Hackney Empire Ltd v Aviva Insurance Uk Ltd (Formerly Trading as Norwich Union Insurance Ltd)

JurisdictionEngland & Wales
JudgeLord Justice Jackson,Lord Justice Moses,Sir John Thomas,or
Judgment Date19 December 2012
Neutral Citation[2012] EWCA Civ 1716
Docket NumberCase No: A1/2011/2956
CourtCourt of Appeal (Civil Division)
Date19 December 2012

[2012] EWCA Civ 1716






Royal Courts of Justice

Strand, London, WC2A 2LL


Sir John Thomas, The President of the Queen's Bench Division

Lord Justice Moses


Lord Justice Jackson

Case No: A1/2011/2956

Aviva Insurance Limited
Hackney Empire Limited

Mr. Richard Wilmot-Smith QC and Ms Alexandra Bodnar (instructed by Gateley LLP) for the Appellant

Mr. David Thomas QC and Mr. Rupert Choat (instructed by CMS Cameron McKenna LLP) for the Respondent

Hearing dates : 20 th and 21 st November 2012

Lord Justice Jackson

This judgment is in seven parts, namely;

Part 1. Introduction,

Part 2. The facts,

Part 3. The present proceedings,

Part 4. The appeal to the Court of Appeal,

Part 5. The law in relation to discharge of sureties,

Part 6. Has Aviva been discharged from liability under the bond?

Part 7. The quantum issues.


This appeal concerns a bond given to secure the performance of a construction contract. The bondsman appeals against a decision that it remains liable under the bond, despite the fact that the employer paid to the contractor additional sums which were not due under the contract. There are also issues concerning the extent of the bondsman's liability; these issues turn upon the meaning and effect of the termination provisions in the construction contract.


Hackney Empire Ltd was the employer under the construction contract. It is claimant in the litigation and respondent in the present appeal. I shall refer to it as "HEL".


Sunley Turriff Construction Ltd was the building contractor concerned. It is not a party to the litigation but features significantly in the narrative of this case. I shall refer to it as "STC".


Aviva Insurance Ltd is the bondsman. This insurer was formerly known as Norwich Union Insurance Ltd. Indeed that name appears on the bond. For simplicity, however, I shall refer to this insurer as "Aviva" at all stages. Nothing turns on the change of name or on any re-structuring which may have occurred within the Aviva group of companies. Aviva is defendant in the litigation and appellant in the present appeal.


Mr. Timothy Ronalds is an architect and the principal of the firm Tim Ronalds Architects. There was a period when his firm had a different name, but those matters are irrelevant to the present appeal. I shall therefore refer to his firm by its current name throughout. Boyden and Company is a firm of quantity surveyors. Mr. Cameron Smith is a partner in that firm.


After these introductory remarks, I must now turn to the facts.


Hackney Empire Theatre was constructed in 1901. It was designed by Mr. Frank Matcham, who was a leading theatre architect in the late Victorian and Edwardian periods. For many years this theatre was highly successful, but following the Second World War the theatre fell on hard times. In the 1960s and 1970s it was used as a bingo hall. In 1976 Hackney Empire Preservation Trust purchased the building and restored it to its original function. Thereafter HEL operated the theatre on behalf of Hackney Empire Preservation Trust.


After many years of fund raising HEL embarked on a project to renovate and restore the theatre. HEL employed Mr. Timothy Ronalds to do the design work. In due course HEL accepted STC's tender to carry out the construction works.


On 24 th April 2001 HEL sent a letter of intent to STC, requesting them to commence work pending the execution of a formal contract. STC countersigned the letter of intent and duly commenced work on 31 st May 2001.


