The importance of three words

The Court of Appeal has handed down a judgment on the termination provisions of the 2016 Edition of the JCT Standard Form of Design and Build Contract.

Termination provisions

The amended form of contract allowed the Contractor to issue a notice citing specified defaults (clause 8.9.1).  If the specified notice continued for 28 days of the date of that notice, the Contractor may serve a termination notice on, or within, 21 days from the end of the 28-day period (clause 8.9.3).  If the contract was not terminated in accordance with clause 8.9.3 “for any reason”, the contractor could terminate the contract within 28 days of a repeated specified default. 

Relevant facts

In December 2022, the Employer failed to pay a notified sum by the final date for payment.  The following day, the Contractor issued a clause 8.9.1 notice.  13 days later, the notified sum was fully paid, ahead of the 28-day period stipulated by clause 8.9.3.

In April 2023, the Employer failed to pay another notified sum by the final date for payment.  The following day, the Contractor issued a clause 8.9.4 termination notice on grounds that the Employer had repeated a specified default.  Six days later, the notified sum was fully paid.  The Employer separately disputed the lawfulness of the Contractor’s termination notice and asserted a repudiatory breach by the Contractor which the Employer subsequently accepted.

The Employer successfully referred the dispute to adjudication and the Contractor commenced proceedings in the High Court.

The High Court decided that clause 8.9.3 envisages an active step being taken by the Contractor, or not. If the Contractor takes that active step under clause 8.9.3 then termination ensues.  If he does not, then, if there is a repeated default, the Contractor may serve notice of termination under clause 8.9.4.  As to the words “for any reason”, the Judge said that neither these words, nor clauses 8.9.3 or 8.9.4 as a whole, envisage that a Contractor can give a valid clause 8.9.4 notice in circumstances where the right to give a clause 8.9.3 notice has never arisen – i.e. where the specified default has been cured within the 28-day period.  The Judge held that clause 8.9.4 requires that a clause 8.9.3 notice could have been given but the Contractor has decided not to do so “for any reason”.

Court of Appeal

The Court of Appeal was therefore required to determine whether the Contractor can terminate under clause 8.9.4 where a right to give the further notice referred to in clause 8.9.3 has never previously accrued.

The Contractor argued that the Contractor can terminate if a specified default is repeated, irrespective of whether or not it is cured in the necessary timeframe.  The Employer argued that the Contractor must first accrue the right to terminate under clause 8.9.3, before it can terminate under clause 8.9.4.   

The Court of Appeal agreed with the Contractor and decided that the natural and probable meaning of Clause 8.9.4 is that it applies to a case where no right accrued to give a further notice under Clause 8.9.3.

Impact of the judgment

The Court of Appeal’s judgment has introduced a significant risk to Employers everywhere who, in the event of a specified default, will face the proverbial sword of Damocles for the remainder of the contract. 

Contrary to the way in which the construction industry has operated the JCT termination provisions (since the current wording was introduced in the 2005 JCT suite), Employers will now be subject to a ‘two strikes and you’re out’ regime.  If they are late making a single payment, even by one day, the Contractor will inevitably serve a default notice.  If it happens again; the Contractor may terminate – even if the previous late payment is promptly cured.  This will be a potentially powerful tool in the armoury of a Contractor that wishes to exit an unprofitable project.

Employers currently in contract should review the existing termination provisions to establish whether the standard clauses (addressed by the judgment) are incorporated.  If they are, then the Employer must ensure that knowledge of the consequences of committing a specified default are cascaded down to the project team and its colleagues, particularly including finance departments that process payments.  Employers should also think carefully as to whether any working practices can be adopted to reduce the risk of committing a specified default – for example, introducing expedited payment practices.  As with all payments in construction contracts, it is crucial that those managing projects strictly comply with the relevant payment regime because this judgment has obvious and more far-reaching consequences than a smash and grab adjudication or a suspension of the works by the Contractor.

Employers entering into contract on the JCT Form (noting that the 2024 version has retained the disputed wording) should carefully consider the termination provisions in light of this judgment.  Devonshires has already advised clients on how to amend the JCT provisions to ensure that Employers are not inadvertently caught by these clauses – so that the effects of this judgment remain purely academic and consigned to the law reports.