Termination by the contractor: is your employer on thin ice?

In Providence Building Services Ltd v Hexagon Housing Association Ltd [2024] EWCA Civ 962, the Court of Appeal considered whether the Contractor was entitled to terminate its employment under Clause 8.9.4 of the JCT Design and Build Contract (2016 Edition).

Clause 8.9.3 of the JCT Design and Build Contract (2016 Edition) provides that the Contractor is entitled to terminate its employment under the building contract in circumstances where:

• the Employer has failed to make payment of a certified sum by the final date for payment;
• the Contractor has given notice of this default (a “specified default notice”);
• this default continues for a period of 14 days from the date of receipt of the specified default notice; and
• the Contractor has given notice terminating the building contract on or within 21 days of the expiry of that 14 day period.

Clause 8.9.4 provides the Contractor with a further right to terminate the building contract where there has been a repeated specified default. In its unamended form, this clause reads as follows:

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

then, upon or within a reasonable time after such repetition, the Contractor may by notice to the Employer terminate the Contractor’s employment under this Contract.”

The key question was whether the Contractor could rely upon repeated failures by the Employer to make timely payments and terminate the building contract under clause 8.9.4, even if previous non-payments were remedied before the right to terminate under clause 8.9.3 arose.

The facts of this case can be summarised as follows:

• The Employer regularly made late payments to the Contractor.
• When the Employer failed to make payment by the final date for payment pursuant to payment notice no.27, the Contractor issued a specified default notice.
• This default was remedied before the Contractor obtained the right to issue a termination notice (the standard form of building contract had been amended by extending the period of continued default that was required before the right to terminate arose from 14 days to 28 days).
• When the Employer again failed to make timely payment, this time pursuant to payment notice no.32, the Contractor issued a termination notice. The termination notice relied upon the non-payment of payment notice no.32 as a repetition of the Contractor’s previous specified default notice.
• In the High Court, the Judge determined that the termination was invalid. The Judge accepted the Employer’s argument that the termination notice under Clause 8.9.4 could only be issued where the Contractor had been entitled to terminate under Clause 8.9.3 following the expiry of the contractual notice period but had, for whatever reason, chosen not to do so.
• This decision was appealed by the Contractor.

Having scrutinised the terms of clause 8.9.4, the Court of Appeal overturned the High Court’s first decision and held that the termination notice was valid. Lord Justice Stuart-Smith, giving the concurrent opinion of the court, stated that:

“the natural meaning of the conditional words at the commencement of Clause 8.9.4 are clear: “If the Contractor … does not give the further notice referred to in Clause 8.9.3” are broad enough to cover any state of affairs other than one where the Contractor does give notice”.

Lord Justice Stuart-Smith also relied upon the decision of the TCC in Reinwood Ltd v L Brown & Sons Ltd [2007] BLR 10, based on the 1998 edition of the standard form,where Judge Gilliland held that:

“… a notice of determination may be given as soon as the specified default has been repeated. There is nothing unreasonable in that, since the employer has already received a warning in respect of the previous default and must be taken to know that if he repeats the default he runs the risk that the contract may be determined either forthwith or within a reasonable time after the repetition of the specified default.”

Lord Justice Stuart-Smith noted that this decision “renders the Employer’s ice thinner from the outset”, making it easier for Contractors to terminate their employment when faced with repeated late payments.

Whilst clauses 8.9.3 and 8.9.4 of the standard form building contract used in Providence Building Services Ltd were subject to bespoke amendments (the time periods referred to at those clauses being revised by the parties), nothing in the Court of Appeal’s decision appears to have turned on those amendments. As such, we can expect this decision to be of assistance to Contractors on projects using JCT or SBCC standard form building contracts with similar or identical termination provisions.