Better late than never…

The Supreme Court of The United Kingdom has overturned the Court of Appeal’s decision which had meant, in effect, a contractor under a JCT D&B contract could terminate if the employer was late with two (or more) payments, even if no right to terminate the contract had accrued following earlier late payments.

The Supreme Court has unanimously held that, on the proper interpretation of JCT D&B 2016 clause 8.9, a contractor cannot rely on the “repeat default” termination route (clause 8.9.4) unless it previously had an accrued right to terminate under clause 8.9.3 (i.e. the employer had failed to make the payment within 28 days of a default notice from the contractor).

This means that an earlier specified default such as non-payment, in this instance, has to have continued beyond the cure period (usually 28 days after a default notice) without being remedied, in order for the right to immediately terminate under clause 8.9.4 to arise.  In turn, employers will be reassured that minor, remedied breaches will not automatically give rise to a termination right simply because they happen more than once.

Background

Providence Building Services Limited (the Contractor) was appointed by Hexagon Housing Association Limited (the Employer) to construct a number of buildings pursuant to an amended JCT 2016 D&B contract. Hexagon was required to make an interim payment to the Contractor on or before 15 December 2022, but failed to do so.

On 16 December 2022, Providence served a notice of ‘specified default’ pursuant to clause 8.9.1 of the contract. However, Hexagon made payment on 29 December 2022; within 28 days (the cure period in the contract), so Providence never acquired the right to terminate pursuant to clause 8.9.3 for that ‘specified default’. 

A few months later in May 2023, Hexagon was late making payment again. Payment was due on 17 May 2023 but was not made. This prompted Providence to serve a termination notice pursuant to clause 8.9.4 on 18 May 2023, referring back to the late payment in December as a ‘specified default’ and relying on the late payment in May as being a repeat of that default. Providence also claimed common law repudiatory breach, on the basis of Hexagon’s repeated late payments.

Hexagon disputed the lawfulness of the termination and was largely successful at adjudication. Providence issued proceedings seeking a declaration as to the correct interpretation of clauses 8.9.3 and 8.9.4.

The disputed provisions

Clause 8.9.1 provides that, if the employer fails to make payment by the final date for payment, then the contractor may serve a notice specifying the default or defaults (a ‘specified’ default or defaults).

Clause 8.9.3 then permits the contractor to serve a termination notice (within 21 days) if the specified default continued for 28 days from receipt of the notice under clause 8.9.1.

Finally, clause 8.9.4 provides that:

“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; or…..…..then, upon or within a reasonable time [28 days] after such repetition, the Contractor may by notice to the Employer terminate the Contractor’s employment under this Contract.”

Decision of the lower courts

The TCC found in favour of Hexagon and decided that a right to terminate under clause 8.9.3 must have arisen before notice to terminate could be given under clause 8.9.4 i.e. the default must have continued for 28 days without remedy.

The Court of Appeal disagreed and instead concluded that the failure to give a further notice under clause 8.9.3 “for any reason” in clause 8.9.4 was, applying the literal meaning of the words, “any reason” which could include that the specified default had been rectified by the employer within the cure period.

The Court also drew comparisons with the employer’s rights to terminate under clause 8.4.3 and expressed concern that any other interpretation would mean that an employer could consistently pay late and the contractor would have no recourse. [See our previous briefing: Parties to a JCT building contract can terminate for repeat of a specified default (UK)].

The Court of Appeal’s decision created a ‘two strikes and you’re out’ position where an employer could, in theory, be late with two payments by a matter of days, but face a termination by the contractor.

The Supreme Court’s decision

The question the Supreme Court had to consider was:

“Can the contractor terminate its employment under clause 8.9.4 of the JCT 2016 Design and Build Form, in a case where a right to give the further notice referred to in clause 8.9.3 has never previously accrued?”

The Supreme Court’s approach was that interpretation of a contract should focus on the objective and natural meaning of the words, rather than concerns about whether or not one party was left with an adequate remedy in the face of a default.  This was particularly the case when the parties had used an industry standard form such as the JCT.

The fact the clause 8.9.4 referenced clause 8.9.3 meant that it was parasitic on that clause, rather than independent of it. Before it had a right under clause 8.9.4 to terminate, Providence must have first accrued a right to terminate under clause 8.9.3. If this was not the case, then the words …If the Contractor for any reason does not give the further notice referred to in clause 8.9.3” would serve no purpose.

The alternative interpretation, proposed by Providence and supported by the Court of Appeal, would be a ‘sledgehammer to crack a nut’, allowing a Contractor to essentially skip a step in the sequence and terminate the contract after just two slightly late payments that were months apart even though no single late payment would give such a right. This would lack commercial sense.

The Supreme Court’s interpretation guards against this and ensures that a right to terminate would only arise where the first late payment was delayed beyond the specified 28 days and was therefore sufficiently serious. So, in this instance, as the first specified default was rectified in time, Providence had no right to terminate for the second (and unrelated) failure to pay.

The Supreme Court also reinforced the fact that the termination rights of contractor and employers did not need to be mirrored and were drafted differently for good reason. The Court of Appeal was incorrect to place emphasis on this.

Key takeaways

As JCT is widely used (and the wording is reflected in the 2024 suite), this decision provides welcome clarity as to how the termination provisions for employer default operate. It also gives reassurance to employers that:

• there is a reduced risk of termination for minor or technical payment breaches that are promptly corrected;
• there is greater certainty that the mechanism providing for a cure for a default within 28 days of a default notice has real effect;
• termination risk now arises only where a default is serious enough to remain unremedied beyond that cure period.

For contractors, there is at least now certainty that:

• clause 8.9.4 cannot be used as a “back-up” termination route where all previous defaults were remedied within the contractual timescale
• termination notices served without a prior accrued Clause 8.9.3 right are likely to be invalid
• if you skip a step, you lose the right to terminate – timing and process are key when considering termination

It may also be that, if contractors do not have the leverage to make bespoke amendments to the termination provisions in their favour, they may instead have to rely on their statutory right to suspend for non-payment (which requires 7 days’ notice) and/or claims for interest on the late payments.

Finally, the judgment included guidance on the interpretation of standard forms – noting that, whilst they should be interpreted using ordinary principles, there are certain nuances that should be applied, in particular, that the objective intentions of the parties using them should be consistent with those of other parties using the same standard form.