It is common for employers to require a bond from the contractor in a construction contract to secure their performance. A bond will not be enforceable, if there is any variation of the construction contract on which the surety has not been consulted and to which he has not consented, unless it is (without inquiry) evident that the alteration is insubstantial, or that it cannot be otherwise than beneficial to the surety (commonly known as the Holme v. Brunskill rule).
In this English case, the employer entered into a side agreement with the contractor concerning advance payments to the contractor for its loss and expense claims. The contractor defaulted and was liable to repay the advance payments to the employer under the terms of the side agreement. The employer made a claim under the bond which included repayment of the advance payments.
The surety disputed liability on the ground that the side agreement was signed without its knowledge and the obligation was not within the scope of the bond.
The bond in question contained the following usual indulgence clause:-
“No alterations in terms of the [building 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 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.” [Interpretation added.]
The Court held that the side agreement did not involve any material variation of the building contract and was in any event within the scope of the indulgence clause. However, the obligations under the side agreement fell outside the scope of the bond. Thus, the employer could only recover liquidated damages under the bond but not the advance payments.