Providence v Hexagon – Supreme Court overrules Court of Appeal on JCT termination provisions

Helen Arthur and David Owens look at the lessons from a landmark Supreme Court ruling on JCT termination.

The Supreme Court has overturned the Court of Appeal’s interpretation of the JCT termination provisions restoring what was largely thought to be the position before this case made its way through to the Court of Appeal.

The Supreme Court unanimously found that a contractor cannot terminate its employment under clause 8.9.4 of the JCT Design and Build Contract 2016 for a repeated default where the right to give a termination notice for the original default has not accrued under clause 8.9.3. (Note the relevant clauses are set out at the end of this article.)

The Court of Appeal found that clause 8.9.4 allows the contractor to terminate if the specified default is repeated even when no right to give a termination notice accrued. Our earlier article explored the Court of Appeal decision which can be found here: Court of Appeal decides on JCT DB 2016 termination provisions Providence Building Services Limited v Hexagon Housing Association Limited [2024] EWCA Civ 962 – Sharpe Pritchard

Background

Hexagon Housing Association Limited (Hexagon) was the employer under an amended JCT Design and Build 2016 contract.

Providence Building Services Limited (Providence) was the contractor, who was engaged to design and build a number of apartment blocks for the contract sum of circa £7.2 million.

On 25 November 2022, the Employer’s agent issued Payment Notice 27 with the final date for payment of the sum due on 15 December 2022. Hexagon did not make payment by that date.

On 16 December 2022, Providence issued a notice of specified default (under clause 8.9.1) on the grounds that Hexagon had failed to pay the amount due by the final date for payment.

Pursuant to clause 8.9.3 of the contract, Hexagon then had 28 days in which to remedy the default otherwise risk possible termination under clause 8.9.3. Hexagon paid the sum on 29 December 2022 being within the 28 day period, so Providence never obtained the right to bring its employment to an end under clause 8.9.3.

A few months later, Payment Notice 32 was issued with Hexagon required to make payment on or before 17 May 2023. Hexagon failed to pay the sum due by that date.

On 18 May 2023, Providence issued a notice of termination under clause 8.9.4 which referred back to the December default and relied on this as the repetition of the specified default. On 23 May 2023, Hexagon made the payment, contesting the validity of the termination.

Hexagon challenged the termination. Its position was that to terminate under clause 8.9.4, Providence must first have accrued a right to terminate under clause 8.9.3 which didn’t happen because Hexagon paid well within the 28 day period.

In contrast, Providence argued that, where there has been a repetition of a specified default (in respect of which a specified default notice has been served), there is no requirement that the right to terminate has previously accrued under clause 8.9.3.

Whilst the Technology and Construction Court found in favour of Hexagon, the Court of Appeal overturned the decision and instead considered that the words ‘for any reason’ within clause 8.9.4 “remain broad enough to catch a case where the reason why the further notice may not be given is that there is no accrued right to give it. On that approach, the conditional words of Clause 8.9.3 are satisfied even where the Contractor had no accrued right to give the further notice referred to in Clause 8.9.3…

Supreme Court findings

This brings us to the Supreme Court findings which can be summarised as follows:

1. The meaning of the words used requires an objective and contextual approach.
2. Clause 8.9.4 is “parasitic” on clause 8.9.3, such that it was clear the right to terminate must first have accrued under clause 8.9.3 but not been exercised for whatever reason. In this case, the non-payment needed to remain beyond the period in order for the right to terminate to exist.
3. If clause 8.9.4 was intended to be independent of clause 8.9.3 instead of parasitic on that clause then the opening words of clause 8.9.4 “if for any reason the contractor does not give the further notice under 8.9.3…” wouldn’t be necessary and instead the clause would start “If the Employer repeats a specified default…”
4. The interpretation put forward by Providence would produce an extreme outcome. It would mean that any breach by late payment (provided a specified notice of default were given by the contractor), if repeated by any subsequent late payment, would entitle the contractor to terminate the contract. This position was thoughtto provide “a sledgehammer to crack a nut”.

5. The Court of Appeal’s attempt to create symmetry between the employer’s termination provisions in clause 8.4 and the contractor’s termination provisions in clause 8.9 was misplaced as the two sets of provisions are drafted differently and so they cannot mirror each other.

Conclusion

This has been a crucial and much anticipated decision on the JCT standard form wording and should help to restore the risk profile between the parties. The same standard wording has also been adopted in the 2024 JCT edition so its applicability is not limited to the 2016 suite.

Employers can take comfort from this decision knowing that under this contractual mechanism repetition of a short delay in payment, for example, will not give a contractor the immediate right to terminate the contract.

Relevant clauses

Default by Employer (parties amendments included in underline)

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).

…

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;

…

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.