In a final twist to the well-documented case of Providence v Hexagon, the Supreme Court has overturned the earlier decision of the Court of Appeal, finding that unless the right to terminate under clause 8.9.3 of the JCT Design and Build Contract (2016 edition) has previously accrued, a contractor will be unable to terminate its employment under clause 8.9.4 of the contract.
This article provides an update on Supreme Court’s decision and explains why this is an important outcome for the construction industry.
We have reported on the case since it was first heard in the Technology and Construction Court through to the Court of Appeal in the following articles.
The Technology and Construction Court found that Providence’s right to terminate under 8.9.4 did not arise as the right to terminate had not first accrued under clause 8.9.3 (by virtue of Hexagon rectifying its earlier failure to make payment within the relevant time period). The Court of Appeal however disagreed and found that it was not necessary that a right to terminate under clause 8.9.3 must have first accrued before the Providence could have the right to terminate its employment under clause 8.9.4.
In reaching its decision, the Court of Appeal took a holistic approach when interpreting the wording of clause 8.9.4, factoring in the case as a whole, the context of the above clauses (as well as the whole contract) and previous forms of the JCT.
The key question for the Supreme Court was therefore:
"Can the contractor terminate its employment under clause 8.9.4 of the JCT 2016 Design and Build Form, in a case where a right to give the further notice referred to in clause 8.9.3 has never previously accrued?"
When interpreting clauses 8.9.3 and 8.9.4, the Supreme Court focussed first on the objective natural meaning of the words in clause 8.9.4. Whilst the Court of Appeal focused on the opening words of clause 8.9.4 referring to “any reason” the Contractor does not issue the termination notice under clause 8.9.3 to suggest that that reason could include the reason that the right to do so had not arisen, the Supreme Court disagreed. The Supreme Court considered clause 8.9.4 to be “parasitic” on clause 8.9.3 rather than being independent of it given the express mention of clause 8.9.3 in clause 8.9.4. The Supreme Court found that this wording was clear that the Contractor must have had an accrued right to terminate under clause 8.9.3 before clause 8.9.4 applies; in essence, clause 8.9.3 served as the "gateway" to clause 8.9.4.
The Supreme Court also found that Providence’s interpretation of the contract that there is no requirement that the right to terminate has previously accrued under clause 8.9.3. produced an “extreme outcome”:
It would mean that any breach by late payment (provided a specified notice of default were given by the Contractor), if repeated by any subsequent late payment, would entitle the Contractor to terminate the contract. For example, if the Employer made two late payments, each being made one day late, the Contractor, on this interpretation, would be entitled to serve a notice terminating the contract (provided a specified default notice had been served in respect of the first late payment).
The above interpretation would, in the Supreme Court’s view, serve as a “sledgehammer to crack a nut”. The suggestion the Employer would be able to challenge any such termination in that circumstance on the basis a termination notice should not be given unreasonably or vexatiously, the Supreme Court agreed with the findings at first instance that proving termination on such grounds would give scant comfort to an employer who would be tasked with undertaking the “tricky and nebulous” task of proving such unreasonable or vexatious conduct.
The Supreme Court also took issue with the approach of the Court of Appeal in comparing clauses 8.9 (termination by the Contractor for Employer default) and 8.4 (termination by the Employer for Contractor default) of the JCT Contract. The Court of Appeal concluded that because the wording of clauses 8.9.4 and 8.4.3 were very similar, they should be given the same meaning. The Supreme Court disagreed with this approach, finding it an unnecessary exercise to draw parallels between the two provisions which are very different in terms of their contractual obligations and wording and also were not intended to be symmetrical to one another.
Similar to the findings at first instance and on appeal, the Supreme Court rejected an interpretation which was based on considering previous versions of the JCT form or past judicial decisions on those previous versions. The Supreme Court also considered it unhelpful when interpreting the application of clause 8.9 to examine whether the contractor does, or does not, have other satisfactory methods of combating cash-flow problems caused by late payment. The Supreme Court concluded that if the contract failed to provide an adequate remedy for the Contractor in such circumstances, that does not give justification to distort the disputed termination so as to favour the contractor; such a matter ought to be addressed in prospective versions of the standard form.
The case provides closure on over two years’ of litigation, which first began with an adjudication in July 2023 before proceeding to the Technology and Construction Court in November 2023 and the Court of Appeal in August 2024. The case also provides sound guidance and reasoning on the principles of contract interpretation in the context of a standard form contract which is widely used within the industry.
The outcome is likely to be the cause of debate, with employers in particular favouring the reassurance that contractors cannot terminate under 8.9.4 without first accruing the right to do so under clause 8.9.3. Contractors may find the higher thresholds that apply to their right to terminate unfair in the face of repetitive late payment by an employer. Given the consequences associated with termination and the inevitable risks, contractors will need to rely on other available remedies (such as ADR or possibly suspension) in the event of non-payment (or a repeat of any other specified defaults).
For more information, please contact our construction team.
