Court of Appeal provides clarity on contractor's right of termination under JCT 2016 D&B

The lawful triggers for termination by a contractor under a JCT Design and Build 2016 contract were dealt with in a recent Court of Appeal decision (Providence Building Services Ltd v Hexagon Housing Association Ltd.). 

The court itself acknowledged that its decision put employers on "thinner ice", and the outcome of the case illustrates why this particular clause (which is replicated in JCT 2024) is sometimes excluded from the standard form contract by employers. 

Trigger for termination 

Broadly, if the employer defaulted, the contractor could issue a notice of default under clause 8.9.1. Should the employer's default persist for an additional 28 days after this notice, clause 8.9.3 permitted the contractor to terminate its employment by issuing a further notice. 

According to clause 8.9.4, if the contractor did not issue this further notice and the employer repeated the default, the contractor could terminate the contract within 28 days of the repeated default. 

The employer defaulted by not paying a sum by the due date, but did pay shortly after the 8.9.1 notice. The contractor could not, therefore, terminate under 8.9.3 because the default did not continue for 28 days. However, when the employer defaulted again by paying late, the contractor issued a termination notice under 8.9.4. 

Was the repeated employer default a sufficient trigger for the contractor to terminate, in spite of the fact that the first default had been remedied before a contractor entitlement to terminate had arisen? Or did that only apply when it had had an entitlement to terminate the first time around but had chosen not to do so? 

Effect of repeated default 

Previously, the High Court had determined that the contractor, Providence, could not terminate in the circumstances. However, the Court of Appeal allowed the claimant's appeal, finding that the intention of clauses 8.9.3 and 8.9.4 was "to encourage and cause the party concerned to comply with their contractual obligations (in this case the obligation to pay by the final date), and a repetition of a previous specified default is the trigger entitling the wronged party to terminate". 

While accepting that the drafting could have been of better quality, the Court of Appeal held 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". 

In practice, this meant that Providence was entitled to terminate due to Hexagon's repeated specified default (under clause 8.9.1, in this case, for failing to meet the payment deadline on two occasions), despite Hexagon "curing" the default within the relevant timeframe. This would not have amounted to Providence committing a repudiatory breach of the contract. 

Osborne Clarke comment 

The court, responding to arguments raised by the parties on commercial sensibility, commented that "[f]or my part, I agree that the commercial consequences of Providence's interpretation represent a contractual allocation of risk that is commercially acceptable, even though it renders the Employer's ice thinner from the outset than would be the case if Hexagon's interpretation were to be adopted." 

The standard clauses within scope of this judgment are present within both the JCT 2016 and 2024 D&B forms. With the employer's contractual ice thinner following this judgment, it is recommended that parties review contracts placed on these forms and, where standard clauses 8.9.3 and 8.9.4 have been incorporated, take appropriate action.

In any event, this decision reiterates the importance of strict compliance with the relevant payment terms under contracts.

This article was written with the assistance of Dan Smithson, Trainee Solicitor at Osborne Clarke