The case of Providence Building Services Limited (Respondent) v Hexagon Housing Association Limited (Appellant) [2024] EWCA Civ 962 has recently been granted permission to appeal the Court of Appeal decision, in relation to the Contractor's right to terminate due to Employer's default under a JCT Design and Build Contract 2016 ("the Contract").
This case was referred to the Court of Appeal ("CA") where it was heard by Coulson LJ, Popplewell LJ and Stuart-Smith LJ. Stuart-Smith LJ summarised the central issue as being: 'can the Contractor terminate its employment under clause 8.9.4 of the JCT Form in a case where a right to give the further notice referred to in clause 8.9.3 has never previously accrued?'. In the Technology and Construction Court ("TCC"), while sitting as a Deputy High Court Judge, Adrian Williamson KC found this not to be the case, but the CA reversed this decision, finding in favour of the Contractor.
The Contractual Provisions
The issues surround the proper construction of clause 8.9 of the Contract. The relevant excerpt of the Contract is as follows:
"8.9.1 If the Employer:
.1 does not pay by the final date for payment the amount due to the Contractor in accordance with clause 4.9 and/or any VAT properly chargeable on that amount; or
.2 [Number not used]; or
.3 fails to comply with clause 3.16,
the Contractor may give to the Employer a notice specifying the default or defaults (a 'specified' default or defaults).
...
8.9.3 If a specified default or a specified suspension event continues for 28 days from the receipt of notice under clause 8.9.1 or 8.9.2, the Contractor may on, or within 21 days from, the expiry of that 28 day period by a further notice to the Employer terminate the Contractor's employment under this Contract.
8.9.4 If the Contractor for any reason does not give the further notice referred to in clause 8.9.3, but (whether previously repeated or not):
.1 the Employer repeats a specified default;
.2 a specified suspension event is repeated for any period, such that the regular progress of the Works is or is likely to be materially affected thereby,
then, upon or within 28 days after such repetition, the Contractor may by notice to the Employer terminate the Contractor's employment under this Contract."
Background to the Dispute
During the course of the works, Hexagon failed to make payment of £260,000 by the required date under the Contract, and Providence issued a Notice of Specified Default under clause 8.9.1. Hexagon then made payment in full within 28 days. A few months later, Hexagon again failed to make payment by the required date, this time for the sum of £360,000. Providence served a Notice of Termination under clause 8.9.4 in reliance on the Notice of Specified Default, and that the specified default was repeated. Without prejudice to the contractual termination, Providence also accepted, or purportedly accepted, Hexagon's repudiatory breach of contract.
Hexagon subsequently paid the sums outstanding, but disputed the validity of the termination, claiming that in doing so, Providence was itself in repudiatory breach of contract. The issue of contractual construction was first brought to adjudication, for which judgement was found in favour of Hexagon.
Providence brought Part 8 proceedings in the TCC, seeking a declaration as to the proper construction of clause 8.9 of the Contract. In turn, Hexagon claimed declarations on similar grounds.
TCC Decision
The matter was brought before Adrian Williamson KC, sitting as Deputy High Court Judge, on 7 November 2023. The facts as summarised above were agreed between the parties.
The Judge considered the natural and ordinary meaning of the clauses, and applied the principle that termination clauses are to be strictly construed, and must be strictly complied with for them to take effect. Clause 8.9.3 was straightforward in this respect, because if the Specified Default continues for 28 days after service of a notice under clause 8.9.1, the Contractor is entitled to terminate, should they choose to do so. This was described as allowing the Contractor to 'take an active step' to terminate by serving the Notice of Termination.
Termination under Clause 8.9.4 was found to be contingent on the right to terminate under Clause 8.9.3 having been accrued, yet the 'active step' to terminate not having been taken by the Contractor.
The Judge was not convinced by the argument put forward by Providence in that the above interpretation would produce 'the harsh and uncommercial result that the Employer could make every payment 27 days late'. In response to this point, the Judge suggested the Contractor has instead a 'battery of weapons' at their disposal, such as the right to suspend works, interest and adjudication. The judge found in favour of Hexagon.
Court of Appeal Decision
Although noting that the drafting could have been of better quality, Stuart Smith LJ found that the wording "for any reason" was broad enough to encompass the situation whereby the reason further notice had not been provided under clause 8.9.3 was that it had not yet been accrued. Therefore, Providence was entitled to terminate its employment under Clause 8.9.4 due to Hexagon's repeated specified default.
Stuart Smith LJ found the Judge's references to the Contractor 'taking an active step' unhelpful, because they distract from the true meaning of the words as they fall to be
interpreted, and that the true question should be whether the contractor has given further notice, not whether the giving (or not) of the notice can be described as the result of an active step.
In making their decision, the CA recognised that this may create a situation whereby a contractor may terminate their employment for repeated default even for small underpayments, or where the delay is relatively short. The Judge, whilst being understanding of the reasoning, did not find the commercial sensibility arguments compelling. Stuart Smith LJ found that this interpretation of the clause represented a contractual allocation of risk that was commercially acceptable. This was in the context that, in the alternative, as was the case here, there was potential for the Employer to escape the consequences of termination, even though they committed multiple defaults by making payment late, yet before expiry of the 28-day period after service of a Notice of Specified Default.
What does this mean?
The current position is that under the standard form JCT Design and Build Contract, where there is a Specified Default (such as failure to make payment) and the relevant notice has been served under clause 8.9.1, a Contractor may terminate their employment under Clause 8.9.4 upon repetition of that Specified Default. It may be that the Supreme Court find a different interpretation of this clause, and therefore we will be monitoring this position, and providing updated guidance, as soon as a decision is reached.
In the meantime, we encourage careful review of contractual provisions, to ensure that no Specified Defaults occur during the course of your contract.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
