Navigating the termination process
Sam Phillips and Frank Alden set out the lessons from a recent Technology and Construction Court ruling.
In the recent case of Providence Building Services Limited v Hexagon Housing Association Limited, the Technology and Construction Court (TCC) delivered a noteworthy verdict regarding a Contractor’s right to terminate its employment under the JCT Design and Build Contract 2016. The case serves as a cautionary reminder to Contractors inclined to hasten through the termination process, emphasising the substantial repercussions that can follow.
Background
Under the backdrop of an amended JCT Design and Build Contract 2016, Hexagon Housing Association Limited acted as the Employer, engaging Providence Building Services Limited as the Contractor.
After Providence submitted interim payment application 27, Hexagon failed to make payment by the final date for payment on 15 December 2022. This prompted Providence to issue a notice of specified default on 16 December 2022, under clause 8.9.1.1 of the JCT.
Hexagon subsequently rectified the default by making a full payment within the amended 28-day period under clause 8.9.3 of the Contract (in place of the standard 14 days).
Hexagon then failed to fulfil its payment obligations for a second time by failing to make payment of interim payment 32 before the final date for payment (17 May 2023).
The following day, Providence delivered a purported termination notice invoking clause 8.9.4 or, alternatively, accepting Hexagon's repudiatory breach. In response, Hexagon disputed Providence's entitlement to terminate. Following attempts to resolve the dispute and Providence's steps to demobilize from the site, Hexagon notified Providence of its acceptance of Providence’s repudiatory breach of the contract on 31 May 2023.
A subsequent adjudication unfolded, and the decision was in favour of Hexagon. The adjudicator's decision highlighted the necessity for a right to terminate under clause 8.9.3 to precede any entitlement to terminate under clause 8.9.4. Providence's attempt to terminate under clause 8.9.4 was deemed invalid as no such right had arisen.
In response, Providence initiated Part 8 proceedings seeking a declaration on the interpretation of the Contract.
Court proceedings and judgment
The court was required to determine whether, as a prerequisite to the Contractor terminating the Contract under clause 8.9.4, a right to terminate must previously have arisen (but not been exercised) under clause 8.9.3. The clauses read as follows:
“.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.
“.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 . . . 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.’
Hexagon submitted that a right to terminate must indeed have previously arisen under clause 8.9.3 before Providence could validly terminate the Contract.
Providence disputed this and argued that Hexagon had committed a specified default and even though the right to termination had not arisen (because Hexagon remedied the specified default by making the payment of interim application 28 within the relevant time period), Providence was contractually entitled to terminate Hexagon’s employment under the Contract because Hexagon committed a further specified default by failing to failing to pay interim application 32 before the final date for payment.
The court scrutinized clauses 8.9.3 and 8.9.4 in the context of the entire contract and concluded that before Providence’s right to terminate under clause 8.9.4 arose, Hexagon needed to have first committed a specified default under clause 8.9.3. However, since Hexagon had rectified the initial specified default, the initial right to terminate had not in fact accrued.
The court determined that Providence had overemphasised the contextual significance of the phrase "for any reason" in clause 8.9.4 in conjunction with the preceding clause. Providence's interpretation was deemed harsh and commercially impractical, potentially enabling Contractors to terminate contracts too easily. The judge stressed that Contractors already had protections, such as the ability to suspend, seek interest, and adjudicate for late payments.
Consequently, Providence's Termination Notice of 18 May 2023 was declared invalid for the purposes of clause 8.9.4, failing to lawfully terminate Providence's employment under the contract.
Conclusion
The judge's decision stands as a cautionary precedent, urging Contractors to approach the termination process with careful consideration and adherence to contractual timelines. Permission to appeal was refused, solidifying the importance of this judgment in shaping future interpretations of similar contractual clauses.
The case also sheds light on the nuanced interpretation of termination clauses within contracts. If unsure, Contractors should seek legal advice to ensure that the right to terminate is in accordance with contractual obligations. The case underscores the importance of a balanced and considered approach to contract termination, overly energetic actions that may lead to unintended legal consequences.
Sam Phillips is an Associate and Frank Alden is a Paralegal at Ashfords.
