Introduction
In Providence Building Services Limited v Hexagon Housing Association Limited, the Court of Appeal has provided clarity on the entitlement to terminate due to repeated specified breaches in the JCT Design & Build (D&B) Contract. Specifically, in circumstances where a Contractor can terminate its employment under clause 8.9.4 for a repeated late payment by the Employer.
Background
The relevant facts were:
- Hexagon engaged Providence as the Contractor under the JCT D&B Contract 2016 (the Contract).
- Section 4 of the Contract provided for interim payments to be made by Hexagon.
- The relevant provisions of clause 8.9 of the Contract, which provided for termination by the Contractor, are copied or summarised below:
Clause 8.9.1 provides that if the Employer does not pay an interim payment by the final date for payment in accordance with clause 4.9, the Contractor may give a notice specifying the default.
Pursuant to clause 8.9.3, if a specified default continues for 28 days from the receipt of notice under clause 8.9.1, then on, or within 21 days of the expiry of that 28-day period, the Contractor may give a further notice to the Employer to terminate the Contractor’s employment.
Clause 8.9.4 states "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 to the Employer terminate the Contractor’s employment….”
- Hexagon failed to pay an interim payment to Providence by the final date for payment of 15 December 2022.
- Providence gave Hexagon a notice of specified default under clause 8.9.1 the following day.
- Hexagon paid the outstanding amount on 29 December 2022, and therefore within the 28-day period prescribed in clause 8.9.3.
- Hexagon then failed to make another interim payment by the final date for payment of 17 May 2023.
- The following day, Providence issued Hexagon with a notice to terminate under clause 8.9.4, on the basis that Hexagon had repeated the specified default that Providence had first notified to it in the December notice of specified default.
- A few days later Hexagon paid the outstanding sum and argued that Providence was not entitled to terminate the Contract under clause 8.9.4, because the right to terminate pursuant to clause 8.9.3 (where a specified default was not remedied within 28 days) had not arisen and that Providence was in repudiatory breach of the Contract. Hexagon later wrote again accepting Providence's repudiation of the Contract.
- Hexagon adjudicated the dispute and substantially won.
- Providence issued Part 8 proceedings asking the court to determine whether a right to terminate under clause 8.9.3 must first accrue before it could terminate pursuant to clause 8.9.4.
- The TCC found in favour of Hexagon and held that Providence was not entitled to terminate. Hexagon appealed.
Judgment
The Court of Appeal disagreed with the TCC and found in favour of Providence. It held that "on proper construction of the Contract" it was not necessary that a right to give further notice under clause 8.9.3 must have first accrued before the Contractor could terminate its employment under clause 8.9.4.
It was accepted that the first time Hexagon committed the specified default, the right to terminate had not arisen because the default had been remedied within the 28-day period. After this, Providence had an immediate right to terminate its employment under the Contract if Hexagon ever committed the same specified default again.
The Judge said the drafting could have been of better quality, but that the words in clause 8.9.4 "If the Contractor for any reason does not give the further notice … in clause 8.9.3" covered the circumstance where no right had accrued to give a further notice under clause 8.9.3 (especially given the words 'for any reason'). Therefore, this was not a pre-condition for the Contractor to terminate under clause 8.9.4.
Comments
Both Employers and Contractors using the JCT D&B contract should take heed that even if a specified default is rectified within the specified period (even theoretically the next day), if that same specified default is repeated the other party will have the right to terminate the Contractor's employment.
The Court acknowledged that this means that Employers would be skating on thin ice if they are late with any payment as they risk the Contractor terminating for any further late payment. Employers should therefore ensure that: (1) the payment terms align with their internal payment processes; and (2) all payments are made on time to mitigate the risk of termination.
The Court also recognised that the main conditional words in the provisions for Employer termination are the same as for Contractor termination. Consequently, both parties to the JCT forms of contract may consider amendments to the standard termination provisions to provide that termination for repeated breaches can only occur if the initial specified default was not rectified within the permitted period.
While this case concerns provisions under the JCT D&B 2016, this will also be applicable to other JCT contracts which contain materially the same wording, including the JCT D&B 2024.
