Guarantees and Bonds - Scottish Construction Contracts - page 489

under which the employer advanced payments to the contractor and that the guar-
antor had also been prejudiced by the fact of the advance payments as these increased
the risk of default under the bond. The Court of Appeal upheld the decision of the
court of first instance and rejected both arguments on the grounds that the varia-
tions to the contract were self-evidently insubstantial; that, in any event, the bond
contained an 'indulgence clause' of the type mentioned above; and that the payments
in issue were, in fact, additional payments not advance payments of the price and so
did not prejudice the guarantor. hat said, the case does illustrate the potential pitfalls
of making variations to the underlying contract without the guarantor's consent, as
the Court of Appeal stated that an advance payment could prejudice, and as a result
discharge, a bondsman since it reduces the contractor's incentive to complete and also
potentially increases the employer's loss and the bondsman's liability by reducing the
amount of retention held.
In De Montfort Insurance Co. plc v. Lafferty (1997), which related to a performance
bond, it was held that a guarantor was not released from its obligations as a result
of novation of the employer's payment obligations under the building contract, since
the novation did not release the employer from its obligations but added an additional
obligant and so did not prejudice or increase the risks to the contractor or the surety.
This case turned very much on the restricted nature of the novation in question and
in most cases a novation replacing the original employer, without the consent of the
surety, could result in the discharge of the surety (provided, of course, that the instru-
ment is not on demand, see Meritz Fire and Marine Insurance Co Ltd referred to in
Section 23.2.3).
The importance of including an indulgence clause and other express safeguards for
the beneficiary is illustrated by Beck Interiors v. Russo (2010). In that case, Dr Russo,
theprincipalshareholderintheemployer,grantedthecontractorashortformofguar-
antee, which did not contain an indulgence clause, in respect of the payment obliga-
tions of the employer. he contractor agreed with the employer to carry out additional
work and subsequently obtained an adjudicator's award against the employer who
shortly thereafter became insolvent without making payment. he court held that the
agreement to carry out additional work was a variation which was not insubstantial
but on the facts the guarantor was considered to have consented to the variation. It was
also held that without express words in the guarantee the guarantor was not bound
by a determination under an adjudication between the contractor and the employer,
unless by his conduct he was found to have participated in the adjudication in a per-
sonal capacity.
The test as to whether a variation in respect of the underlying obligation requires
to be disclosed to the guarantor is an objective one and the beneficiary must dis-
close known facts to the guarantor if they reveal matters which might not naturally be
expectedtotakeplacebetweenthepartiestothetransaction,see North Shore Ventures
Ltd v. Anstead Holdings Inc and others (2011).
However,variationstounderlyingobligations,evenifsubstantial,donotinallcases
require the guarantor's consent. In National Merchant Buying Society v .AndrewBel-
lamy and another (2013), the guarantee was not related to obligations under a specific