Supreme Court overturns Court of Appeal on termination for repeated default under JCT contract

In a previous article, we analysed an important Court of Appeal decision concerning a contractor’s right to terminate under clause 8.9.4 of the JCT Design and Build Contract 2016, where a right to terminate under clause 8.9.3 had never accrued.

That decision, in Providence Building Services Limited v Hexagon Housing Association Limited, was welcomed by many contractors given the potential impact on cashflow where employers repeatedly pay late, whilst raising risks for employers. You can read that article here.

The Supreme Court has now considered the same issue on appeal. In a judgment which will be of interest to to the wider construction industry, it has overturned the Court of Appeal’s decision and reinstated the first instance ruling of the Technology and Construction Court.

Given that the wording of clause 8.9 remains unchanged in the new JCT 2024 Design and Build Contract (and also appears in other forms of JCTs, as well as SBCCs, including sub-contracts), the Supreme Court’s decision has wide practical implications for both contractors and employers.

The issue revisited

As set out in our earlier article, clause 8.9 of the JCT Design and Build Contract provides a stepped mechanism for termination by the contractor for employer default, including failure to pay by the final date for payment.

In summary:

• Clause 8.9.1 allows the contractor to issue a notice of specified default, with a 14-day cure period (which was amended to 28 days in this case);
• Clause 8.9.3 permits termination by the contractor upon further notice, if that default continues for 28 days; and
• Clause 8.9.4 also allows termination if the employer “repeats a specified default”, in circumstances where the contractor has not “for any reason” given the termination notice referred to in clause 8.9.3.

The central question was whether clause 8.9.4 could be relied upon where the earlier default had been remedied within the 28-day cure period, so that no right to terminate had ever arisen under clause 8.9.3.

The Court of Appeal answered that question “yes”. The Supreme Court has now answered it “no”.

The Supreme Court’s answer

The Supreme Court held that clause 8.9.4 does not give the contractor an independent right to terminate for a repeated specified default. Instead, clause 8.9.3 is the “gateway” to clause 8.9.4. That means a contractor can only rely on clause 8.9.4 if it previously acquired a right to terminate under clause 8.9.3 - meaning that the earlier specified default must have continued beyond the contractual cure period (here of 28 days). If the employer remedies the default within that period, clause 8.9.4 cannot later be used to terminate immediately for a further late payment.

On the facts of the case, because the Employer’s (Hexagon Housing Association Limited’s) first late payment had been remedied within the 28-day cure period, the contractor (Providence Building Services Limited) had never acquired a termination right under clause 8.9.3. As a result, its subsequent termination under clause 8.9.4 was deemed to be invalid. This restores the position adopted at first instance and overturns the more contractor-friendly interpretation taken by the Court of Appeal.

Why the Supreme Court disagreed with the Court of Appeal

In considering the principles of contractual interpretation, the Supreme Court noted that an industry-wide standard-form contract should usually be interpreted consistently for all contracting parties using that form. Further, subject to bespoke amendments, that interpretation is unlikely to be contradicted by the objective intentions of the particular contracting parties.

It went on to acknowledge that the contractor’s interpretation, accepted by the Court of Appeal and discussed in our earlier article, would have given contractors a powerful remedy. However, it would also “provide a sledgehammer to crack a nut” and have led to extreme outcomes. On that interpretation, two relatively minor late payments in the context of a sizeable Contract Sum, even if each were only one day late, could entitle a contractor to terminate its employment under the contract, provided a specified default notice had been served the first time.

The Supreme Court also thought it was unhelpful to examine whether the contractor had other satisfactory methods of combating cash-flow problems caused by late payment. Instead, the Supreme Court’s reasoning focused firmly on the objective natural wording in clause 8.6.4, in the context of clause 8.9.

The opening words of clause 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)”, were critical. The Supreme Court held that those words only make sense if clause 8.9.4 is dependent on a situation where a right to terminate under clause 8.9.3 has already arisen, but the contractor has chosen not to exercise it (for whatever reason).

The Supreme Court also rejected the Court of Appeal’s reliance on the apparent symmetry between clause 8.9 (termination by the contractor) and clause 8.4 (termination by the employer). It said there was no necessary reason why the right to terminate should be symmetrical as between employer and contractor, given that the relevant contractual obligations are so different.

Practical implications for JCT and SBCC users

Terminating a contractor’s employment under a contract is a significant step for either party, with contractual and commercial consequences. If choosing to terminate, parties will want to ensure that they do so correctly, to avoid claims of having repudiated the contract themselves.

The Supreme Court’s decision now provides welcome clarity on this aspect of the specified default process:

• Clause 8.9.4 cannot be used unless a prior right to terminate under clause 8.9.3 has arisen.
• Employers who cure payment defaults within the contractual cure period are not exposed to immediate termination for a subsequent late payment under clause 8.9.4.
• Contractors must continue to rely on other contractual and statutory remedies where payment defaults are remedied in time.

With the same wording appearing in the design and build JCT 2024 and SBCC 2016, as well as others, parties entering into or operating those contracts should ensure they understand how these termination provisions operate in practice and consider whether any bespoke amendments are required at the contract negotiation stage.

If you would like to discuss anything raised in this article, please get in touch with Zoheb Khalid or your usual Burness Paull contact. 

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