A salient reminder to trigger happy contractors that jumping the gun during the termination process will have significant consequences.
In a recent case (Providence Building Services Limited v Hexagon Housing Association Limited), in which Devonshires acted for Hexagon, the Technology and Construction Court (the “TCC”), ruled that on a true and proper construction of the contract, it was necessary that Providence had accrued the right to terminate its employment pursuant to clause 8.9.3, before it could elect to terminate it employment pursuant to clause 8.9.4 for a repeated specified default.
The parties entered into an amended JCT Design and Build Contract 2016 – Hexagon was the Employer and Providence the Contractor.
In relation to interim payment application 28, the final date for payment of the sums due was 15 December 2022. Hexagon did not make payment of the sums on, or before, that day. Subsequently, on 16 December 2022 Providence issued a notice of specified default on the grounds that Hexagon had failed to pay the amount due (clause 220.127.116.11).
Hexagon made the payment in full on 29 December 2022 thereby curing the specified default within the relevant time period (being 28 days rather than the standard 14 days).
Further interim payments were made, and Providence made an application for interim payment 33. The final date for payment of the sums due (in accordance with a payment notice) was 17 May 2023. Hexagon did not make payment of that sum on, or before, that day. The following day, Providence delivered to Hexagon a purported termination notice alleging that it had terminated its employment under the Contract pursuant to clause 8.9.4, or in the alternative, was accepting Hexagon’s repudiatory breach (the “Notice of Termination”).
By letter dated 24 May 2023, Hexagon disputed Providence’s entitlement to terminate. Between 24 May and 31 May 2023, Hexagon attempted to resolve the dispute and Providence took steps to demobilise from site. On 31 May 2023, Hexagon gave notice to Providence accepting its repudiation of the Contract.
Subsequently, Hexagon, represented by Devonshires, started an adjudication in which it was wholly successful. By a decision dated 25 July 2023, the adjudicator concluded:
- A right to terminate under clause 8.9.3 needs to arise before an entitlement to terminate can arise under clause 8.9.4. As no such right has arisen, Providence’s attempt to terminate for the purpose of clause 8.9.4 was invalid.
- In relation to Providence’s alternative ground, Hexagon was not in repudiatory breach.
- But Providence had been in repudiatory breach which had been accepted by Hexagon.
Thereafter, Providence commenced Part 8 proceedings seeking:
- A declaration to the effect that, on the proper construction of the Contract, it is not necessary that a right to terminate under clause 8.9.3 must have first accrued before Providence could have a right to terminate under clause 8.9.4; and/or
- A declaration that the Notice of Termination dated 18 May 2023 was therefore valid and terminated Providence’s employment under the Contract pursuant to clause 8.9.4.
It was later conceded by Providence that its second declaration was not suitable for a Part 8 hearing.
Mr Adrian Williamson KC, sitting as a Judge of the High Court, concluded that he was tasked with ascertaining the natural and ordinary meaning of clauses 8.9.3 and 8.9.4 in the context of the Contract as a whole. In his view, clause 8.9.3 when triggered, gives a discretion to terminate and that requires an active step to be taken by the Contractor to serve the applicable notice of termination. That step could be taken or not taken by the Contractor, at its discretion, for a range of possible commercial or other reasons.
Turning to critical clause 8.9.4, he did not agree with Providence’s overemphasis on the words “for any reason”, but instead looked at those words in the context of the preceding clause 8.9.3 and the words “does not give” which immediately followed. The Judge held that, in context, those words meant that it was only where the Contractor had elected not to take the necessary active step of giving notice to terminate under clause 8.9.3, that it could acquire the right to terminate under clause 8.9.4 upon the repetition of a default. In other words, the right to terminate for the original specified default had to have previously accrued, if any right to terminate under 8.9.4 was to arise.
To adopt Providence’s interpretation of the clause would, he said, have led to a harsh and uncommercial position, with trigger happy contractors terminating with relative ease with the only protection for an employer being the argument that a notice was served unreasonable and/or vexatious. This was not appropriate, when a contractor already had the protection of being able to suspend, seek interest and/or adjudicate for late payments.
Given the above, he made the following declaration as requested by Hexagon:
- A declaration to the effect that, on the proper construction of the Contract, it is necessary that a right to terminate under Clause 8.9.3 must have first accrued before the Contractor could have the right to terminate its employment under Clause 8.9.4 ; and
- The Claimant’s Notice of 18 May 2023 purporting to terminate the Contract was invalid for the purposes of clause 8.9.4 and did not lawfully terminate the Claimant’s employment under the Contract pursuant to that clause.
Permission to appeal was refused.
We are very pleased to have secured this outcome for Hexagon who are now working with others to complete the works left unfinished by Providence.
The case should remind all parties of the strict application of, and need to adhere with, contractual termination provisions. The consequences of failing to do so, can be, and often are, significant.