Terminating a JCT Design & Build Contract: Supreme Court clarification on using resolved specified defaults when terminating the contract

In Providence Building Services Limited (Respondent) v Hexagon Housing Association Limited (Appellant) UKSC/2024/0130, the Supreme Court heard a “short point of contractual interpretation” relating to how to properly utilise a termination clause in a JCT construction contract. This article provides a summary of the judgment and highlights its key implications for the construction industry.

BACKGROUND 

The parties were Hexagon Housing Association Limited (“Hexagon”; “the Appellant”) and Providence Building Services Limited (“Providence”; “the Respondent”). In February 2019, Hexagon was engaged by Providence to carry out building works under JCT Design and Build Contract 2016 edition with a Schedule of Amendments (“the Contract”). The works were for construction of a number of buildings in Purely, London (“the Works”). The Contract was for the original sum of approximately £7.2 million.

The issue at the heart of this case was whether, properly construed, a right to terminate under clause 8.9.3 must first have accrued before a contractor can have any right to terminate under clause 8.9.4.

THE DISPUTE

The dispute arose as a result of Hexagon not making a payment on the contractually required date of 15 December 2022, which prompted Providence to serve a notice under clause 8.9.1 of the Contract on 16 December 2022 specifying a default that may entitle Providence to terminate the Contract.

However, payment was made, although it was 14 days late (on 29 December 2022). Consequently, Providence could not terminate the Contract under clause 8.9.3, as the payment was made less than 28 days after the date of the 8.9.1 notice.

Months later, Hexagon missed a further payment that it should have paid on 17 May 2023. On 18 May 2023, Providence, instead of relying on clause 8.9.3, served a notice under clause 8.9.4 of the Contract in order to immediately terminate the Contract. Providence, in this notice, referred to the notice under clause 8.9.1 that was served in December 2022 and relied on the non-payment in May 2023 as demonstrating that Hexagon had continued this specified default and, as a result, it was entitled to terminate the Contract on the ground that Hexagon had repeated a specified default. Providence, in the same notice, also referred to how Hexagon had paid Providence late in respect of 19 of the 32 payments Providence was contractually owed.

Hexagon ultimately paid the amount due under the May 2023 payment notice and went on to terminate the Contract for Providence’s alleged repudiatory breach by Providence’s attempt to terminate the Contract under clause 8.9.4. Hexagon referred the issue of whether or not Providence had committed a repudiatory breach of the contract to an adjudicator, who broadly found in Providence’s favour.

COURT ACTIONS

The parties asked for declarations from the High Court to clarify if a right to terminate under clause 8.9.3 of the Contract had to have accrued before Providence had a right to terminate the Contract under clause 8.9.4. At first instance, the High Court found in Hexagon’s favour on the grounds that, in order to issue a notice under clause 8.9.4, it had to be demonstrated that a notice under clause 8.9.3 could be issued and this could not be shown to be the case here as the specified default had been ‘cured’ (i.e. the specified default relied on had been resolved). In the Court of Appeal, the appeal by Providence was allowed. This was on the grounds that 8.9.4 allowed the Contractor to issue a notice under this clause even if it had not issued a notice under clause 8.9.3 and that the non-issuance under clause 8.9.3 could be ‘for any reason’. The Judge in the Court of Appeal also referred to clause 8.4 (which allows an Employer to terminate the Contractor) and observed that clause 8.9 should be read in conjunction with clause 8.4. The Judge noted that clause 8.4 stated that termination under clause 8.4 could occur “whether as a result of the ending of any specified default or otherwise” and that the use of the words “for any reason” in clause 8.9 should encompass the term “whether as a result of the ending of any specified default or otherwise” used in clause 8.4. As a result, a specified default that had been previously resolved could be used, in the Court of Appeal’s Judgment, to subsequently terminate the Contract under clause 8.9.

Hexagon appealed to the Supreme Court. The question was:

“Can the contractor terminate its employment under clause 8.9.4 of the JCT 2016 Design and Build Form, in a case where a right to give the further notice referred to in clause 8.9.3 has never previously accrued?”

