The Contract
In Providence Building Services Ltd v Hexagon Housing Association Ltd,[1] the Court of Appeal overturned the High Court’s[2] interpretation of a commonly used standard form design and build contract, regarding a contractor’s right to terminate for repeated late payment.
The case concerned a £7.2 million construction contract between Hexagon Housing Association Limited (the Employer) and Providence Building Services Limited (the Contractor). The parties had used an amended version of the standard form JCT Design and Build Contract 2016 (DB 2016) (the Contract).
The Contract’s terms on termination for late payment
Clause 8.9 of the Contract contains a mechanism whereby the contactor can terminate for continued or repeated late payment by the employer.
The relevant provisions are clauses 8.9.1, 8.9.3 and 8.9.4 (author’s emphasis).
Default by Employer
Clause 8.9.1
If the Employer … does not pay by the final date for payment … the Contractor may give to the Employer a notice specifying the default … (a ‘specified’ default) …
Clause 8.9.3
If a specified default … continues for 28 days[3] from the receipt of notice under clause 8.9.1 … 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.
Clause 8.9.4
If the Contractor for any reason does not give the further notice referred to in clause 8.9.3, but … 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 …
The Employer’s two late payments
Strike one
In December 2022, the Employer missed a final due date for payment and the Contractor sent a notice of specified default (First Default). The 28-day clock in clause 8.9.3 started to run.
However, the Employer then made late payment in full before the 28-day deadline expired. As the Employer’s default had been cured before the 28-day deadline, the Contractor’s right to terminate under clause 8.9.3 by sending a further notice did not arise.
Strike two
In May 2023, the Employer again missed a final due date for payment (Second Default).
This time, the Contractor issued a termination notice under clause 8.9.4. The Contractor referred to the First Default and that by again missing a payment, the Employer had repeated a specified default and the Contractor was now terminating the contract.
The Employer disputed the Contractor’s interpretation of clause 8.9.4 and the right to terminate for the Second Default.
The rival interpretations of clause 8.9.4 – two strikes and you’re out?
The parties were at odds over when the Contractor’s right to terminate for repeated specified default was triggered.
Their different interpretations centred on the meaning of the words “for any reason does not give” in clause 8.9.4.
Employer's interpretation
The Employer’s interpretation emphasised the words “does not give”.
The Employer claimed that a contractor can only terminate under clause 8.9.4 for a second default if the first default had continued past the 28-day period, entitling the contractor to terminate for that first default under clause 8.9.3.
In other words, the right to terminate for a repeated default required an accrued right to terminate for the previous default.
The Employer argued that because it had cured its First Default, and the Contractor’s right to terminate under clause 8.9.3 had never arisen, there could be no right under clause 8.9.4 to terminate for the Second Default.
The Employer argued that this interpretation makes commercial sense, because it prevents trigger-happy contractors terminating for a repeated but minor delay in payment or underpayment.
Contractor's interpretation
The Contractor’s interpretation emphasised the words “for any reason”.
The Contractor claimed that an employer’s second default triggers the Contractor’s right to terminate under clause 8.9.4.
It did not matter that the Employer had cured its First Default before triggering the Contractor’s right to terminate under clause 8.9.3. The right to terminate under clause 8.9.4 was triggered by the Second Default and did not require a previous right to terminate for the First Default.
The Contractor argued that this interpretation makes commercial sense, because otherwise an employer could make every payment late without the risk of termination.
Adjudicator favours the Employer’s interpretation
The Employer referred the matter to adjudication.
The adjudicator agreed with the employer’s interpretation and consequently that the Contractor did not have the right to terminate.
High Court favours the Employer’s interpretation
The Contractor took the matter to the High Court and sought a declaration as to the proper construction of clause 8.9.4.
The High Court agreed with adjudicator and favoured the Employer’s interpretation
In the High Court judge’s view, the natural and ordinary meaning of “does not give” in clause 8.9.4 involves the contractor taking an active step – that is, a clause 8.9.3 notice could have been given, but the contractor decided not to do so. “For any reason” simply means the contractor may have decided not to give the 8.9.3 notice for any reason. But where the specified default was cured, the contractor did not have any right to “give” a clause 8.9.3 notice, and therefore it could not decide not to give it for the purposes of clause 8.9.4.
