UK – Repeat. This Is A Specified Default!
In Providence Building Services Ltd -v- Hexagon Housing Association Ltd [2024] EWCA Civ 962, the Court of Appeal has considered the application of the standard JCT provisions concerning termination for repeat of a ‘Specified Default’ by an Employer.
What is a Specified Default?
Termination of contract can be a legal minefield due to the lack of certainty it often involves. The JCT suite seeks to deal with this by specifying limited contractual grounds in which either party can terminate the Contractor’s employment under the contract.
Those familiar with the JCT suite will know that a failure by an Employer to make payment to the Contractor by the final date for payment is one of those grounds. A Specified Default such as this non-payment triggers the two-stage notice process (which can be a legal minefield in itself) required for a termination to be legally valid.
The Facts in Providence
In brief, the relevant facts of the case are as follows:
- Hexagon employed Providence to carry out certain works pursuant to an amended JCT Design and Build Contract 2016 (“the Contract”).
- The Contract incorporated the employer default provisions at clause 8.9 of the standard form, with only minor amendments, which provided that:
- Failure to make payment before the final date for payment would entitle Providence to give notice of a specified default (cl.8.9.1.1);
- Providence were entitled to issue a further notice to terminate its employment in the event a specified default continued for 28 days (amended from 14 days) from receipt of a notice under clause 8.9.1 on the expiry of this 28 period, or within 21 days thereafter (cl.8.9.3);
- If Providence “for any reason” did not give the further (termination) notice referred to in clause 8.9.3, but Hexagon repeated the same specified default then upon or within 28 days of such repetition, Providence became entitled to terminate its employment by notice (cl.8.9.4).
- In December 2022, Hexagon failed to pay a notified sum before the final date for payment, resulting in Providence serving a notice of specified default the following day.
- Hexagon made payment of the outstanding amount in full 13 days after this notice.
- In April 2023, Hexagon again failed to pay a notified sum before the final date for payment.
- Providence responded by issuing a notice of termination on the basis this was a repeat of a previously notified specified default, relying on the first notice issued in December 2022.
- Hexagon subsequently made payment of the outstanding amount in full, and thereafter accepted what it considered to be a repudiatory breach of contract by Providence in terminating its employment.
- Following a referral to adjudication, the adjudicator sided with Hexagon, resulting in Providence issuing Part 8 proceedings.
The Decision
The case centred on whether a right to terminate under clause 8.9.3 of the Contract must have accrued before 8.9.4 could be relied upon.
In the first instance, it was held by the TCC judge (agreeing with the decision of the adjudicator) that a contractor could not give a valid notice under 8.9.4 in circumstances where the right to give a notice under clause 8.9.3 had not yet arisen. In arriving at this decision, the judge construed the meaning of this clause 8.9.4 as requiring that a notice under clause 8.9.3 could have been given (i.e., the right to issue had eventualised), but the contractor decided not to issue this notice for whatever reason.
The Court of Appeal had a different view. At paragraph 31 of this judgment the court noted:
“…it may be argued that “the further notice referred to in clause 8.9.3” (with particular emphasis on the word “the”) supports an inference that it is referring to a notice that the Contractor is entitled to give under Clause 8.9.3 since there is no other notice referred to in that clause. However, to my mind, that inference, though supportable, is not compelling, not least because of the words “for any reason”, which 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. I do not find that the Judge’s references to the Contractor “taking an active step” or “deciding” not to give a Clause 8.9.3 notice helpful. To my mind, they distract 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.”
In allowing the appeal, the court held that the natural and probable meaning of clause 8.9.4 was that it applied even when no right to give a further notice under clause 8.9.3 had accrued.
Commentary
This case provides a key decision and serves as a health warning for Employers contracting on JCT forms of contract. However, it is also equally as useful to Employers in terms of defaulting Contractors, given that a Contractor can also be guilty of a specified default.
We may now witness a change in mentality in respect of termination on construction projects and see more Specified Default Notices issued under existing JCT arrangements. Issuing such notices would result in the receiving party having to be very mindful of its future conduct or risk a termination being effected should the default be repeated, notwithstanding whether it was subsequently rectified and did not continue beyond the period prescribed. This risk is likely to be elevated in problematic projects.
In view of this, we anticipate that we will almost certainly see (and be advising on appropriate) amendments to the standard form termination provisions on new JCT matters. It is also worth noting that these provisions are unchanged in the 2024 JCT suite of contracts.
For further information, please contact:
David Banks, Partner, Hill Dickinson
david.banks@hilldickinson.com
