In the case of Providence Building Services Ltd v Hexagon Housing Association Ltd [2024] (Hexagon), the Court of Appeal has upheld a contractor’s legal right to terminate a JCT form of building contract for repeated specified defaults by an employer, despite the employer rectifying the initial specified default within the contractual “cure” period.

Introduction

On 15 August 2024, the Court of Appeal delivered a significant judgment with substantial implications for a contractor's legal right to terminate a contract following repeated defaults or suspension events by an employer.

Under the Joint Contracts Tribunal Design and Build Contract 2016 (2016 JCT Contract), a contractor may terminate their employment by first issuing a notice of default under Clause 8.9.1 or 8.9.2 (e.g. for non-payment, non-compliance with CDM regulations and/or assignment without consent). Should the default persist for 14 days following the initial notice, the contractor is entitled, within 21 days, to serve a notice of termination to the employer as stipulated in Clause 8.9.3.

Pursuant to Clause 8.9.4 of the 2016 JCT Contract, if the contractor, for any reason, fails to issue the termination notice as required under Clause 8.9.3 of the 2016 JCT Contract, and the employer subsequently repeats a specific default or a suspension event, the contractor may, within a reasonable time, serve a termination notice.

The recent judgment clarifies that the contractor retains the right to issue the termination notice under Clause 8.9.4 of the 2016 JCT Contract, even if the specified default was remedied within the 14-day period and the right to serve an additional notice had not yet accrued under Clause 8.9.3 of the 2016 JCT Contract.  

The same core drafting applies in other contracts in the JCT suite of contracts (though the specific clause numbers may be different). Please note that in the particular circumstances of the Hexagon case, the 14-day period is referred to as a 28-day period, as the parties' specific contract modified it.

Background

The employer, Hexagon Housing Association Limited (Employer) engaged the contractor, Providence Building Services Limited (Contractor) to carry out works under a JCT Design and Build Contract 2016. The Employer failed to make payment due under interim payment notice 27 by the final date for payment (15 December 2022). In response, on 16 December 2022, the Contractor issued a notice identifying the non-payment as a specified default under Clause 8.9.1 of the 2016 JCT Contract.

This would have conferred upon the Contractor the right to terminate under Clause 8.9.3 of the 2016 JCT Contract had the specified default continued for 28 days. (While the JCT 2016 and 2024 Editions specify a 14-day period, the parties' contract extended this to 28 days). However, on 29 December 2022, the Employer settled the full payment, which was within the 28-day “cure period”.

The Employer subsequently failed to pay a later interim payment notice on time (this time, interim payment notice 32, which was due on or before 17 May 2023). On 18 May 2023, the Contractor issued a termination notice under Clause 8.9.4 (which permits a contractor to terminate if the employer repeats a specified default).

The Employer contended that the Contractor was not entitled to terminate the contract under Clause 8.9.4 of the 2016 JCT Contract. At first instance, the Court of Appeal determined that termination under Clause 8.9.4 was not permissible if the previous specified default had been remedied before the Contractor became entitled to terminate under Clause 8.9.3.

However, the Court of Appeal ruled in favour of the Contractor, notwithstanding that the right to issue a notice under Clause 8.9.3 had not yet arisen. The Court of Appeal ultimately concluded that the wording of Clauses 8.9.1 to 8.9.4, interpreted according to their “natural and ordinary” meaning, entitled the Contractor to terminate the contract due to the repeated defaults by the Employer, despite the Employer’s's initial default being remedied before it triggered a right to terminate.

The judgment also includes an insightful, albeit brief, obiter discussion of the Employer's similar right to terminate under Clause 8.4.3 of the 2016 JCT Contract, which employs slightly different language from Clause 8.9.4. Should the Contractor repeat the specified default in the first notice, Clause 8.4.3 enables the Employer to terminate the Contractor's engagement under the building contract.

Conclusion

The decision indicates that, at the very least, two non-sequential default events concerning non-payment may permit a contractor to terminate for default should they choose to do so. This scenario poses a potentially problematic prospect for employers, as it represents a relatively narrow margin for termination that may not align with their commercial interests.

This ruling is a significant victory for contractors in terms of securing timely payments and resolving potential disputes, as it enhances the protection of a contractor's cash flow.

Capsticks’ view

This judgment is broadly relevant and has sparked considerable debate throughout the industry, as these provisions are featured in various JCT contracts, including the latest 2024 Editions, and remain largely un-amended by users. The decision will be of significance to all those engaged in the construction sector.

Most users of JCT suite of contracts likely presumed that clause 8.9.4 of the 2016 JCT Contract was only activated if the contractor’s right to issue a termination notice had arisen under clause 8.9.3, as was the opinion of the Court of Appeal at first instance. However, while the Court of Appeal acknowledged this as a possibility, they ultimately found that there was not "sufficient linkage between Clauses 8.9.3 and 8.9.4" to uphold this interpretation (paragraph 31 of the judgment).

The implications of this judgment for parties currently engaged under a JCT contract are significant: an employer who has received a notice of default under clause 8.9.1 of the 2016 JCT Contract, but has rectified the fault within the required timeframe remains vulnerable to the contractor terminating their engagement under the contract with immediate effect, should the employer repeat the specified default, regardless of the default's severity.

In practical terms, parties must be diligent in making future payments punctually and must scrutinise any notices previously issued by the contractor.

How Capsticks can help

We anticipate that Clause 8.9 of the 2016 JCT Contract will be a focal point for employers seeking to amend the JCT suite of contracts during the pre-tender stage to enhance clarity concerning termination due to repeated defaults.

For employers currently governed by JCT suite of contracts where Clause 8.9 of the 2016 JCT Contract is un-amended, the Court of Appeal's decision significantly alters their relationship with contractors.

Capsticks has already introduced into its recommended JCT Schedule of Amendments a longer "cure period", in place of the standard 14-day "cure period" specified under Clause 8.9.3, and has also refined the definition of "default" under Clause 8.9.1 of the 2016 JCT Contract to only encompass substantial overdue payments above a certain £ amount.

However, given the Court of Appeal decision, Capsticks advises that Clause 8.9.4 of the 2016 JCT Contract is also amended to ensure that a contractor’s right to terminate is exercisable only if a previous specified default has not been corrected during the prescribed "cure period". This amendment is critical to ensuring that an employer can avoid the unexpected termination that the Court of Appeal has decided is lawful.

If you have any queries around what's discussed in this article, and the impact on your organisation, please speak to Lee Clarke to find out more about how Capsticks can help.