Getting noticed: when can you give notice to terminate a “serial defaulter”?

The decision to terminate any contract in the construction industry can be a high-stake move, typically used as a last resort. The financial and reputational consequences of later being found to have unlawfully terminated a contract can be significant and, as is often the case in an industry that is squeezed with low profit margins, end up being a ‘bet the business’ decision.

Whether a party is, as a matter of law, entitled to terminate a contract is factually sensitive and depends on the precise terms agreed by the parties, and whether the circumstances of any particular project has had the effect of triggering the relevant contractual rights and remedies.

Whenever we talk to our contractor clients about the issues that they are grappling with, their issues tend to revolve around one theme: cashflow. It is therefore quite understandable that if a contractor does not receive the sums it is due by the final date for payment it would look at the contractual rights and remedies available and, potentially whether it can terminate.

The decision in Providence Building Services Ltd v Hexagon Housing Association Ltd [2024] EWCA Civ 962 has caught the attention of lawyers and construction professionals alike because it had to tackle this very issue.

The Contract

If you use the 2016 suite of JCT contracts on your project, you will probably be very familiar with the contractual provisions at the centre of this dispute, but have you ever scrutinised or had to argue with the other party about whether two defaults, both rectified within a 28 period, allow you to terminate a contract?

As a reminder, these are the relevant clauses (without any amendments):

“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;

2.a specified suspension event is repeated for any period, such that the regular progress of the Works is or is likely to be materially affected thereby,

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.”

For the purpose of this update, we shall refer to a notice issued in accordance with clause 8.9.3 of the contract as a ‘Specified Default Notice’ and a notice issued in accordance with clause 8.9.4 as a ‘Termination Notice’.

Background

Hexagon (the Employer) and Providence (the Contractor) entered into a contract for the construction of a number of buildings in Purley. The contract was based on JCT Standard Form of Design and Build Contract (2016 edition), with bespoke amendments agreed between the parties.

On 25 November 2022, the Employer’s Agent issued Payment Notice 27 certifying the amount due as £264,242.55 (the “November 2022 Payment Cycle”). Hexagon failed to pay the notified sum by the final date for payment and so Providence issued a Specified Default Notice. Hexagon remedied its default by paying the notified sum, in full, within 28 days of receiving the Specified Default Notice. This meant that the payment default did not give rise to an accrued right to issue the “further notice” referred to in clause 8.9.3.

On 28 April 2023, the Employer’s Agent issued Payment Notice 32 certifying the amount due as £365,812.22 (the “April 2023 Payment Cycle”). Hexagon again failed to pay the notified sum by the final date for payment. Instead of issuing another Specified Default Notice, which would have given Hexagon another 28-day period to remedy the default, Providence issued a Termination Notice.

The Termination Notice issued by Providence referred to the previous default in relation to the November 2022 Payment Cycle. It noted that the failure to pay the notified sum by the final date for payment in the April 2023 Payment Cycle amounted to a repetition of a specified default, which then triggered a right for Providence to terminate its employment in accordance with clause 8.9.4.

Hexagon responded by paying the notified sum in respect of the April 2023 Payment Cycle within 28 days of the date of default, thinking that this would avoid triggering a contractual right to terminate. Hexagon then argued that Providence had committed a repudiatory breach by issuing a Termination Notice in circumstances whereby there was no accrued right to do so.

A dispute was crystallised and subsequently referred to adjudication by Hexagon. The Adjudicator agreed with Hexagon’s position.

The issue / decision   

In July 2023, Providence issued proceedings in the High Court seeking a determination of whether it (as the Contractor under the contract) was entitled to terminate its employment under Clause 8.9.4 in circumstances whereby the right to give the “further notice” in Clause 8.9.3 had not previously accrued.

At first instance, the High Court decided that Providence was not entitled to issue the Termination Notice. Providence sought to challenge this decision in the Court of Appeal (“CoA”).

The CoA decided that clause 8.9.4 (termination notice) applies even if there is no accrued right to give the ‘further notice’ referred to in clause 8.9.3. The result was that Providence was entitled to issue a Termination Notice in light of Hexagon’s repetitive default (i.e. the failure to pay the notified sum by the final date for payment in two different payment cycles).

It noted that if it were to adopt Hexagon’s interpretation, this would mean that a “serial defaulter” could “escape any meaningful consequences of their defaulting” if they were to rectify their default within 28 days, each and every time it committed a specified default.

Commentary

The CoA’s decision provides further clarity as to the circumstances in which a contractor is entitled to terminate its employment due to a default by the Employer under standard JCT terms. However, the true impact of this case on the construction industry will depend on the contracting parties’ relationship and what stage a project is at in the project lifecycle.

Contract drafting

Many parties decide to use a standard form contract, whether that is JCT, NEC, FIDIC or IChemE, but use a bespoke schedule of amendments to depart from those terms to suit the intricacies and commercial circumstances of the parties. However, such amendments can sometimes have further, often unintended, consequences.

Any bespoke amendments to industry standard forms should be carefully considered by a specialist and limited to points which are necessary to address project-specific risks or relationships. This is a position advocated in the recent Construction Leadership Council statement.

The interesting point about this case is that, although the parties had amended the JCT contract, these particular clauses were left as they appear in the standard form. It is possible that parties (particularly Employers) that use this contract will now try to introduce amendments to ensure that default under clause 8.9.3 requires a separate notice (i.e. so that employer/contractor needs to be notified of each breach, before it can be escalated and potentially lead to termination of the contract).

Contracts and Project advisory

If parties are in the middle of a ‘live’ construction project and one party is in default, whether in relation to a payment cycle or otherwise, it is important to carefully consider the contract, and contract documents, to identify which contractual mechanisms, rights and remedies are available.

Each project will be factually sensitive depending on what form of contract was used, what amendments were incorporated, and whether the circumstance of that project has the effect of triggering those contractual rights. It is not possible to provide one piece of advice that will be applicable to all projects and so this needs to be looked at on a project-by-project basis.

Difficulties often arise in a project where both the contractor and the employer have very different interpretations of the same clause or clauses. Where this is the case, it is important to seek specialist input at the earliest possible stage to ensure that the best case is being put forward, particularly if the strength and credibility of that argument is the key to unlocking a payment or a pre-requisite to reaching a commercial compromise.

Dispute resolution

Sometimes parties are not able to resolve their differences during a project or even after completion. We may see other disputes which contain similar clauses, but with slightly different amendments or circumstances, perhaps even covering some of the other standard forms.  Where a disagreement escalates into project delivery issues or a full-blown dispute, it is again important to seek specialist legal advice at the earliest opportunity.