Two wrongs don’t make a ‘right to terminate’ – Supreme Court clarifies interpretation of contractor’s JCT Termination Clauses

The Supreme Court’s judgment in Providence Building Services Limited v Hexagon Housing Association Limited (UKSC/2024/0130) has resolved uncertainty over contractor rights to terminate under the JCT Design & Build Contract (‘D&B’). Alex Walmsley and Amelia Dobson in our construction law team explore the case and its implications.

The case centred on clause 8.9 of the D&B, which governs contractor termination for employer default, particularly the correct procedure when the employer repeatedly fails to pay on time. This ruling is significant due to the widespread use of JCT contracts in the construction sector and concludes a longstanding battle in the courts as to the proper interpretation of the JCT termination provisions.

The facts of the case

Providence Building Services Limited (‘Providence’) was appointed under a JCT Design and Build Contract 2016 Edition with amendments (‘Contract’) by Hexagon Housing Association Limited (‘Hexagon’). The dispute arose over two late payments by the employer, Hexagon.

The Contract incorporates the standard form employer default provisions at clause 8.9 of the D&B, with only minor amendments which provided that:

1. Failure by Hexagon to make payment before the final date for payment would entitle Providence to serve a notice of specified default (‘Notice’)
2. In the event Hexagon failed to remedy the default within of 28 days (amended from standard form 14 days) from service of the Notice, Providence was entitled to serve a notice to terminate its employment under the Contract (‘Termination Notice’)
3. The Termination Notice could be served on expiry of that 28-day period, or, within 21 days thereafter
4. If Providence “for any reason” did not serve that Termination Notice following the right to serve being triggered, but Hexagon repeated a specified default, Providence was entitled to terminate its employment under the Contract, by notice to Hexagon (‘Second Termination Notice’).

Following the issuance of a payment notice in November 2022, Hexagon failed to make payment by the final date for payment and Providence issued a Notice under Clause 8.9.1 for that default. Hexagon made payment in full thereafter, which, albeit late, was within the 28-day period before a right arose for Providence to serve a Termination Notice.

A subsequent Payment Notice was issued in April 2023 confirming a sum to be paid on or before the final date for payment. Hexagon again failed to pay by this date.

As a result of this repeated default, Providence issued a Second Termination Notice pursuant to Clause 8.9.4 relying on Hexagon’s failure to pay a previous sum in December 2022, and the Notice that was previously served, as triggering a right to serve the Second Termination Notice terminating the Contract with immediate effect. Full payment was then made by Hexagon five days later, with Hexagon contesting the validity of the termination, alleging that Providence’s actions amount to a repudiatory breach of contract.

The dispute was referred to adjudication, with the adjudicator finding in Hexagon’s favour. As a result, Providence issued Part 8 proceedings seeking a court declaration as to the proper interpretation and effect of the termination provisions in the Contract.

Issues for determination

The issues which the court sought to determine was whether, on a true construction of the standard JCT D&B termination provisions, clause 8.9.4:

1. Provided a right for a contractor to terminate its employment immediately in the event that a specified default was repeated following a previous service of a Notice pertaining to that previous default, regardless of whether that previous default had been cured within the relevant time period given before the right to serve a Termination Notice had accrued; or,
2. Provided a right for a contractor to terminate its employment only in circumstances where a specified default had been repeated and, in the first instance where a Notice had been served, the right to issue a Termination Notice had also accrued but was not exercised.

The High Court had found in favour of Hexagon, finding that a Notice had to have remained uncured and the right to terminate must have previously arisen to allow a contractor to terminate following a repeated default.

The Court of Appeal then decided in favour of Providence, finding that clause 8.9.4 operated independently of 8.9.3 and therefore, any repeat of a previous default that was subject to a Notice, gave the contractor a right to terminate in the event of a repeated default, even where that original default was immediately cured. The Court of Appeal sought to achieve symmetry here between the employer’s right to terminate under Clause 8.4.3 and the contractor’s right to terminate under Clause 8.9.4. Hexagon then appealed to the Supreme Court.

The Supreme Court’s Decision

The Supreme Court allowed Hexagon’s appeal and held that Providence was not entitled to terminate the Contract. The correct interpretation of Clause 8.9 was held to be the objective natural meaning of the words in the context of the wider provisions in the Contract. This was said to be the more commercially rational approach for interpretation.

The words as they are written in Clause 8.9.4, were held to mean that the Contractor must have first accrued a right to terminate the Contract under Clause 8.9.3 before the Contract could be subsequently terminated under clause 8.9.4 for a repeated default.

Particular weight was given to the wording in clause 8.9.4 that preceded the termination right “if the Contractor for any reason does not give the further notice referred to in clause 8.9.3…”. The Supreme Court said that this wording would be superfluous on Providence’s interpretation of the clause and so gave necessary weight to this wording.

The Supreme Court found the Court of Appeal’s decision to be extreme, with Lord Burrows likening it to using “a sledgehammer to crack a nut”, commenting that this interpretation would lead to extreme scenarios where a contractor could terminate in the event that an employer missed a payment deadline by one day on two separate occasions.

Further criticism was directed towards the Court of Appeal’s attempt to create symmetry between the employer’s and contractor’s termination provisions, as the two sets of provisions are drafted differently as agreed by the parties, and so provide for asymmetrical rights and obligations. The Supreme Court stated there was no intention for both sets of termination provisions to have identical meanings and so it should not be inferred by the courts in this way.

Key takeaways

This judgment represents a success for all employers who engage contractors on unamended JCT D&B provisions. A decision in favour of Providence risked opening the floodgates to contractors terminating contracts for rather minor breaches which happened to have occurred on more than one occasion, which would not be seen as breaches significant enough to warrant termination.

The impact on ongoing projects is not so significant, as the Supreme Court have confirmed that the interpretation marries up to what the general consensus of interpretation is amongst parties in the construction sector. The Supreme Court’s distinguishing between contractors’ rights of termination under clause 8.9 and employers’ rights of termination under clause 8.4, which allows for an employer to terminate in the event of a repeated default without any right to terminate accruing, is also a welcome decision for employers which tips the scales in their favour under standard JCT contracts, which are widely considered to be more contractor friendly in their drafting.

Nonetheless, this judgment serves as a timely reminder of the importance of parties ensuring their desired rights and obligations are properly and accurately reflected within and amendments made to standard form contracts, such as JCT contracts.

In this judgment, the Supreme Court provided important guidance on the principles of contractual interpretation to be applied to standard form contracts generally. It was clarified that, in construing a standard form contract, such as JCT or NEC suites, it is generally assumed that the parties’ objective intentions as to their rights and obligations are consistent with others in the industry using the same standard form contracts. Thus, it is important to consider the objective intention of the relevant provisions, as the courts will elect to maintain consistency in interpretation for all contracts, rather than giving weight to any specific party intentions which contradict industry standard interpretations.

If you need assistance with a construction dispute and want to discuss it in confidence with a member of Harrison Drury’s construction law team, contact us on 01772 258321.