Providence Building Services Ltd –v- Hexagon Housing Association Ltd

A judgment of the UK Supreme has provided clarity on the termination rights in the JCT Design and Build Contract—a standard form construction contract that is widely used in Northern Ireland and beyond.

Background

The case arose out of the construction of buildings in London. Hexagon Housing Association Ltd (Employer) engaged a contractor, Providence Building Services Ltd (Contractor), to carry out design and construction work pursuant to an amended JCT Design and Build Contract, 2016 edition.

In November 2022, a payment notice was issued that required the Employer to pay the Contractor £264,242.55 on or before 15 December 2022. The Employer did not pay that amount by 15 December 2022 and so, the next day, the Contractor notified the Employer of a ‘specified default’. The Employer paid in full on 29 December 2022.

In April 2023, another payment notice was issued—this time requiring the Employer to pay the Contractor £365,812.22 on or before 17 May 2023. The Employer again failed to pay on time. The following day, the Contractor issued a notice of termination.

The Contractor argued that it was entitled to terminate if the Employer had paid late twice, provided that a specified default notice has been served in respect of the first late payment. It had been in this case, in December 2022.

The Employer disagreed, arguing that the Contractor must have had a previously accrued right to terminate. That was not the case here, as the Employer had made payment within 28 days of the notification of the specified default.

The Employer won the argument at first instance, before the Court of Appeal accepted the Contractor’s interpretation. The Supreme Court was then tasked with definitively interpreting the termination provisions in the JCT Design and Build Contract.

The Contract

The focus of the judgment was on clause 8.9 of the JCT Design and Build Contract, which reads as follows:-

“Termination by Contractor

Default by Employer

8.9.1. If the Employer:

.1 does not pay by the final date for payment the amount due to the Contractor in accordance with clause 4.9 and/or any VAT properly chargeable on that amount;

…

the Contractor may give to the Employer a notice specifying the default or defaults (a ‘specified’ default or defaults).

…

8.9.3 If a specified default … continues for 14 days[1] from the receipt of notice under clause 8.9.1 …, the Contractor may on, or within 21 days from, the expiry of that 14 day period by a further notice to the Employer terminate the Contractor’s employment under this Contract.

8.9.4 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;

…

then, upon or within a reasonable time after such repetition, the Contractor may by notice to the Employer terminate the Contractor’s employment under this Contract.”

The parties agreed that it was not open to the Contractor to terminate, under clause 8.9.3, in respect of the December 2022 payment, as the Employer had paid in full within the period allowed for it to remedy the specified default.

The Court of Appeal decided that the “for any reason” wording in clause 8.9.4 was wide enough to include the situation where the clause 8.9.3 termination was not served because the sum had been paid and so the termination right did not arise.

Supreme Court

By unanimous decision, the Supreme Court rejected the Contractor’s argument and concluded that the Contractor was not entitled to terminate. Amongst the reasons for that decision were:-

The opening words of clause 8.9.4 were “redundant” if all that was needed for the Contractor to terminate was that the Employer had repeated a specified default. If that were the case, the “clause would simply start with the words … “If the Employer repeats a specified default…””.

If the Contractor’s interpretation had been correct, it would mean that, for example, if the Employer made two late payments, each being made one day late, the Contractor would be entitled to terminate. That would be a “sledgehammer to crack a nut” and the Employer’s interpretation produced a “rational and less extreme outcome”.

That late payment may cause cash-flow problems for the Contractor should not distort the interpretation of the termination clause. “If there is a problem for Contractors, which could be justifiably ameliorated by a differently worded termination clause, that is a matter for the JCT to consider, in the light of this judgment, in a future draft of the standard form contract.”

Carson McDowell view

The consequences of getting a termination wrong are serious. A wrongful termination can itself be a repudiatory breach and expose a party to a claim for damages.

Although the Supreme Court considered the 2016 edition of the JCT Design and Build Contract, the wording of the disputed termination clause was unchanged in the 2024 edition.

Parties using either edition of the JCT standard form now have clarity that it is only where an earlier breach (for which a notice of specified default is given by a contractor) goes uncured for 14 days that a contractor can terminate immediately for a further late payment. If the parties amend the standard form, then they will need to carefully consider the impact of those amendments.

In the judgment, the Supreme Court also discussed the correct approach to the interpretation of industry-wide standard form contract, such as JCT contracts. It was confirmed that the correct approach was to interpret standard form contracts “based on the objective intentions of the parties in the relevant context … It is not a departure from that approach to say that, where parties choose to use an industry-wide standard form, it can generally be taken that their objective intentions in the relevant context are that their respective rights and obligations should be consistent with those of other parties using the same form and should reflect the objective intentions of those who were concerned with the drawing up of that standard form agreement.”

The Supreme Court’s indication that standard form contracts should be interpreted consistently will be of comfort to users of JCT and other standard form contracts. However, again, care will need to be taken with any amendments to those standard forms.

For more information, please contact John Dugdale or another member of the Construction team.

*This information is for guidance purposes only and does not constitute, nor should be regarded as, a substitute for taking legal advice that is tailored to your circumstances.

[1] The parties had amended the JCT Design and Build Contract to provide for a 28-day timeframe.