Practical Law

A contractor whose progress and performance are unsatisfactory presents an employer with a number of options as to how to proceed. Whichever option the employer chooses, it will be wise to bear in mind the implications of that course of action for other interested parties, including a bondsman of the contractor’s obligations (as in the case of Aviva v Hackney Empire Ltd, decided by the Court of Appeal last month).

Aviva v Hackney Empire

There is venerable authority to the effect that a variation of the underlying contract can discharge a bondsman (Holme v Brunskill [1877]). To counter this, bonds commonly contain a provision to the effect that no variation to the terms of the underlying contract will release the bondsman from his liability. The bond in Aviva v Hackney Empire contained such a clause.

In Aviva v Hackney Empire, at first instance, Edwards-Stuart J, found that the underlying contract was not varied and there was no appeal from that finding. However, the bondsman contended that the parties had acted in such a way as to prejudice him, thereby leading to his discharge.

What caused this argument to be advanced?

The parties had been at loggerheads from the beginning of the contract. The contractor had submitted an “on account” claim which the employer’s quantity surveyor rejected as being unsupported by evidence. However, the employer decided to pay sums on account of the claims against a revised programme for the works. A side agreement was entered into under which the sums were paid expressly “on account”. The agreement made it clear that it did not amount to an acceptance of any of the contractor’s claims. Subsequently, the contractor went into administration and its employment under the contract was determined. The employer made a claim under the bond for the extra cost of completing the works.

The crucial issue was whether the parties’ actions prejudiced the bondsman. To resolve this issue, the court had to look at earlier cases and, in particular, Trade Indemnity Co Ltd v Workington Harbour and Dock Board [1937] AC 1. In that case, the contractor fell into financial difficulty and the employer made an advance payment by way of two loans. These were to be repaid from future instalments of the contract price otherwise payable. Once again the contractor did not finish the works and the court concluded that the loan contracts were not alterations of the original contract. They were made independently with a view to enabling the contractor to perform the contract. The bondsman had no liability in respect of them.

In Aviva v Hackney Empire, the Court of Appeal concluded that the employer’s actions were similar to those in Trade Indemnity and did not discharge the bond. By contrast, had there been a concession by the employer so that instalments of the agreed contract price would be paid before they fell due, then the liability of the bondsman might be discharged. In such a situation, the employer would have voluntarily reduced the incentive for the contractor to complete on time and thereby reduced the sums retained by it against that prospect.

It’s a fine line

It might be thought that there is a somewhat fine line between the actions taken in Aviva v Hackney Empire and the circumstances when the bondsman’s liability will be discharged. However, the Court of Appeal’s approach seems logical. A separate transaction by way of side agreement does not in any way reduce the contractor’s obligations or the employer’s entitlement. Indeed, the side agreement in this case expressly said so. By contrast, a variation to the underlying contract would prejudice the bondsman if it made him liable in respect of obligations that he did not consent to when agreeing to guarantee the obligations under the contract.

It remains to be seen whether Aviva will seek leave to appeal this judgment to the Supreme Court.