Providence Building Services Limited v Hexagon Housing Association Limited [2024] EWCA Civ 962

Construction law solicitor, Taiwo Temilade, takes a look at recent case law resulting in a significant decision regarding payment and contractor’s termination rights under the JCT D&B 2016, but are there unintended consequences?

On 15 August 2024, the Court of Appeal made a groundbreaking decision that has significant implications for a contractor’s ability to lawfully terminate in default for repeated instances of nonpayment by an employer.

The Court of Appeal ruled in favour of a contractor, Providence Building Services Limited (“Providence”), which exercised its common law right to terminate the contract under Clause 8.9.4 of JCT Design & Build 2016, even though the right to issue a notice under Clauses 8.9.3 had not yet accrued.

In the initial judgment, the employer, Hexagon Housing Association Limited (“Hexagon”) argued that Providence was not entitled to terminate the contract under Clause 8.9.4, and that Providence had committed a repudiatory breach by doing so, despite the employer’s own repeated failure to strictly adhere to the payment provisions of the contract.

Per the unamended JCT Design & Build 2016, a contractor retains the right to terminate its employment by providing further notice to an employer after 28 days from the issuance of the initial notice of default under Clause 8.9.1 or 8.9.2. A contractor can effect termination within 21 days following the expiration of the 28 day period by serving a further notice to the employer in accordance with Clause 8.9.3.

Case of Providence Building Services Limited v Hexagon Housing Association Limited [2024] EWCA Civ 962

The Court of Appeal ultimately decided that the wording of the Clauses from 8.9.1 to 8.9.4 in conjunction with the interpretation of their “natural and ordinary” meaning, meant that Providence was entitled to terminate the contract due to the multiple breaches in default by Hexagon.

In practical terms, the ruling means that even if a contractor does not give further notice as detailed by Clause 8.9.3, but a specified default is repeated by an employer (such as nonpayment) or a specified suspect event continues, a contractor can still terminate its employment under the contract within 28 days by giving notice to the employer under Clause 8.9.4.

Analysis

This is a decision that is undoubtedly a big win for contractors in terms of receiving on time payment and resolving potential disputes:

1. It provides greater protection of a contractor’s cash flow and therefore its own contractual obligations downstream.
2. It enables contractors to terminate a contract, without risking a repudiatory breach, where an employer has repeatedly failed to observe contractual payment provisions.
3. Practically, it provides a viable tool for contractors to resolve potential upstream disputes in a quicker and more definitive manner.

Despite the benefits this decision brings to contractors, a more pertinent question must be asked: Is this how the JCT intended Clauses 8.9.3 and 8.9.4 to be applied in practice?

On appeal, Hexagon maintained that a contractor would essentially have open recourse to terminate in default for the remainder of a contract even where an employer has remedied defaults within the 28-day period detailed by Clause 8.9.3.

Hexagon warned that, given the seriousness of termination and the implications upon the parties, it should be based on significant breaches of the contract. The effect of termination upon a programme, particularly under a design & build contract, has serious consequences for any employer who will need to utilise its step in rights and take on additional liability on an urgent basis.

For employers already subject to the JCT Design & Build 2016, where Clause 8.9 has not been amended, the Court of Appeal’s decision instantly changes the nature of its relationship with contractors as the decision does not fully advise on the effect of Clause 8.9.4 in respect of multiple defaults by an employer.

The decision suggests that, at a minimum, two nonsequential default events in respect of nonpayment can enable a contractor to terminate in default if it so chooses. This presents a potentially troublesome prospect for employers as this is a relatively thin margin for termination that is not necessarily in its commercial interest.

These points may resonate with various employers, many of whom will have internal factors and external realities they may have to contend with in respect of construction works. We expect that Clause 8.9 will be of particular focus for employers seeking to amend the JCT Design & Build 2016 in pre-tender to ensure greater clarity as it relates to termination in default.

If you have any questions regarding a construction contract or any element of construction law, our specialist construction solicitors can help.