The Court of Appeal has delivered an important judgment concerning whether a contractor could terminate its employment under clause 8.9.4 of a JCT contract

The Court of Appeal has delivered an important judgment concerning whether a contractor could terminate its employment under clause 8.9.4 of a JCT contract, where a right to terminate for a repeated specified default under 8.9.3 had not accrued.

The judgment will be of interest to those agreeing and operating JCT and SBCC contracts, in particular their payment and termination provisions.

The Contract

In February 2019 an Employer, Hexagon Housing Association Ltd (“Hexagon”) and a Contractor, Providence Building Services Ltd (“Providence”) contracted for the construction of several buildings in Purley (the “Contract”). The Contract incorporated the JCT Design & Build 2016, as amended by the parties. The clause in dispute was 8.9, setting out grounds for termination by the Contractor for default by the Employer. It was largely unamended (save for a minor amendment in clause 8.9.3, changing 14 to 28 days), stating:

“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…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 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.

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 28 days after such repetition, the Contractor may by notice to the Employer terminate the Contractor’s employment under this Contract”. [Emphasis added.]

The facts

In November 2022, Payment Notice 27 was issued by the employer’s agent, under which Hexagon was required to pay circa £265,000 by a final date for payment of 15 December 2022. Hexagon failed to do so. The following day, Providence served a notice under clause 8.9.1 (the “December Notice”). On 29 December 2022, Hexagon paid the £265,000 in full. Therefore Providence’s right to issue a notice of termination under clause 8.9.3 did not accrue, because the specified default (non-payment of Payment Notice 27) did not continue for 28 days from receipt by Hexagon of the December Notice.

In April 2023, Payment Notice 32 was issued by the employer’s agent, under which Hexagon was required to pay circa £365,000 by a final date for payment of 17 May 2023. Again, Hexagon failed to do so. The following day, Providence issued a notice terminating its employment under the Contract under clause 8.9.4 (the “Termination Notice”) and relying on the specified default within the December Notice. In other words, Providence said that non-payment of Payment Notice 32 was a repeated specified default, entitling it to terminate its employment under the Contract. That was despite the first non-payment being remedied within the timescales of clause 8.9.3.

Hexagon disputed the lawfulness of the Termination Notice and claimed that Providence had repudiated the Contract.

The decision

At first, the Technology and Construction Court (TCC) found the Termination Notice to be invalid. It said that because Providence had not accrued any prior right to terminate for the continuation of a specified default under clause 8.9.3, it did not have any right to terminate for the repetition of a specified default under 8.9.4.

However, the Court of Appeal overturned that decision. It said that on the true and proper construction of the Contract, it was not necessary that a right to terminate under clause 8.9.3 must have first accrued before the Contractor could have the right to terminate its employment under clause 8.9.4. The natural meaning of the words in 8.9.4 "If the Contractor … does not give the further notice referred to in Clause 8.9.3" were clear and did not imply a requirement for an accrued right under clause 8.9.3, in order to give notice under clause 8.9.4. 

Therefore, once an employer has committed a specified default by failing to pay under clause 8.9.1, but the right to termination has not accrued under clause 8.9.3 because the specified default has been remedied in time, the contractor will still have a right to terminate under clause 8.9.4 if the employer fails to make a further payment timeously. The Court of Appeal made its decision based on the express words of the clauses in question, viewed in their context.

In commenting on interpretation of contracts generally, the Court of Appeal noted that “where dealing with a standard form of wording, the interpretation is unlikely to be affected by the context in which the parties concluded their particular contract: rather the process of interpretation will ultimately depend upon an intense focus on the words used”.

It also endorsed the note of caution sounded in the 2012 case of Polestar Maritime Limited v YHM Shipping Co Ltd & Anr, about looking at previous of standard term versions and using the drafting committee’s commentary as aids to construction. There, the court stated that such exercises in "the archaeology of the forms" can make the task of interpreting contractual wording unnecessarily over-elaborate and can add to the time and expense of litigating what should be short points of construction.

Ramifications

In judging the effect of these standard form termination provisions, at appeal, this decision is of significance to contractors and employers alike.  The same wording in clause 8.9 appears across various JCT and SBCC standard forms, including new JCT 2024 contracts.

For Contractors, issuing a notice under this clause 8.9.1 specifying a failure to pay the amount due by the final date for payment can hang over the employer across future payment cycles. It opens the possibility that, if an employer fails to make a further payment timeously, the contractor may go straight to notifying termination for a repeated specified default under 8.9.4. Whilst the decision to terminate employment under a contract is never one to be taken lightly, this may be a useful potential tool for contractors and assist with protection of their cashflow.

Employers (and those managing contracts on their behalf) are therefore at more risk of being on the receiving end of a clause 8.9.4 termination notice following repeated late payments (or other specified defaults), even where there was remediation within the clause 8.9.3 timescales. They would be advised to ensure they are well versed on contractual timeframes and events which could give rise to a specified default, in particular the proper operation of payment provisions. In the meantime, contract negotiators may look to amend these standard form provisions to prevent such a position arising.

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