Know your (termination) rights! Court of Appeal applies strict interpretation of termination provisions

The Court of Appeal has overturned the TCC decision in Providence Building Services Ltd v Hexagon Housing Association Ltd¹ where it considered the Contractor’s right to terminate for repeated breaches under a JCT Contract. This decision highlights the importance of parties understanding their termination provisions which will be applied strictly by the English Courts.   

Background

Hexagon Housing Association Limited (Hexagon), the employer, and Providence Building Services Limited (Providence), the contractor, entered into a contract for the construction of number of buildings. The contract incorporated the 2016 JCT Design and Build Contract as amended by the parties (the Contract).

Contractual provisions

The termination rights of Providence were set out in Clause 8.9 of the Contract. Clause 8.9.1.1 stated that in case Hexagon failed to make a payment due to Providence under Clause 4.9 before the date of final payment, Providence would be entitled to give a notice of specified default. Clause 8.9.3 and 8.9.4 of the Contract then further provided:

“8.9.3 If a specified default or a specified suspension event continues for 28 days from the receipt of the 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.“

Similarly, Clause 8.4 lays down the provisions by which Hexagon can terminate the Contract in case of Providence’s default. Clause 8.4.2 and 8.4.3 of the Contract states the following:

“8.4.2   If the Contractor continues a specified default for 14 days from receipt of the notice under clause 8.4.1, the Employer may on, or within 21 days from, the expiry of that 14 day period by a further notice to the Contractor terminate the Contractor’s employment under this Contract.

8.4.3    If the Employer does not give the further notice referred to in clause 8.4.2 (whether as a result of the ending of any specified default or otherwise) but the Contractor repeats a specified default (whether previously repeated or not), then, upon or within a reasonable time after such repetition, the Employer may by notice to the Contractor terminate that employment.”

Facts

Hexagon failed to pay the amount specified in the Payment Notice 27 by 15 December 2022, which was the final date for payment. Providence served a notice of specified default under Clause 8.9.1. Hexagon paid the amount on 29 December (within 28 days) which meant that Providence did not have the right to serve a further notice pursuant to Clause 8.9.3

Hexagon then repeated the default by not paying Payment Notice 32 by the final date of payment in May 2023. Providence issued a notice to terminate under Clause 8.9.4 based on the repeated specified default. Hexagon subsequently paid the outstanding sum and accepted what it characterised as Providence’s repudiatory breach.  

Hexagon referred the dispute to adjudication and the adjudicator found substantially in favour of Hexagon. Providence commenced Part 8 proceedings under the CPR as to whether a right to terminate under Clause 8.9.3 of the Contract must accrue before Providence could have any right to terminate under Clause 8.9.4.

At first instance, the Technology and Construction Court (TCC) decided in favour of Hexagon. The TCC held that the right to terminate under Clause 8.9.4 could not be valid in circumstance where the right to give a notice under Clause 8.9.3 has not arisen. In its opinion, Providence had not accrued the right under Clause 8.9.3 as Hexagon had remedied the specified default. The right to give notice under Clause 8.9.4 required that a notice under Clause 8.9.3 could have been given, but Providence decided to not to do so for whatever reason.

Court of Appeal Decision

Providence filed an appeal, and the Court of Appeal overturned the TCC’s decision. The Court of Appeal considered the natural meaning of Clause 8.9.4 and held that it was not necessary that the right to terminate must first accrue under Clause 8.9.3 before Providence could terminate the Contract under Clause 8.9.4. The term “for any reason” in Clause 8.9.4 was broad enough to catch a case where the reason why further notice may not be given is that there is no accrued right to give it.

While interpreting Clause 8.9.4, the Court of Appeal observed that Clause 8.4 (termination by Employer) and Clause 8.9 are structurally similar. It noted that Clause 8.4.3 which contained the words “whether as a result of the ending of any specified default or otherwise” was different from “for any reason” in Clause 8.9.4. The Court considered that these words in Clause 8.4.3 cover both a case where the right to give further notice had accrued and a case where it had not. Therefore, the Court held that Providence’s right in Clause 8.9.4 must be at least as wide as the one in the Clause 8.4.3.

Conclusion

This judgment confirms that English Courts will interpret termination provisions of the contract strictly. In this case, the Court of Appeal decided that there had been an Employer default termination based on what was arguably a relatively minor (but repeated) breach that was quickly rectified. The case therefore serves as a stark warning to those using standard JCT contracts including this wording, and is a reminder that parties need to be cautious once they receive a default notice as their conduct may lead to termination if the default is repeated, even if the default is subsequently rectified. More broadly, the case emphasises the importance of understanding contractual termination provisions, which have significant consequences and will be construed strictly. 

Footnotes

1. [2024] EWCA Civ 962