This case concerns the interpretation of termination clauses in JCT standard form building contracts, and the lawfulness of the contractor, Providence Building Services Limited (Providence), terminating its contract with Hexagon Housing Association Limited (Hexagon). 

Overview

Hexagon repeatedly failed to pay interim payments to Providence on time. Providence ran out of patience and purported to terminate the Contract.

Hexagon argued that, at the point in time it did so, Providence did not have a right to terminate the Contract.

That seemingly simple question was looked at by an adjudicator and then a High Court judge – before the Court of Appeal unanimously disagreed with both of them.

Contract terms

Hexagon engaged Providence as a contractor under a JCT Design and Build Contract 2016 (the Contract).  When it came to the contentious termination of the Contract, the Court of Appeal had to consider the following relevant provisions:

• clause 8.9.1

“If the Employer:.. does not pay by the final date for payment the amount due to the Contractor…the Contractor may give to the Employer a notice specifying the default or defaults…”;

• clause 8.9.3

"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… terminate the Contractor's employment under this Contract"; and 

• clause 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)… the Employer repeats a specified default… then, upon or within 28 days after such repetition, the Contractor may by notice… terminate the Contractor's employment…" 

Facts – the first missed payment

• On 25 November 2022, Providence issued a payment notice. In accordance with the terms of the Contract, this required Hexagon to make payment within 21 days, i.e. by 15 December. 
• Hexagon did not make the payment by the deadline, and on 16 December, Providence issued a notice under clause 8.9.1 – specifying Hexagon’s default in not paying by the final date for payment.
• Hexagon ultimately paid the outstanding sum 13 days late, on 29 December. 
• As a result, Providence’s right under clause 8.9.3 of the Contract – the right to terminate if the default continued for 28 days after a default notice - never arose. 

Facts – the second missed payment

• Subsequently, Hexagon failed to make a further payment on time. 
• This time, in response, Providence did not simply issue another default notice – it issued a termination notice.  In doing so, Providence relied upon clause 8.9.4 of the Contract – Providence said that because Hexagon had repeated a specified default, Providence was entitled to terminate.  

The adjudication

Hexagon disputed the lawfulness of Providence’s termination and referred the dispute to adjudication. 

The adjudicator found in favour of Hexagon, finding that in the circumstances of this case, Providence was not entitled to rely on clause 8.9.4 to terminate the Contract unless and until (1) a right to terminate had arisen under clause 8.9.3 – i.e. a specified default continuing for 28 days – and (2) Providence had not in fact exercised its right to terminate under clause 8.9.3.

Providence issued proceedings in the High Court, seeking to overturn the adjudicator’s decision. 

The High Court judgment 

Providence asked the High Court to determine "whether a right to terminate under Clause 8.9.3 must first have accrued before Providence could have any right to terminate under Clause 8.9.4”.

The High Court agreed with the adjudicator that, on these facts, Providence was not entitled to terminate the contract under clause 8.9.4.  For a contractor to be entitled to terminate under clause 8.9.4, the High Court said that the Contractor must first have become entitled to terminate under clause 8.9.3, and have not exercised that right.

The Court of Appeal judgment 

The Court of Appeal disagreed, however – it held that Providence was entitled to rely on clause 8.9.4 to terminate the Contract.

In particular, the Court of Appeal carefully examined the wording of clause 8.9.4 – and decided that the words "If the Contractor for any reason does not give the further notice referred to in clause 8.9.3…" were broad and meant precisely what they said – they covered any situation where the contractor had not given the notice under clause 8.9.3 – including where the right to give such a notice under clause 8.9.3 had never arisen in the first place. 

The Court of Appeal also took time to consider the overarching purpose of clause 8, namely to ensure that contractors do not have to put up with “serial defaults” – such as repeated late payment by employers.  It therefore accepted Providence’s argument that this was “a contractual allocation of risk that is commercially acceptable, even though it renders the Employer’s ice thinner from the outset”.

Comment

The Court of Appeal decision has important practical implications. It clearly increases the opportunities for – and so the risk of - a contractor terminating a contract for repeated defaults by an employer. 

The decision means that once a specified default (such as failing to make an interim payment on time) is committed and is the subject of a valid default notice from the contractor, an employer runs the risk that the contractor could terminate the contract if the employer repeats that default. 

In an extreme case, this means that an employer could make a payment one day late, and then make a further payment one day late, and in doing so, give the contractor the right to terminate the contract.

This risk will obviously be most acute on distressed projects, where an employer might be reluctant to make payments on time or at all, at a time when the contractor might equally be looking for a way out of the project.

Unless and until the Supreme Court weighs in on this issue – whether in this case or another – the Court of Appeal’s decision means that it is a case of “employers beware” when it comes to repeat defaults.