Construction Law: Aviva Insurance Limited v Hackney Empire Limited [2012] EWCA Civ 1716

This Court of Appeal case from the TCC concerned when a surety would be discharged under a guarantee. In March 2002, Hackney Empire Limited (“HEL”) contracted with Sunley Turiff Construction Ltd (“STC”) for restoration and renovation work to the Hackney Empire Theatre. The performance of STC’s obligation was guaranteed by a bond with Aviva executed prior to the contract formation. Following delays to STC’s work, HEL entered into a side agreement with STC based on a new completion date. STC failed to meet this date, and HEL claimed on Aviva under the bond in 2004 for the damages caused by STC’s breach of contract.
Aviva rejected the claim on the bond. In defence to HEL’s claim against it, Aviva first argued that its liability under the bond was discharged by HEL’s conduct in making extra-contractual payments to STC for the delays it has sustained, and second, that even if Aviva was liable under the bond, that this only extended to £205,000 for liquidated and ascertained damages.
Edwards-Stuart J found against Aviva on both points. Aviva was not discharged from liability because HEL’s conduct was not “prima facie prejudicial” to Aviva’s position in guaranteeing STC’s obligations under the contract. Additionally, HEL’s entitlement under the bond extended beyond £205,000.
Aviva brought proceedings before the Court of Appeal on the basis that Mr Justice Edwards-Stuart had applied the wrong legal test in determining a discharge of a surety under a guarantee, and that in the alternative, even if Aviva was liable, that the quantum of this only extended to £205,000. The Court of Appeal rejected both parts of the appeal. In considering the legal authorities on discharge of a surety under a guarantee, Jackson LJ provided that while advance payments of the agreed contract price made by an employer to a contractor may have the effect of discharging the liability of a surety, the making of additional payment by an employer to a contractor under a separate contract did not have the same effect. The surety would remain liable under the original contract, but not under the additional agreement.