Just what is a repeated default?

Stuart Pemble considers a Court of Appeal decision on when a contractor can terminate a JCT contract Key point A Court of Appeal decision on when a contractor can terminate a JCT contract may result in arguments about whether the clause in question should be deleted The Court of Appeal’s decision in Providence Building Services Ltd v Hexagon Housing Association Ltd [2024] EWCA Civ 962 has caused a bit of a stir in the construction team at Mills & Reeve. It relates to the provisions in clause 8.9 (clause in 8.9.4 in particular) of the JCT 2016 Design and Build form. These provisions are repeated verbatim in the recently issued 2024 edition, so the decision remains an important one going forward. And, although the clause in question had been amended from that contained in the underlying standard form (by extending the relevant time periods in clause 8.9), the Court of Appeal’s decision applies equally to the unamended clauses as it does to the amended version in issue in Providence. Clause 8.9 of the Design and Build form Clause 8.9.1 allows for a contractor to serve a notice specifying a default or defaults in a number of instances, including where the employer fails to pay a sum due by the final date for payment. Clause 8.9.3 states that, where the employer continues that default for 14 days (amended to 28 days in this instance) from the receipt of the first notice, the contractor has a further 21 days in which it can terminate the contract. Clause 8.9.4 deals with the situation where the contractor does not terminate under clause 8.9.3. The contractor can still terminate the contract where the employer repeats the specified default. The unamended form allows the contractor a “reasonable time after such repetition” to terminate. In this instance, that period had been amended to 28 days. The facts In February 2019, H employed P as a contractor for the design and construction of a number of buildings in Purley. The contract price was just under £7.2m. In December 2022, H failed to pay a certified sum of circa £265,000 by the final date for payment. P served a notice of default on the next day. H paid the certified amount 14 days later. This was before the expiry of the 28-day period which the amended clause 8.9.3 required the default to continue before entitling P to terminate the contract. In May 2023, H again failed to pay a certified amount (of circa £366,000) by the final date for payment and P issued a notice of termination under clause 8.9.4 on the basis that this was a repeat of the late payment default in relation to the December certificate. H paid the certified amount five days later, disputed the lawfulness of the notice of termination and referred the dispute to adjudication. The adjudicator found in H’s favour. P issued Part 8 proceedings asking the court to decide on the validity of the termination. At first instance ([2023] EWHC 2965 (TCC)), Adrian Williamson KC agreed with H. He held that a contractor cannot “give a valid clause 8.9.4 notice in circumstances where the right to… [terminate under clause 8.9.3]… has never arisen”. Relying on the summary of key principles contained in Lamesa Investments Ltd v Cynergy Bank Ltd [2020] EWCA Civ 821, the judge stressed that contractual termination clauses were to be strictly construed and strictly complied with. In his view, clause 8.9.4 only applied where termination notice could have been given under clause 8.9.3, but the contractor decided not to do so. Because the right to terminate under the amended clause had not arisen in this instance, the termination was invalid. The appeal The Court of Appeal (Stuart-Smith LJ, with whom Coulson and Popplewell LJJ agreed) thought differently, having stressed there was little benefit to using prior versions of the form as an aide to interpretation (there was disagreement between the parties on this). Clause 8.9.4 provides: “If the Contractor for any reason does not give the further notice referred to in Clause 8.9.3.” That was “sufficiently broad enough to cover any state of affairs other than one where the Contractor does give notice”. The use of the phrase “for any reason” simply reinforced the natural meaning of the words used and should be given as wide an interpretation as possible. And, although clauses 8.9.3 and 8.9.4 were linked, on the ordinary meaning of the words used, it was not the case that clause 8.9.4 could only apply where a right to terminate under clause 8.9.3 had accrued but the contractor had failed to exercise that right. Consequences The decision is more than just an application of the principles of interpretation to a particular clause. The clauses are still included in the 2016 and 2024 versions of the form, both of which are currently being used in the market. It has given employers particular cause for concern, not least because late payments of sums due are a problem on projects, especially in straitened times. Employers would prefer that contractors did not have as stark an ability to terminate. The commercial consequences of the decision were argued before the Court of Appeal. While accepting that the decision “renders the Employer’s ice thinner from the outset” than if its interpretation was preferred, it was still a commercially acceptable outcome. Nor did the other options available to P (such as suspension or adjudication) provide a “satisfactory and immediate solution” to the problem of non-payment. In the meantime, employer clients concerned about the possible consequences of the decision are well-advised to delete clause 8.9.4 in its entirety. Whether contractors will agree to that remains to be seen. Stuart Pemble is a partner at Mills & Reeve Photo © Troy Mortier/Unsplash