Review your bond: does it survive changes?

With any bond and all guarantees, it is imperative that the document continues to provide a form of surety throughout the life of a project.

That means the document has to continue to bite even where there are changes to the project: whether that is changes to the scope, the programme, the cost, or the quality. There is a general rule that if you change the bonded contract then the surety is released.

Variation Discharges the Surety…

David Bebb explains the rule in Holmes v Brunskill (from his article on the High Court decision) as:

“if there is any agreement between… [the employer] and [the contractor]… to alter the …building contract… then [the surety] should be consulted and if [the surety] has not consented to the alteration, or if it is not self-evident that the alteration is unsubstantial or which cannot be prejudicial to [the surety], then the court will not go into the merits of the alteration or the question of whether it is prejudicial but will instead allow [the surety] to be discharged from its obligations.”

So a surety is discharged if the contract it guarantees is varied without its consent or where the change might prejudice the surety (which is a high barrier).

…Except Where Permitted

An ‘indulgence clause’ is a term of the bond which allows the parties to vary the underlying agreement without the surety’s consent.

The purpose of an indulgence clause is to allow the parties to vary the bond without the need for the consent of the surety, and so avoid the consequences of the rule in Holmes v Brunskill. The relevant clause in Hackney v Aviva was:

‘…no alteration in (1) the terms of the Contract or (2) the extent or nature of the Works to be constructed and (3) no allowance of time by the Employer nor (4) any forbearance or forgiveness in respect of the Contract by the Employer shall release the Guarantor from any liability under the Bond.’

This clause is intended to allow the contractor and the employer to get on with the project, without constantly seeking permission from the surety or guarantor for every minor change or extension of time and so on.

Although it is really sensible, indulgence clauses are not very lovable! They are complex, technical and full of jargon. A simpler version would be:

‘the Guarantor agrees that the Contractor and the Employer can change any terms of the Contract or the Works without needing the Guarantor’s permission and that no change will prevent the Guarantor being liable under this Agreement.’

What should you do?

If you are the recipient or beneficiary of a bond, or guarantee, please look out for an indulgence clause to ensure that bond or guarantee will still be valid when you need it!

Case: Aviva Insurance Ltd v Hackney Empire Ltd [2012] EWCA Civ 1716. If you want to know more about the background to this clause, I have uploaded a note to slideshare.

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