts on great live music, comedy drama and dance in the East of London. Its latest long running drama moved to the West End when its legal dispute with Aviva Insurance reached the stage of the Court of Appeal.

The ornate 1901 auditorium had become dilapidated after World War II but a preservation trust got the theatre up and running again by 1976. After years more fund raising and with the help of the then Sir Alan Sugar the theatre set about a major and intricate renovation project in 2001. The JCT 1998 form of contract provided for liquidated damages for delayed completion. In the event that the theatre terminated the contract for the contractor's failure to perform, it had clause 27, which provided for the drawing up of an account of monies owing for the work as against additional costs and losses suffered. However, that was without prejudice to the theatre's other rights and remedies.

Aviva provided the theatre with a performance bond that promised to pay up to a sum that was 10% of the contract price in the event of default by the contractor. The work ran into delay, disruption and disputation. The contractor said it could not finance the work if its claims were not paid and threatened adjudication.

Sir (now Lord) Alan Sugar mediated and there resulted a 'side agreement' to make advances against the contractor's claims, repayable if the claims turned out to be worthless. There were to be three instalments adding up to a million pounds; a fraction of what the contractor alleged they were worth. Two were paid but on the brink of paying the third the contractor abandoned the site and then went into administration.

The theatre called the bond to help finance a replacement contractor but Aviva refused to pay. They said the bond had been discharged by the making of the payments or the making of the side agreement. The theatre went to law to claim the money. Aviva relied on the rule in Holme v Brunskill.

That was a nineteenth century case in which it was held that a bondsman is discharged if the contract he guarantees is varied without his consent.

There was debate about the scope of the rule and in particular whether it caught alterations in the way a contract was performed even though there was no actual variation to the obligations of the parties. Aviva argued that it applied to advance payments and that was in effect what the theatre had allowed the contractor in this case.

They said the rule should apply because there was less incentive for the contractor to complete and so the bondsman's security was diminished.

Aviva's arguments were rejected. The court stated in clear terms that the rule in Holme v Brunskill applies to variations to the contract guaranteed. Advance payments under the contract might have the effect of discharging the bondsman if he had not consented. However, that was to be distinguished from the present case, because the payments concerned were outside the terms of the original contract.

On quantum Aviva relied on the well-known case of Perar to contend that they could not be liable for more than the value of liquidated damages that had accrued due at the date of termination, the theatre not having drawn up the account referred to in the contract. That argument was also rejected, because claims to general damages were preserved by the reference to rights under the contract being without prejudice to other rights and remedies.

So - a triumphant last night for the theatre! And welcome clarification of the law. But is the denouement yet to come? The judgment of the Court of Appeal is subject to an application to the Supreme Court for permission for a second appeal.

The articles and papers published by Keating Chambers are for the purpose of raising general awareness of issues and stimulating discussion. The contents must not be relied upon or applied in any given situation. There is no substitute for taking appropriate professional advice.

This material is prepared for Chambers by our Director of Research and Professional Development, Professor Anthony Lavers (LL.B. M.Phil Ph.D. D.Litt MCI.Arb FRICS Barrister) Visiting Professor of Law, Oxford Brookes University.