In the recent case of Providence Building Services Ltd v Hexagon Housing Association Ltd, the Court of Appeal was asked to consider an issue about the proper construction of the 2016 Edition of the JCT Standard Form of Design and Build Contract, namely, 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.
Background
Providence Building Services Ltd ("Providence") entered into a JCT Design and Build 2016 Contract (amended by a Schedule of Amendments) ("the Contract") with Hexagon Housing Association Ltd ("Hexagon") in February 2019. Providence agreed to carry out the Contract works which involved the erection of a number of buildings at a site in Purley with an original contract value of approximately £7.2 million.
The background to the dispute is that, pursuant to Payment Notice 27, Hexagon was obliged to pay a sum of £260,000 on or before 15 December 2022 but it did not do so. Providence therefore issued a Notice of Specified Default under clause 8.9.1 of the Contract a day later, which resulted in Hexagon paying the required sum two weeks later (and before a right for Providence to terminate for non-payment had arisen).
Subsequently, in April 2023, a further Payment Notice (no. 32) was issued in the sum of £360,000, which was due for payment on or before 17 May 2023. Again, Hexagon did not pay by that final date for payment.
Providence therefore issued a Notice of Termination on 18 May 2023 under clause 8.9.4 of the Contract, relying on the Notice of Specified Default issued in December 2022 and asserting that the May 2023 non-payment was a repeat of that earlier specified default. There was also, without prejudice to the contractual termination, an acceptance, or purported acceptance, of Hexagon's alleged repudiatory breach (i.e.: its failure to pay).
Hexagon then paid the sum owed by it pursuant to Payment Notice 32 but challenged the validity of the Notice of Termination. Hexagon then accepted, or purported to accept, Providence's alleged repudiatory breach (i.e.: Providence's assertion that it had terminated when Hexagon alleged that no right to terminate had arisen) on 31 May 2023. Hexagon then referred a dispute between the parties to adjudication, seeking decisions and declarations, inter alia, as to the Notice of Termination and whether Providence could issue a Notice of Termination under clause 8.9.4. Hexagon also sought relief in relation to the repudiatory breach. The Adjudicator found substantially in favour of Hexagon.
Following receipt of the Adjudicator's decision, Providence brought a Part 8 claim seeking a declaration against Hexagon as to the correct construction of clause 8.9.4 of the Contract. The wording of clause 8.9 in the Contract was not materially amended from the standard form, save that some time periods were extended. Clause 8.9 of the Contract concerns a Contractor's (in this case, Providence's) entitlement to terminate for default of the Employer (in this case, Hexagon). The clause of the Contract provided as follows (amendments are underlined):
"Default by Employer
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...
...
the Contractor may give to the Employer a notice specifying the default or defaults (a 'specified' default or defaults).
.2. ...
.3 If a specified default......continues for 28 days from the receipt of notice under clause 8.9.1...., 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.
.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;...
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."
The issue between the parties was whether, in order for Providence to terminate the Contract pursuant to clause 8.9.4, a right to terminate must previously have arisen (but not been exercised) pursuant to clause 8.9.3. Providence argued that no such prior right to terminate was required but Hexagon argued that it was.
Original TCC Judgment
Deputy High Court Judge Mr Williamson KC noted that his principal task was to ascertain the natural and ordinary meaning of clauses 8.9.3 and 8.9.4 of the Contract set out in the context of the Contract as a whole.
The Judge's view was that clauses 8.9.3 and 8.9.4 as a whole envisaged that a Contractor could not give a valid clause 8.9.4 notice in circumstances where the right to give a clause 8.9.3 notice has never arisen. That is where the specified default has been cured within the 28 day period. It was Mr Williamson KC's view that clause 8.9.4 requires that a clause 8.9.3 notice could have been given but the contractor had decided not to do so for whatever reason.
Mr Williamson KC's view therefore meant that Providence had not acquired any prior right to terminate for the continuation of a specified default under clause 8.9.3, and it therefore did not have any right to terminate for the repetition of a specified default under 8.9.4. As a result, the Termination Notice was invalid for the purposes of clause 8.9.4.
The Judge also noted that a contractor has a "battery of weapons" available to protect its cash flow position which included the right to suspend, the payment of statutory interest, and the right to refer disputes to adjudication. It was therefore not necessary or appropriate to read into clause 8.9 a right to terminate to deal with the position that Providence had found itself in. Further, Mr Williamson KC considered that it would be surprising if clause 8.9 was so drafted that a contractor could terminate where there was a specified default that had been cured and was then repeated, perhaps only to a very small extent, subject only to recourse to the contention that the termination was unreasonable or vexatious.
Mr Williamson KC also held that the "business common sense" arguments did not take the matter very far one way or the other. The parties had chosen to draft clause 8.9.4 in a particular fashion, which, in his view, was clear on a matter of language. Mr Williamson KC did not grant the declaration sought by Providence but did grant those sought by Hexagon subject to any issues as to the wording.
Appeal
Providence appealed Mr Williamson KC's judgment and it was heard in the Court of Appeal on 30 July 2024 with judgment handed down on 15 August 2024.
Providence's appeal was successful and the TCC's decision was overturned. The Court of Appeal unanimously held that the right to terminate upon repetition of a specified default extended to the circumstance in which the further notice referred to in clause 8.9.3 had not been served because no right to serve it had arisen, the preceding specified default having ended before the right to serve the further notice under clause 8.9.3 had arisen.
The Court of Appeal was not persuaded by Mr Williamson KC's reference to the "battery" of other remedies noting that, while they may ameliorate the position to some extent, none provides a satisfactory and immediate solution to the typical case of late payment.
The Court of Appeal was persuaded that the plain meaning of the words "do not give"; the congruence of those critical words in clauses 8.4.3 and 8.9.4; and the presence of the words "for any reason" in clause 8.9.4, when seen in the full context of the terms of the contract and the previous versions of the JCT form, meant that Providence's assertions were correct. The position adopted by the Court of Appeal was based on the effect of the drafting of the JCT standard forms up to 2005 (the judgment refers to Reinwood v Brown [2007] LR 10 and Ferrara Quay v Carillion [2009] BLR 367). The Court of Appeal judgment makes it clear that those drafting changes to the 2016 edition (and the more recent 2024 edition) did not have the effect of radically altering the manner in which the termination provisions were to operate.
The case provides important clarification of a Contractor's right to terminate its employment under the JCT Design and Build 2016 Contract. It is believed this litigation is the first to address the issue regarding the contractor termination clauses of a JCT standard form contract and will hopefully provide clarity and certainty to users of the JCT standard forms (including the new 2024 suite of contracts).
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.