“Skating on thin ice”: the consequences of termination provisions post-Providence
Deciding whether to terminate a contract is a difficult and complex decision. The right to terminate comes down to contractual interpretation, which is rarely straightforward and, as a result, often disputed. This thorny issue was the subject of the recent decision in Providence Building Services Ltd v Hexagon Housing Association Ltd [2024] EWCA Civ 962. Following this ruling, we look at what the potential consequences of termination provisions are in this article.
Facts
The Contractor, Providence entered an amended JCT Design and Build Contract (2016 edition) with the Employer, Hexagon. The JCT provided for Hexagon to make interim payments, stating that the final date for payment for each Interim Payment was 21 days from its respective due date. The JCT provided a mechanism for Providence to terminate for non-payment: if payment was not made by the final date for payment, Providence could give a “specified default notice”. If the default continued for a further 28 days after receipt of that notice, Providence could terminate its employment. In addition, if Providence did not give the required notice “for any reason”, and Hexagon repeated a specified default, Providence could terminate their employment.
Timeline of Events for both defaults
| Default 1 | Default 2 |
|---|---|
| 25 November 2022: the Employer’s Agent issued Payment Notice 27, which required Hexagon to pay £264,242.55 on or before 15 December 2022. | 28 April 2023: the Employer’s Agent issued Payment Notice 32, which required Hexagon to pay £365,812.22 on or before 17 May 2023. |
| 15 December 2022: Hexagon failed to pay the sum by the final date. | 17 May 2023: Hexagon failed to pay the sum by the final date. |
| 16 December 2022: Providence served a specified default notice pursuant to the Building Contract. | 18 May 2023: Providence issued a further notice, this time to notify Hexagon of their intention to terminate the Building Contract. In issuing the termination notice, Providence relied on Hexagon’s failure to pay the sums due on 17 May 2023 as a repetition of the default that was the subject matter of the December default notice, and Providence accordingly gave notice that Hexagon had repeated a specified default and was therefore terminating its employment under the Building Contract. |
| 29 December 2022: Hexagon paid £264,242.22 in full. It was agreed that because payment was made on this date that the specified default did not continue for 28 days from receipt of the notice, and therefore never became open to Providence to serve a further notice for late payment. | 23 May 2023: Hexagon paid £365,812.22 in full. |
| 24 May 2023: Hexagon disputed the lawfulness of the termination notice and asserted that Providence had repudiated the Building Contract. | |
| 31 May 2023: Hexagon wrote to Providence, accepting what it characterised as Providence’s repudiatory breach. |
Hexagon referred the dispute to adjudication, whereby the adjudicator found in their favour and Providence issued court proceedings shortly afterwards. The dispute concerned whether a right to terminate must first have accrued before Providence had the right to terminate.
TCC Decision
The Technology and Construction Court (TCC) found in favour of Hexagon, first considering clause 8.9.3 of the Building Contract, and then moving on to clause 8.9.4:
| Clause | JCT equivalent |
|---|---|
| Clause 8.9.3: if a specified default continued for more than 28 days, Providence could terminate within the following 21 days on notice. | Unamended JCT position: the Contractor may terminate if a specified default continues for 14 days. |
| Clause 8.9.4: if for any reason no notice was given under clause 8.9.3, but Hexagon repeated the specified default, a termination notice could be issued upon or within 28 days after the repetition. | Unamended JCT provision: the Contractor may terminate its employment on notice, upon or within a reasonable time after such repetition. |
The judge based his finding on the strict construction of, and compliance with, termination clauses and focused on ascertaining the ‘natural and ordinary’ meaning of clauses 8.9.1 to 8.9.4. It was held that the right to terminate in accordance with clause 8.9.4 arose only after the obligation to serve a further notice under clause 8.9.3 occurred; in other words, Providence couldn’t rely on the earlier default notice because payment was made within 28 days. Consequently, until that ‘positive step’ had occurred, a termination notice could not be served.
Court of Appeal Decision
The Court of Appeal reversed this verdict and held that there was no basis to impose qualifying conditions on the words “for any reason” under clause 8.9.4. This wording wasn’t to be considered in isolation, but in the wider context of clause 8.9.
As such, the Court of Appeal found that the issue was whether there was a sufficient link between clauses 8.9.3 and 8.9.4, so that the latter clause could only operate where there was a valid accrued right to terminate under clause 8.9.3. The Court of Appeal held that this was not the case and that it did not matter that the earlier default was cured, there was still a repeated default and Providence’s termination was valid.
To support this conclusion, the Court of Appeal referred to two cases which considered the drafting of the 1998 JCT terms: Reinwood Ltd v L Brown & Sons Ltd [2007] BLR 10 and Ferrara Quay Limited v Carillion Construction Ltd [2009] BLR 367. Both cases supported the notion that a right to terminate arose upon the repetition of a specified breach. Providence’s argument that the TCC finding produces ‘harsh and uncommercial results’ was considered and ultimately concurred with. The Court of Appeal found that the right to terminate had arisen after the repeated breach, and that this represented a contractual allocation of risk that was commercially acceptable.
Conclusion
The Court of Appeal judgment broadens the contractual interpretation of termination provisions, by allowing contractors, in certain cases, to terminate for repeated payment defaults without needing to serve a second default notice first. This represents a more flexible approach and highlights the importance of understanding risk allocation in JCT contracts.
This judgment has implications for both employers and contractors, because although the judgment concerns a contractor’s right to terminate for an employer’s repeated default, this rationale applies to the actions of both parties. The judgment suggests that once a default occurs and has been notified, the defaulting party could face a termination of the contract if they repeat the default later. This is primarily likely to affect employers in relation to ensuring they comply with the interim payment regime (and paying attention to notices which have already been served) and contractors if they fail to proceed regularly and diligently.
The new suite of JCT 2024 contracts retain similar provisions to the 2016 suite and whilst contractors rarely seek to terminate contracts because of late payment, the JCT forms do provide for such a situation (and indeed, the JCT provisions are largely unamended in practice). JCT users may wish to consider bespoke amendments to termination provisions as part of contract negotiations, or at the very least employers should ensure they are vigilant about making future payments in a timely manner.
If you require legal advice on termination provisions post-Providence, contact our Construction team.
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