THE SUPREME COURT PROCEEDINGS

Hexagon broadly argued that, in order to terminate under clause 8.9.4, a Contractor must demonstrate that it has accrued a right to serve such a notice under clause 8.9.3. In this case, as Hexagon had paid the amounts due under the December 2022 8.9.1 notice, the right to terminate under clause 8.9.3 for this specified default had ceased.

Providence argued that where a notice under clause 8.9.1 has already been served, and that specified default has been repeated, then there is no need to demonstrate that a right has accrued under clause 8.9.3 and the Contractor can immediately rely on clause 8.9.4.

DECISION

Interpreting a standard form contract, such as the JCT

When considering how to interpret a standard form of contract, such as the JCT form of contract, the Court confirmed that this form of contract should be interpreted consistently across all parties that use it. It should be reviewed against what parties in that industry, broadly, understand about the contract and, in respect of the specific parties’ objective intentions, the Court should take the view that the parties’ objective intentions are broadly consistent with those of other parties in the industry that use the standard form of contract.

The correct interpretation of clauses 8.9.3 and 8.9.4

The Judge observed that clause 8.9.4 was ‘parasitic’ on clause 8.9.3 and was not independent of it.

The Judge, in coming to this conclusion, relied on the phrase in clause 8.9.3 “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 Judge found that as a result of this wording, in order to use clause 8.9.4 to terminate, the defaulting party must have failed to resolve the default during the 28 day period referred to in clause 8.9.3. It is only after the 28 day period referred to in clause 8.9.3, if the specified default continues, can the Contractor use clause 8.9.4 to terminate the Contract.

The Judge also observed that, if he found in Providence’s favour, that this would result in ‘an extreme outcome’ in that a subsequent late payment after an initial late payment would allow the Contractor to terminate the contract and this would result in allowing a ‘sledgehammer to crack a nut’.

The Judge also disagreed with the Court of Appeal Judge’s reliance on clause 8.4 to interpret the terms of clause 8.9. The Judge’s reasons were there was no given reason why clause 8.4 and 8.9 should be viewed symmetrically (1), the two clauses, when reviewed, were not similar in that clauses 8.4 and 8.9 provided for different time periods by which the default must continue and clause 8.4 provided that failing to comply with clause 7.1 as a specified default (2) and the words used in clause 8.4 and 8.9 are different (3). The wording of clause 8.4, as opposed to clause 8.9, made it clear that clause 8.4 could be evoked without an accrued right to terminate.

The appeal was ultimately allowed.

IMPLICATIONS FOR THE CONSTRUCTION INDUSTRY

This Judgment is important clarification for Contractors, and even Employers, as to how they should utilise the terms of clause 8.9, and clause 8.4 in the case of Employers.

The Court has clarified that a ‘specified default’, and the 28 day period that follows that specified default, should be viewed in isolation and, if that specific specified default has been rectified (i.e. by receiving payment for the amount that is outstanding) then the Contractor should consider that it has lost its right to terminate under clause 8.9.

If another possible specified default has occurred after the previous, rectified, specified default, then the Contractor should ensure it serves a new notice under clause 8.9.1. The Contractor must not attempt to rely on the previous notice it has served under clause 8.9.1 for a specified default that was previously rectified. If the Contractor does this, then they risk committing a repudiatory breach of contract which could result in their employment being terminated and the Contractor being liable for damages.

If the Contractor is frustrated with this position, then they should consider taking more immediate action with regards to pressurising the Employer to pay them. This could include serving a notice to suspend work as a result of non-payment.

In relation to Employers, the Judge left open whether or not an Employer, unlike a Contractor, may be able to rely on a historical, resolved, specified default in order to terminate the contract under clause 8.4.

However, both Employers and Contractors, if they are considering terminating their contract, must ensure they seek proper legal advice.

If you have any concerns or questions please do not hesitate to contact our construction and engineering team or your usual Brodies Contact.