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锘縃ackney Empire, the theatre backed by Alan Sugar, is suing insurer Aviva for 拢1.1m over a construction dispute, which could affect the use of construction bonds.

The case concerns Aviva鈥檚 refusal to pay up when the theatre鈥檚 contractor and project manager, Sunley Turriff Construction (STC), went into administration in 2003 despite having agreed a 拢1.1m bond with the contractor.

The London theatre, which is funded by Lord Sugar, lodged a writ claiming the sum in damages from Aviva after STC went into administration during a 拢15m renovation of the venue.

In the writ Hackney Empire claims it is entitled to the sum on the grounds that STC defaulted on its building contract.

Aviva claims the contract became invalidated when the theatre forwarded a sum of 拢500,000 to STC to ease cash-flow problems at the company.

Work on the Victorian theatre started in September 2001 with Lord Sugar donating about 拢1.3m to the project. The Arts Council contributed 拢5m and the Heritage Lottery Fund nearly 拢4m.

STC had agreed to complete works by 2 September 2002 but the date was revised several times as the contractor - whose turnover averaged 拢100m - suffered diminishing margins. It was finally completed in 2004.

An agreement was eventually reached that Hackney Empire would assist STC with its cash-flow problems, resulting in a payment of 拢500,000 to STC.

Work halted when 80 workers walked off site after hearing STC had gone into administration.

Christopher Hill of law firm Norton Rose said the outcome of the case is likely to have a bearing on construction bonds.

鈥淓ssentially this case boils down to a bond covering a client in circumstances where one would normally expect it to do so - like when a contractor becomes insolvent,鈥� he said.

鈥淭he type of third party product offered by Aviva in this case is one which has a high uptake in the construction industry. Depending on the outcome of this case insurers may market it at a higher price and increase the conditions.鈥�

Aviva declined to comment.