Rejecting the Contractor’s argument that this interpretation resulted in a harsh and uncommercial result for contractors faced with serial late-payers, the High Court noted that contractors have a battery of weapons available to protect their cash flow, including the right to suspend works, statutory interest and adjudication.
Court of Appeal overturns High Court and favours the Contractor’s interpretation
The Contractor appealed to the Court of Appeal. The Court of Appeal disagreed with the adjudicator and the High Court and favoured the Contractor’s interpretation.
The Court of Appeal noted that the interpretation of standard form contracts involves an intense focus on the words, and that it was vital to view those words in the context of the rest of clause 8.9. While clause 8.9.3 deals with the consequences of a continued specified default, 8.9.4 deals with the consequence of a repeated specified default.
The Court of Appeal found no basis for implying an active step, decision, or particular reasons for the decision into the words “does not give” in clause 8.9.4. While the drafting of the standard form could have been of better quality, the natural and probable meaning of “for any reason does not give” includes where the reason for not having given the 8.9.3 termination notice was because the previous default was cured and the right to give that notice did not arise.
In other words, for the purposes of clause 8.9.4, the trigger for termination is repetition of a previous specified default, which does not require a previous right to terminate.
Previous versions of the standard form contract
The Court of Appeal cautioned in general against archaeological digging for differences in the wording of previous versions of a standard form contract, as an aid to construction. Such comparison is useful only where changes in the wording are known to have been made in response to court decisions, changes in legislation or widely publicised events.[4] Similarly, the Court of Appeal discouraged digging for committee drafting notes as it adds unnecessary time and expense to the task of interpretation.[5]
However, in this case, it was accepted that the previous versions of the standard form contract supported the Contractor’s interpretation. Furthermore, there were two previous cases concerning the equivalent of clause 8.9 in the previous versions of the standard form, and these decisions were also consistent with the Contractor’s interpretation. The Court of Appeal drew particular attention to comments in one of these decisions:[6]
… an employer who has defaulted once on his payment obligations is skating on thin ice… If the default is not rectified or there is a further similar default, the contractor is entitled to give notice of termination…
The Court of Appeal found there was nothing to suggest that any differences in the wording of the current version had been made in order to produce a different, more employer-friendly commercial result.
The Court of Appeal noted that clause 8.9 sought to encourage parties to comply with the obligation to pay by the final payment date, and that both parties’ interpretations made commercial sense.
However, the Court of Appeal was satisfied that the plain meaning of the words, full context of the rest of the clause and previous versions of the standard form favoured the Contractor’s interpretation.
The Court of Appeal was not persuaded by the High Court’s reliance on a contractor’s battery of other remedies to deal with serial late payers, and remarked that the Contractor’s interpretation resulted in an allocation of risk which was commercially acceptable, even though it renders the Employer’s ice thinner from the outset.
Conclusion – skating on thin ice
The JCT Design and Build Contract 2016 is a very popular standard form contract. An updated 2024 version was released a few months ago (shortly before the Court of Appeal’s decision). While the new version brings in various changes, the clause 8.9 termination provisions remain the same.
The Court of Appeal’s decision is therefore welcome reassurance for contractors using this standard form who are dealing with serial late-paying employers – and an equally important warning for employers that the ice may be thinner than they think.
References
[1] Providence Building Services Ltd v Hexagon Housing Association Ltd [2024] EWCA Civ 962.
[2] Providence Building Services Ltd v Hexagon Housing Association Ltd [2023] EWHC 2965 (TCC).
[3] The parties had amended this from 14 days in the standard form.
[4] Seadrill Management Services Ltd v OAO Gazprom [2010] EWCA Civ 691.
[5] The Rewa [2012] EWCA Civ 153.
[6] Ferrara Quay Ltd v Carillion Construction Ltd [2009] BLR 367 at [88] and [89]; and Reinwood Ltd v L Brown & Sons Ltd [2007] BLR 10.