On 6 th August 2001 STC and Aviva executed a bond in favour of HEL in the sum of £1,106,852. This secured the due performance of STC's obligations under the proposed construction contract. The main provisions of the bond read as follows:

"NOW THE CONDITIONS of the above-written Bond are such that if:-

(a) the Contractor shall subject to Condition (c) hereof duly perform and observe all the terms provisions conditions and stipulations of the said Contract on the Contractor's part to be performed and observed according to the true purport intent and meaning thereof or if

(b) on default by the Contractor the Surety shall satisfy and discharge the damages sustained by the Employer thereby up to the amount of the above-written Bond or if

(c) the Architect defined in the said Contract shall pursuant to the provisions thereof issue a Certificate of Practical Completion then upon the date stated therein (hereinafter called "the Relevant Date")

this obligation shall be null and void but otherwise shall remain in full force and effect but no alteration in the terms of the said Contract made by agreement between the Employer and the Contractor or in the extent or nature of the Works to be constructed and completed thereunder and no allowance of time by the Employer or the Architect under the said Contract nor any forbearance or forgiveness in or in respect of any matter or thing concerning the said Contract on the part of the Employer or the said Architect shall in any way release the Surety from any liability under the above-written Bond."


The last part of this passage, beginning with the words "but no alteration …", has been referred to by all parties as "the indulgence clause". I shall refer to that provision in the same way.


On 5 th March 2002 HEL and STC entered into a construction contract in relation to the works which were already under way at Hackney Empire Theatre. This contract was in the JCT Standard Form, 1998 edition, with quantities, subject to certain amendments. The contract sum specified was £11,098,612. The architect named in article 3 of the articles of agreement was Tim Ronalds Architects. The quantity surveyor named in article 4 of the articles of agreement was Boyden and Company. The completion date stated in the appendix to the contract was 2 nd September 2002.


The rate of liquidated damages for delay was specified as £5,000 per week. No-one suggests that this was anything other than a genuine pre-estimate of the loss likely to be caused by delay. HEL had a major production booked for the autumn of 2002.


Clause 25 of the contract conditions sets out the grounds on which the architect may grant an extension of time for completion. These grounds include compliance with certain categories of architect's instructions. Clause 26 of the contract conditions provides that the contractor may recover loss and expense caused by matters affecting the regular progress of the works. Clauses 26.1.2 and 26.1.3 require the contractor, if so requested by the architect, to provide supporting information and details in respect of his claim for loss and expense.


Clause 27 of the contract conditions deals with determination by the employer. It includes the following provisions:

"27.3.1 If the Contractor

makes a composition or arrangement with his creditors, or becomes bankrupt, or,

being a company,

makes a proposal for a voluntary arrangement for a composition of debts or scheme of arrangement to be approved in accordance with the Companies Act 1985 or the Insolvency Act 1986 as the case may be or any amendment or re-enactment thereof, or

has a provisional liquidator appointed, or

has a winding-up order made, or

passes a resolution for voluntary winding-up (except for the purposes of amalgamation or reconstruction), or

under the Insolvency Act 1986 or any amendment or re-enactment thereof has an administrator or an administrative receiver appointed


27.3.2 the Contractor shall immediately inform the Employer in writing if he has made a composition or arrangement with his creditors, or, being a company, has made a proposal for a voluntary arrangement for a composition of debts or scheme of arrangement to be approved in accordance with the Companies Act 1985 or the Insolvency Act 1986 as the case may be or any amendment or re-enactment thereof;

27.3.3 where a provisional liquidator or trustee in bankruptcy is appointed or a winding-up order is made or the Contractor passes a resolution for voluntary winding-up (except for the purposes of amalgamation or reconstruction) the employment of the Contractor under this Contract shall be forthwith automatically determined but the said employment may be reinstated if the Employer and the Contractor [kk] shall so agree;

27.3.4 where clause 27.3.3 does not apply the Employer may at any time, unless an agreement to which clause refers has been made, by notice to the Contractor determine the employment of the Contractor under this Contract and such determination shall take effect on the date of receipt of such notice.


27.5 Clauses 27.5.1 to 27.5.4 are only applicable where clause 27.3.4 applies.

27.5.1 From the date when, under clause 27.3.4, the Employer could first give notice to determine the employment of the Contractor, the Employer, subject to clause 27.5.3, shall not be bound by any provisions of this contract to make any further payment thereunder and the Contractor shall not be bound to continue to carry out and complete the Works in compliance with clause 2.1.

27.5.2 Clause 27.5.1 shall apply until


.2.1 the Employer makes an agreement (a ' agreement') with the Contractor on the continuation or novation or conditional novation of this Contract, in which case this Contract shall be subject to the terms set out in the agreement


.2.2 the Employer determines the employment of the Contractor under this Contract in accordance with clause 27.3.4,...

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