An advanced payment of the price due under a building contract could discharge a bondsman from its obligation to make payment under a bond, unless contract terms provide otherwise. Employers and contractors need to be aware of the consequences of making irregular payments, and be clear as to the basis of the payment being made and how that payment is likely to be characterised if challenged. A recent Court of Appeal judgment in Aviva Insurance Limited v Hackney Empire Limited from December 2012, explores this issue.
Aviva provided a Bond in favour of HEL, ancillary to a building contract between HEL (the employer) and STC (the contractor). Aviva challenged its obligation to pay on the Bond once called upon because HEL had made side payments to STC, which Aviva claimed were out with the terms of the building contract.
The Court of Appeal held that Aviva was not discharged from its obligations as a bondsman by virtue of the side payments made to STC. In the particular circumstances of this case, the Court held that the payments in question were additional payments and not advanced payments of the price under the building contract. On that basis it was not prepared to find that Aviva had been discharged from its obligations.
The Court highlighted that an advanced payment of the price under a building contract prejudices the bondsman insofar as it (a) reduces the incentive of the contractor to complete, given that there is now a reduced amount of money to be earned from the contract, and (b) the employer holds less retention, so if it does suffer loss it is more likely to require and seek reimbursement from the bondsman. Had the payment been categorised as an advanced payment, Aviva might have been discharged from its obligations under the Bond.
The case is a useful summary of the law in relation to bondsman's obligations and the circumstances in which a bondsman may be discharged from its obligation owing to the conduct of the underlying parties to the building contract.