Can You Change a Bonded Contract?

Can you amend a bonded (or guaranteed) contract without the beneficiary losing its rights to claim under the associated bond?

This was the decision of the Court of Appeal in Hackney Empire v Aviva which has received more coverage than most bond cases. Is it because the case decided a legal nuance which needed clarity? Err… I fear the real reason had more to do with the involvement of Lord Sugar!

The Bond’s Background

The facts were relatively simple. STC was the contractor for a £11m refurbishment on the Victorian Hackney Empire theatre, ‘backed by £1.1m from Lord Sugar as well as funding from the Heritage Lottery Foundation and the Arts Council.’ The surety was Aviva.

The question was whether payments made by the employer to the contractor totalling £750,000 – to help with cashflow problems – had invalidated the bond.

The surety for the bond isn’t actually involved in the project, but has nonetheless (for a fee) promised to guarantee performance of the contractor. This can be an uncomfortable position as the surety has no control over what the contractor and employer are doing or agreeing. Over the history of bonds, some sureties have relied on fairly spurious changes to escape liability and avoid paying, based on a rule in an 1878 case, Holme v Brunskill.

The temptation for any employer whose contractor is looking shaky is to speed up payment; the alternative is too awful to contemplate! But you need to beware the impact those changes have on any bonds or guarantees.  The payments were made under a separate side agreement. The court had to consider whether (1) the side agreement varied the bonded contract? and (2) if not, did it prejudice the surety and permit the surety to avoid having to pay under the bond?

Was Aviva (the surety) off the hook?

The court considered whether the rule in Holmes v Brunskill extended beyond variations OF the bonded contract, to other agreements which varied the performance of obligations UNDER the bonded contract including the side agreement. The court decided the surety was not discharged.

What do should you do?

If you are the recipient of a bond, you need to check that

  1. the bond includes an indulgence clause and
  2. no-one acting for you on the project takes acts or makes decisions which might prejudice the surety are taken without you asking for the surety’s consent, including creating side agreements and novation.

Case: Aviva Insurance Ltd v Hackney Empire Ltd [2012] EWCA Civ 1716.

[Updated November 2018]

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