Hackney Empire Ltd v Aviva Insurance Ltd  EWCA Civ 1716 concerned the issue of whether a guarantor will still be liable when there are additions or alterations in respect of the original contract. Hackney Empire Limited (HEL) had entered into a contract with Sunley Turiff Construction Limited (STC), under which STC was to restore the Hackney Empire Theatre in London. STC's performance was guaranteed by Aviva Insurance Limited (Aviva) through a bond executed prior to the construction contract being signed.
STC fell into financial difficulty and there were delays completing the work. HEL entered into a side-agreement with STC which provided a new completion date and the provision of extra payments by HEL to STC. STC failed to meet this new date and was subsequently liquidated. HEL made a demand on Aviva under the bond for damages caused by STC's breach of contract. Aviva asserted that it was discharged from liability under the bond because HEL had made extra payments to STC, thus varying the original contract.
The Court of Appeal discussed the legal authorities and history surrounding when guarantees can be said to have been discharged, which made clear that the making of payments in advance of when they were due under an original contract can discharge a guarantee if guarantors have not consented to the alteration of the original contract. The Court found, however, that in this situation, the side-agreements were under a separate contract and did not therefore alter the original contract. Therefore, Aviva was not discharged from its liability. However, Aviva's liability only related to the original construction contract and, as such, it was not liable to HEL to repay the sum HEL had advanced to STC under the side-agreement.
See court decision here.