Supreme Court reverses Court of Appeal decision on the termination provisions of the English JCT contract

In the recent decision of Providence Building Services Limited (Respondent) v Hexagon Housing Association Limited (Appellant), the Supreme Court considered the proper contractual interpretation of a termination clause in the JCT Design and Build (D&B) Contract (2016 edition). This is significant as it determines (and limits) a contractor's right to terminate where employers repeatedly make late payments under the JCT D&B. 

Background to case

The brief facts of the case are as follows:

• Providence agreed to construct buildings at a site in Purley for Hexagon, under an amended JCT D&B 2016.
• In 2022, a payment notice for around £260k was issued, which was not paid by the final date for payment, so a Notice of Specified Default was issued by Providence under clause 8.9.1 of the contract. That amount was later paid by Hexagon (before a right to terminate arose for failure to pay in the cure period under clause 8.9.3).
• In 2023, a second payment notice was issued with a final date for payment of 17 May 2023 for around £360k. Again, Hexagon did not pay by the final date for payment and the following day, Providence issued a notice of termination pursuant to clause 8.9.4.

The parties' arguments

The sole issue of contractual interpretation considered by the Supreme Court 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?”

According to Providence, a specified default had been repeated (as provided for in 8.9.4) because the notified sum had not been paid by the final date for payment on two separate occasions, providing the right to terminate under 8.9.4.

Hexagon, on the other hand, argued that the wording of clause 8.9.4 pre-supposed that Providence must have acquired a right to terminate under clause 8.9.3 for a continuing late payment first, before it could exercise its right to terminate under clause 8.9.4 for a repetition of the specified default.

Technology and Construction Court decision

The first instance decision sided with Hexagon, arguing that Providence's interpretation would enable contractors to terminate contracts too easily and, as such, was harsh and commercially impractical.

Court of Appeal decision 

The Court of Appeal unanimously overturned this decision and agreed with Providence's interpretation of the contract, deciding that no right of termination needs to have arisen under 8.9.3 in order for a contractor to exercise its right to terminate under 8.9.4. Provided that there has previously been a notice of specified default, then 8.4 permitted a contractor to terminate the contract if that specified default was repeated, even if payment was only late by one day. It stated that this was the natural and ordinary meaning of the wording in the default JCT D&B.

Supreme Court decision

The Supreme Court unanimously allowed Hexagon's appeal, holding that Providence was not entitled to terminate the contract. It is only if the employer has failed to cure the earlier specified default within the period provided by 8.9.3 (14 days in the standard form, but 28 days in this case as it had been amended) and so the contractor's termination right has crystallised (even though that right might then have lapsed due to no termination notice having been given within the 21 day period specified in 8.9.3), that the contractor can terminate for a repetition of the specified default under clause 8.9.4. 

The following reasons were given for this decision:

• An objective, natural meaning of the opening words of clause 8.9.4 meant that Providence must have had an accrued right to terminate under clause 8.9.3 before the right to terminate accrued under 8.9.4. If the intention of the clause was to provide a contractor with the ability to terminate where the employer has repeated a specified default, the clause would have been worded differently. To accept Providence's interpretation would have rendered parts of the clause redundant.
• It would be an extreme outcome to allow a contractor to terminate a contract when it received two payments a single day late. In Lord Burrow's view, "that might be thought to provide a sledgehammer to crack a nut".
• The Court of Appeal's approach of aligning the contractor's termination rights with those of the employer under the contract was misplaced. The obligations of the parties are very different, and there is no reason to presume their termination rights were identical, given that they were asymmetrical in other respects and the respective termination clauses used different wording. 

The Supreme Court also provided important clarification more generally on the approach that should be taken to the contractual interpretation of industry-wide standard form contracts. This is that the "usual" approach of contractual interpretation (that the court should consider the objective intentions of the contracting parties in the relevant context) should be applied.

In the context of standard form contracts such as the JCT, the parties' intentions can be presumed to be that their respective rights and obligations should be consistent with those of other parties using the standard form contract, which should also reflect the objective intentions of the drafters.

Osborne Clarke comment 

This ruling provides important clarity as to how these key (and widely used) contractual provisions should be interpreted. While contractors have lost an important (though arguably overpowered) tool to protect against persistent late payments, employers will welcome the protection afforded by the judgment against the risk of termination for minor payment delays under the JCT D&B 2016 contract. This will continue to be of significance: even though the industry is continuing to move towards the JCT D&B 2024 edition, the payment provisions considered in this case are the same as in the 2016 version. 

Yasmine Jauffur, paralegal at Osborne Clarke, assisted with producing this Insight