The Court of Appeal decides on JCT DB 2016 termination provisions

Helen Arthur provides an update on an important Court of Appeal ruling in a case concerning the proper construction of termination provisions in a JCT 2016 Design & Build form of Contract.

The Court of Appeal handed down its Judgment last week in Providence Building Services Limited v Hexagon Housing Association Limited [2024] EWCA Civ 962 overturning the decision of the Technology and Construction Court (TCC) in relation to the proper construction of termination provisions in a JCT 2016 Design & Build form of Contract.

Facts

In February 2019 Hexagon and Providence entered into an amended JCT Design & Build 2016 contract (for the construction of a number of buildings in Purley for the sum of £7.2m (the “Contract”). The Contract provided for interim payments to be made by Hexagon with the final date for payment for each Interim Payment being 21 days from its due date.

In December 2022 Hexagon failed to pay the notified sum by the final date for payment and Providence issued a specified default notice relying on clause 8.9.1 of the Contract. The notified sum was eventually paid by Hexagon some 13 days later.

In April 2023 Hexagon failed to pay the notified sum by the final date for payment so Providence issued a termination notice relying on clause 8.9.4 of the Contract, arguing that Hexagon had repeated its specified default. Hexagon paid the notified sum under a week later. Hexagon brought arguments in relation to the validity of the termination notice and accepted what it considered was a repudiatory breach by Providence.

The parties referred the dispute to adjudication resulting in the adjudicator deciding in Hexagon’s favour. Providence then commenced Part 8 proceedings in the TCC for a declaration in respect of the proper construction of clause 8.9 of the Contract.

Clause 8.9 of the Contract states:

“8.9.1 If the Employer:

.1 does not pay by the final date for payment the amount due to the Contractor in accordance with clause 4.9 and/or any VAT properly chargeable on that amount…the Contractor may give to the Employer a notice specifying the default or defaults (a ‘specified’ default or defaults).

8.9.3 If a specified default or a specified suspension event continues for 28 days from the receipt of notice under clause 8.9.1 or 8.9.2, the Contractor may on, or within 21 days from, the expiry of that 28 day period by a further notice to the Employer terminate the Contractor’s employment under this Contract.

8.9.4 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…then, upon or within 28 days after such repetition, the Contractor may by notice to the Employer terminate the Contractor’s employment under this Contract.” [Emphasis added]

TCC Decision

The question to be decided was whether a right to terminate under clause 8.9.3 of the Contract needed to accrue before clause 8.9.4 could be relied on.

The Judge noted that the principal task was to ascertain the natural and ordinary meaning of clauses 8.9.3 and 8.9.4. Clause 8.9.3 was straightforward: the clause gave the Contractor the choice whether or not to serve a notice to terminate and that termination would require the Contractor to ‘take an active step’ in serving the termination notice. Neither the words ‘for any reason’ nor clauses 8.9.3 and 8.9.4 as whole envisaged, that a Contractor can give a valid clause 8.9.4 notice in circumstances where the right to give a clause 8.9.3 notice has never arisen—i.e. where the specified default has been cured within the 28-day period.

Providence’s termination notice was found to be invalid.

Court of Appeal decision

The Court of Appeal considered this differently and stated that: “the words ‘for any reason’ remain broad enough to catch a case where the reason why the further notice may not be given is that there is no accrued right to give it. On that approach, the conditional words of Clause 8.9.3 are satisfied even where the Contractor had no accrued right to give the further notice referred to in Clause 8.9.3…”

The Court went on to state that the TCC decision, in particular the references to the Contractor needing to ‘take an active step” not to give a clause 8.9.3 notice, to be unhelpful as it distracts “attention from the true meaning of the words that fall to be interpreted. The question to be addressed is simply and only whether the Contractor has given further notice, not whether the giving (or not) of the notice can be given the (non-contractual) description of being the result of a decision or the taking of an active step.”

Therefore, the Court found in favour of Providence and overturned the TCC decision.

Points to note

1. Termination provisions and the related notice requirements always need to be approached with caution and considered carefully.
2. The Court noted that this approach now means that in terms of risk profile as between the parties the Employer is on “thinner ice from the outset”. As such, Employers should keep an even closer eye on contractual timeframes and events which could give rise to a ‘specified default’.

Helen Arthur is a Senior Professional Support Lawyer at Sharpe Pritchard LLP.

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