Court of Appeal clarifies termination for repeated breach and late payment under the JCT

The Court of Appeal has overturned a TCC decision in relation to the JCT termination provisions for repeated breach, finding that a contractor may terminate for repeated breach even where it has not previously accrued a right to terminate in respect of an earlier breach. This decision provides contractors with a powerful weapon to combat late payment even where delays are minor. Employers operating under these provisions should be extra vigilant to ensure that payments are made on time and that valid payment and pay less notices are given. Many employers may also wish to make amendments to the standard form to reverse the outcome in this case.

Providence Building Services Limited v Hexagon Housing Association Limited: a recap

This appeal arose out an application for declarations made by Providence, a contractor, in respect of its rights under an amended JCT Design and Build 2016 edition contract to terminate the contract on the basis of repeated breach by Hexagon, the employer. The relevant provisions were largely unchanged from the standard form, except for the notice periods.

Clause 8.9.1 stated that where Hexagon failed to make a payment by the final date for that payment, Providence could give Hexagon a notice of that failure as a “specified default”. Clause 8.9.3 then allowed Hexagon a period of 28 days to remedy the specified default, failing which Providence could serve a notice to terminate on the expiry of the 28-day period or within a further 21 days.

Clause 8.9.4 stated that if Providence did not, “for any reason”, serve a termination notice under 8.9.3, and if Hexagon repeated a specified default, then Providence may, upon the repetition or within a further 28 days, serve a notice to terminate.

Providence issued a notice under clause 8.9.1, identifying a “specified default” following late payment by Hexagon. That breach was cured within the 28 day cure period and the right under 8.9.3 to serve a notice to terminate therefore did not accrue.

When Hexagon failed to make another payment, Providence issued a notice of termination under clause 8.9.4 on the basis that this was a repeat of the specified default already notified in December 2022.

Hexagon disputed that Providence had a valid contractual right to terminate under clause 8.9 and at first instance the TCC agreed with Hexagon, finding that in order for Providence to obtain a right to terminate for repeated breach under clause 8.9.4, it first had to have a right to terminate under clause 8.9.3. For a more detailed review of the TCC’s decision, please see our earlier Law-Now here.

The Court of Appeal

The Court of Appeal overturned the TCC’s decision, finding that Providence did not need to have previously accrued a right to terminate under clause 8.9.3 in order to terminate for repeated breach under clause 8.9.4.

The Court of Appeal considered the natural meaning of the words in clause 8.9.4 and accepted Providence’s submission that the words “for any reason” were broad enough to include a case where the reason why the further notice was not given was that the right had not accrued under 8.9.3. It drew support for this interpretation from the employer’s equivalent right to terminate for repeated breach in clause 8.4.3, which referred expressly to the further notice (of termination) not being given “whether as a result of the ending of any specified default or otherwise”. The Court considered that these words expressly contemplated a failure to give the further notice because the default in question had been remedied within the cure period. Given that the contractor’s right in clause 8.9.4 referred to the further notice not being given “for any reason”, this must be at least as wide as the reasons stated in the employer’s clause.

The Court of Appeal noted that in relation to standard forms, interpretation depends primarily on an “intense focus on the words used” as opposed to the commercial context of the contract. Nevertheless, the Court was persuaded that the consequences of Providence’s interpretation represented a contractual allocation of risk that was commercially acceptable.

Conclusions and implications

This decision has significant implications for those adopting the JCT suite of contracts. The parties raised various arguments as to the commercial consequences of their different interpretations of the termination provisions. The Court of Appeal’s finding means that employers are at a greater risk of termination in the event of the repetition of a specified default. For example, once a contractor gives a notice of default to an employer for late payment, any further instance of late payment by the employer will give the contractor an immediate right of termination. Under the standard JCT termination provisions, a contractor exercising such a right of termination would be entitled to recover, in addition to payment for work carried out, demobilisation costs and loss of profit on the remaining work left at termination.

Hexagon’s interpretation would have allowed an employer to repeatedly pay late, each time curing the breach, and thereby removing the ability of the contractor to terminate on that basis and requiring it to satisfy the much more difficult test of repudiatory breach before it could terminate. The Court noted the TCC judge’s reference to a “battery” of other remedies at a contractor’s disposal in the face of an employer who fails to pay on time, for example, the right to suspend work, the payment of interest and the right to refer disputes to adjudication. However, the Court of Appeal considered that each involved a measure of delay and additional cost and uncertainty for the contractor in pursuing them.

One consequence of the Court of Appeal’s decision may be to raise the stakes in typical “smash and grab” disputes based on an employer’s failure to serve a payment or pay less notice on time or in the proper form. A contractor who finds itself with such a claim might now consider serving a notice identifying a specified default, either in addition to or instead of pursuing payment of the “smash and grab” amount through adjudication. Should any other non-payment or “smash and grab” points arise in future payment cycles, the contractor would then be able to terminate with the consequences noted above.

Many employers may find the position arrived at by the Court of Appeal to be commercially unsatisfactory and may therefore seek to amend the standard form to expressly adopt the interpretation argued by Hexagon and upheld at first instance by the TCC. Employers who have live projects under JCT contracts which have not been amended in this respect should exercise extra vigilance to ensure that payments are made on time and that valid payment and pay less notices are given.

References:

Providence Building Services Limited v Hexagon Housing Association Limited [2023] EWHC 2965 (TCC) 

Providence Building Services Ltd v Hexagon Housing Association Ltd [2024] EWCA Civ 962