In a significant decision issued on 15 August 2024 (Providence Building Services Limited v Hexagon Housing Association), the English Court of Appeal unanimously overturned the decision of the first instance judge on the proper interpretation of termination provisions in JCT 2016 standard form contracts, which are reflected in the Scottish Building Contract Committee (SBCC) 2016 forms. The relevant wording continues to be used in what we've seen so far of the new 2024 JCT forms, which have yet to be kilted by SBCC.
As a result of this decision, it will now be easier than some previously thought for Contractors to terminate their employment under JCT/SBCC contracts where Employers repeat defaults, including when Employers do not pay Contractors timeously.
The Background
The JCT/SBCC 2016 Standard Form building contracts make provisions for Contractors to be able to terminate their employment under the building contract upon the occurrence of various events, including non- timeous payment of the Contractor by the Employer. In this case, the 2016 JCT Design and Build form had been used with certain amendments.
Clause 8.9.1 of the relevant contract form provides, among other things, that if the Employer does not pay an amount due to a Contractor by the final date for payment, the Contractor may give the Employer a notice specifying the default (the specified default).
Clause 8.9.3 of the relevant contract form provides that if the specified default, e.g. non- timeous payment, continues for 14 days after receipt of the notice, the Contractor can, on or within 21 days from the expiry of the 14-day period, give a further notice terminating the Contractor's employment under the building contract (the termination notice).
In the contract in this case, the 14-day period in the Standard Form had been changed to 28 days by agreement of the parties.
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):
… the Employer repeats a specified default … then upon or within a reasonable time after such repetition, the Contractor may by notice to the Employer terminate the Contractor's employment under this Contract."
In this case, the Standard Form had been changed by agreement of the parties to substitute '28 days' for 'a reasonable time'.
The Employer failed to make payment of a sum due to the Contractor on or before the last day for payment (15 December 2022). The next day, the Contractor gave the Employer notice of default under Clause 8.9.1 The Employer paid the sum on 29 December 2022. Accordingly, the default did not continue for the period of 28 days, which would have allowed the Contractor to issue a termination notice under Clause 8.9.3.
Thereafter, the Employer failed to make timeous payment of a further sum due to the Contractor on or before the last day for payment, 17 May 2023. On 18 May 2023, the Contractor issued a notice terminating its employment, purportedly acting under Clause 8.9.3 and 8.9.4. The Employer paid the sum due on 23 May 2023 and challenged the lawfulness of the termination notice, claiming that the Contractor had wrongly repudiated the building contract.
The Main Issue
The main issue in the case was whether a Contractor was entitled to terminate its employment under clause 8.9.4 in a situation where there had been a repetition of a specified default (non- timeous payment), but the earlier specified default had been remedied by the Employer within the 28 days allowed, which meant that the Contractor never had the right to give the termination notice referred to in clause 8.9.3.
The Position Before the Appeal Court's Decision
The adjudicator in an adjudication between the parties and the judge at first instance found in favour of the Employer, essentially on the basis that Clause 8.9.4 only came into operation if the Contractor had previously accrued the right to issue the termination notice referred to in Clause 8.9.3 but for whatever reason hadn’t issued it. As that could not happen because payment had each been made within the 28 days mentioned in Clause 8.9.3, the Contractor was not entitled to issue a termination notice under Clause 8.9.4 when it purported to do so.
The Decision of the Appeal Court
The appeal court disagreed with that approach. In its view, on a proper interpretation of the contractual provisions, there was nothing in the words used which meant that the right to give a termination notice under Clause 8.9.3 had to have arisen at some point in the past but for some reason the Contractor had decided not to give it, before the Contractor could rely on clause 8.9.4. Accordingly, the appeal court considered that the Contractor's right to terminate upon the repetition of a specified default by the Employer extended to when the termination notice referred to in Clause 8.9.3 had not been given because no right to give it had arisen. In this case, the earlier specified default had been remedied by the Employer before the Contractor had any right to serve the termination notice under Clause 8.9.3.
Comment
For decades, JCT and SBCC have tried to strike a difficult balance when it comes to termination rights given the nature and effects of termination. Considering the position to which termination gives rise, many consider it should be 'a last resort'.
As a result, some may consider this a surprising decision as the JCT terms appeared to be drafted in such a way as to allow for the remediation of certain defaults given the importance and effects of a termination of the Contractor's employment, including the ability of the Contractor to recover direct loss and damage caused to the Contractor as a result of the termination by it of its own employment in the event of the Employer's default.
Many users of JCT/SBCC contracts will have thought, with some justification, that Clause 8.9.4 was only triggered if the Contractor's right to give a notice of termination had previously accrued under Clause 8.9.3 but it had not been exercised.
Given the structure and content of the termination provisions as a whole, many in the construction sector will question the view of the Court of Appeal that the words used, when properly construed in context, reflect an intention of the parties that the right to issue a termination notice under Clause 8.9.4 extended to when 'the further notice', i.e. the termination notice under Clause 8.9.3, had not been given because no right to give it had ever arisen.
All that said, when considering the possible termination of the employment of a Contractor, it is important to remember and consider the structure and content of the JCT/SBCC termination provisions as a whole. Those provisions begin by setting out certain terms which apply to all such notices purporting to terminate the employment of a Contractor.
One important and general requirement of those provisions is that such termination notices should not be given unreasonably or vexatiously. That particular provision was not considered by the Court of Appeal. In this case, the Court of Appeal was, understandably, asked to consider what is the proper legal interpretation of the relevant contractual terms, not the different question of whether a particular termination notice was invalid because it was unreasonable or vexatious. The latter would require an inquiry into factual material i.e. the background circumstances of each case. Any party thinking about terminating the Contractor's employment under JCT/SBCC provisions would also need to meet that requirement. Accordingly, arguments are still likely to rage about whether the giving of a termination notice was unreasonable or vexatious in the particular circumstances of any given case.
It remains to be seen whether the Supreme Court or JCT/SBCC (by way of amendment of the forms) have the last word on the issue raised by this case. JCT has recently launched its 2024 suite of contracts, but those new contract forms will have been put to bed without knowledge of this new decision coming down the tracks.
The unfortunate effect of the Court of Appeal's decision is that, unless and until the position changes by a decision of the UK Supreme Court or a change is made to the relevant wording by JCT/SBCC, it is likely that Employers will seek to amend the relevant terms of the standard forms so that they more clearly reflect what many will have considered to be the true intention of the parties.
Key Takeaways
Going forward, if Employers want to avoid the possibility of termination by the Contractor for non- timeous payment, they'll have to make sure they pay on time if operating under the same or very similar JCT/SBCC provisions.
Even if Employers who have been notified of a specified default remedy it within the period allowed under the contract, they run the risk that if they repeat the default, they'll be on the receiving end of a termination notice. Some who operate in the sector may think that might be seen as an attractive option for a Contractor who may have under-tendered or mis-managed a contract. Others will think that 'two defaults and you're out' is the best way of ensuring timeous payment.
Employers and construction professionals may need to further reinforce their payment procedures to make sure that payment is made timeously. A failure to do so may not just result in a 'smash and grab adjudication' or a suspension of the works, which may be bad enough - it may give rise to the Contractor terminating its employment under the contract.
It is worthy of note that, although this case deals with the wording of a JCT/SBCC main contract standard form, materially the same provisions are contained in the JCT/SBCC standard form sub-contracts. Accordingly, the same kind of issues identified and discussed above arise between Contractors and Sub-Contractors in connection with the terms of those sub-contracts and any termination of a Sub-Contractor's employment under those sub-contracts.
