Contractors’ termination rights under JCT clarified in recent judgment.
- JCT contracts are a suite of widely used standard form construction contracts, often between an Employer and a Contractor, which set out the contractual obligations of the parties in carrying out a building project.
- In the recent case of Providence Building Services Limited v Hexagon Housing Association Limited [2023] EWHC 2965 (TCC)[1] (‘Providence v Hexagon’), the Technology and Construction Court, a division of the High Court in England and Wales, considered the meaning of the JCT termination provisions.
- The findings of this judgment are relevant to Contractors who are often faced with repeated late payments from Employers and are seeking to navigate the termination provisions contained within a JCT contract.
- Lessons can also be learnt by Employers who are seeking to identify the triggers for termination under JCT in the context of late payment.
Background:
In February 2019, the parties entered into a contract incorporating the standard form JCT Design and Build Contract 2016 (‘JCT’) with amendments. The Employer, Hexagon Housing Association Limited (‘Hexagon’), appointed Providence Building Services Limited (‘Providence’) as the Contractor for works related to the erection of buildings in Purley, London. The wording of the termination provisions largely remained the same as the wording contained in the standard form JCT, with the exception of amendments to the relevant notice periods.
In November 2022, Providence issued a payment notice which obliged Hexagon to make payment by the due date (‘first payment notice’). Hexagon failed to make payment on time and, so, Providence served a notice of specified default on Hexagon. Hexagon then remedied the specified default by making payment. In April 2023, Providence raised a further payment notice (‘second payment notice’). Hexagon again failed to pay Providence on time. Providence therefore served a notice of termination on Hexagon the day after payment was due.
Clause 8.9 of the JCT concerns termination as a result of default by the Employer. Clause 8.9.1.1 provides that the Contractor may serve a notice of specified default on the Employer if the Employer does not pay by the final date for payment. Clauses 8.9.3 and 8.9.4 of the JCT which was the subject of Providence v Hexagon provided 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.”
The parties applied to the Court seeking declarations as to the proper construction of the termination provisions contained in the JCT contract. The “key battleground” between the parties was whether Providence was entitled to terminate its employment.[2]
Did Providence have the right to terminate?
The process under JCT is that the Contractor can initially notify the Employer of a default, such as a late payment, by way of a notice of specified default. The Court established that clause 8.9.3 was straightforward. If a breach continued for a number of days (28 days in Providence v Hexagon) after a notice of specified default was served, then the Contractor could serve notice to terminate its employment.
However, the central point of dispute in Providence v Hexagon was whether Providence had the right to terminate for repeated breach under clause 8.9.4. The express requirements of clause 8.9.4 include firstly that the Contractor must not have served notice to terminate under clause 8.9.3 for any reason. Secondly, “…then, if there is a repeated default, the Contractor may serve Notice of Termination under clause 8.9.4”[3] It could be interpreted that both of these express requirements had been met given that Providence had not previously served notice of termination under clause 8.9.3 and Hexagon had repeated the specified default by not paying the second payment notice on time.
However, Hexagon contended, and the Court agreed, that the Contractor’s right to terminate under clause 8.9.4 only arose where a right to terminate had previously arisen but had not been exercised pursuant to clause 8.9.3. Providence argued that it was entitled to “for any reason… not give the further notice referred to in clause 8.9.3” and this included the reason for not serving notice under 8.9.3 in this instance, which was that the specified default had been remedied. In deciding that Providence was not entitled to terminate the contract for repeated breach, the Court interpreted that “…clause 8.9.4 requires that a clause 8.9.3 notice could have been given but the Contractor has decided not to do so for whatever reason.”[4]
The Court granted a declaration confirming the proper construction of the termination provisions and that Providence’s notice of termination was invalid. Providence sought permission to appeal the Court’s judgment, but this was refused.
What are the triggers for termination under JCT in the context of repeated late payment by Employers?
This case highlights the difficulties which can be encountered when interpreting termination clauses. It is important that both Employers and Contractors are aware of the triggers for termination under JCT in the context of repeated late payment. Providence v Hexagon established that a Contractor’s right to serve a notice of termination for repeated late payment under clause 8.9.4 only arises where the following circumstances apply:
- A right to terminate must have previously arisen under clause 8.9.3. It is not sufficient that the Employer has made multiple late payments. Clause 8.9.3 requires that:
a. the Employer has acted in default – by for instance failing to pay the Contractor by a due date;
b. the Contractor has served a notice for specified default on the Employer; and
c. the specified default has remained unremedied for a number of days (specified under JCT) from the date of receipt of the notice of specified default.
- The Contractor has not, for whatever reason, served notice of termination on the Employer despite the fact that a right to terminate has arisen under clause 8.9.3.
- The Employer then “repeats a specified default” – by for instance failing again to pay the Contractor by a due date.
Does Providence v Hexagon allow scope for Employers to repeatedly make late payments whilst avoiding termination?
The Court accepted that the correct construction of clause 8.9.4 “…would produce the harsh and uncommercial result that the Employer could make every payment 27 days late and thus avoid the possibility of termination because the right to serve a clause 8.9.3 notice would never arise.”[5] There therefore is a possibility that this judgment could minimise the importance of Employers paying Contractors on time under JCT. Termination can seemingly be avoided by Employers even if they repeatedly pay late, provided that the late payments are paid within the period for remedy. On the other hand, the Court warned that adopting Providence’s position could allow a “trigger-happy” Contractor to terminate for repeated default, even if it was a small underpayment or delay.[6]
This case highlights that navigating termination clauses in contracts can be challenging. Legal consequences can arise when a party wrongly seeks to terminate. When considering termination, parties should ensure that they hold the requisite contractual right before serving notice of termination.
Contractors who are seeking to secure their cash flow during a project may wish to consider their termination rights under JCT before entering into a contract with an Employer. Despite the possible uncommercial outcome of this interpretation of clause 8.9.4, the Court considered that its drafting was the parties’ choice, and its meaning was clear as a matter of language.[7] It could be that negotiation of amendments to the standard form JCT which allow termination for repeated breaches, even where a termination right under clause 8.9.3 has not arisen, could ensure that due dates for payments to Contractors hold sufficient gravitas.
[1] Judgment dated 7 November 2023.
[2] Providence v Hexagon [paragraph 10]
[3] Providence v Hexagon [paragraph 17]
[4] Providence v Hexagon [paragraph 19]
[5] Providence v Hexagon [paragraph 23]
[6] Providence v Hexagon [paragraph 24]
[7] Providence v Hexagon [paragraph 28]
While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.
