Lena Barnes reviews the implications for the construction sector of a recent Court of Appeal ruling regarding a contractor’s termination of contract after repeated late payments.
The judgment engages with the termination provisions of the JCT Design and Build Contract 2016.
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Termination provisions
The amended form of contract allowed the contractor (Providence) to issue a notice citing specified defaults (clause 8.9.1). If the specified notice continued for 28 days (an agreed amendment – the norm being 14 days) from the date of that notice, the contractor could serve a termination notice on, or within, 21 days from the end of the 28-day period (clause 8.9.3). If the contract was not terminated in accordance with clause 8.9.3 “for any reason”, the contractor could terminate the contract within 28 days of a repeated specified default.
Relevant facts
In December 2022, the employer (Hexagon Housing Association) failed to pay a notified sum by the final date for payment. The following day, Providence issued a clause 8.9.1 notice. Thirteen days later, the notified sum was fully paid, ahead of the 28-day ‘cure’ period.
In April 2023, Hexagon failed to pay another notified sum by the final date for payment. The following day, Providence issued a clause 8.9.4 termination notice on the grounds that Hexagon had repeated a specified default. Six days later, the notified sum was fully paid. Hexagon separately disputed the lawfulness of Providence’s termination notice and asserted a repudiatory breach by the contractor which Hexagon subsequently accepted.
Hexagon successfully referred the dispute to adjudication and Providence commenced proceedings in the Technology and Construction Court (the TCC).
The TCC decided that clause 8.9.3 envisages an active step being taken by the contractor, or not. If the contractor takes that active step under clause 8.9.3 then termination ensues. If the contractor does not, then, if there is a repeated default, the contractor may serve notice of termination under clause 8.9.4.
As to the words “for any reason”, the judge said that neither these words, nor clauses 8.9.3 or 8.9.4 as a whole, envisage that a contractor can give a valid clause 8.9.4 notice in circumstances where the right to give a clause 8.9.3 notice has never arisen – i.e. where the specified default has been cured within the 28-day period. The judge held that clause 8.9.4 operated where a clause 8.9.3 notice could have been given but the contractor decided not to so issue a notice “for any reason”.
The appeal
The Court of Appeal was therefore required to determine whether the contractor can terminate under clause 8.9.4 where a right to give the further notice referred to in clause 8.9.3 has never previously accrued.
Providence argued that it could terminate if a specified default is repeated, irrespective of whether or not it is cured in the necessary timeframe. Hexagon argued that Providence must first accrue the right to terminate under clause 8.9.3, before it can terminate under clause 8.9.4.
The Court of Appeal agreed with Providence and decided that the natural and probable meaning of Clause 8.9.4 is that it applies to a case where no right accrued to give a further notice under Clause 8.9.3.
Impact of the judgment
The Court of Appeal’s judgment has introduced a significant risk to employers everywhere who, in the event of a specified default, will face the proverbial sword of Damocles for the remainder of the contract.
Contrary to the way in which the construction industry has operated the JCT termination provisions (since the current wording was introduced in the 2005 JCT suite), employers will now be subject to a ‘two strikes and you’re out’ regime.
Any parties currently in contract – whether on the contractor or employer side – will need to review the existing termination provisions to establish whether the standard clauses (addressed by the judgment) are incorporated.
If they are, then – for the contractor – it means that if the employer is late making a single payment, even by one day, the contractor may be entitled to serve a default notice.
If it happens again, the contractor may then be entitled to terminate – even if the previous late payment is promptly cured by the employer. This will be a potentially powerful tool in the armoury of a contractor who wishes to exit an unprofitable project.
For the employer, it will be important to ensure that a clear understanding of the consequences of committing a specified default is cascaded down to the project team together with finance departments that process payments; and that working practices are adapted to reduce the risk of committing a specified default – for example, introducing expedited payment practices.
As with all payments in construction contracts, it is crucial that those managing projects strictly comply with the relevant payment regime because this judgment has obvious and more far-reaching consequences than a smash-and-grab adjudication or a suspension of the works by the contractor.
Lena Barnes is a senior associate at Devonshires Solicitors.
