Providence v Hexagon JCT Termination: Two strikes and you’re out

The Court of Appeal has provided a ruling on how the termination for specified default regime in the JCT form of contracts should be construed. In a nutshell, once the guilty party has committed, and the innocent party has notified a specified default, any repetition of the same category of specified default by the guilty party gives the innocent party an entitlement to terminate. 

To many this will come as no surprise, but in reaching this decision the Court of Appeal overturned the first instance judgment of the High Court. 

The facts

Hexagon (as Employer) employed Providence (as Contractor) under a contract based on the JCT D&B 2016 (the Contract).

The Contract included the standard JCT terms as to termination (amended only to extend 14 days to 28 days in clause 8.9.3, and to amend “upon or within a reasonable time” in clause 8.9.4 to “upon or within 28 days”), in particular under clause 8.9 that:

“8.9.1.1 If the Employer does not pay by the final date for payment the amount due to the Contractor in accordance with clause 4.9 […] the Contractor may give to the Employer a notice specifying the default or defaults (a ‘specified’ default or defaults).

[…]

8.9.3 If a specified default or a specified suspension event continues for 28 days from the receipt of notice under clause 8.9.1 or 8.9.2, 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.

8.9.4 If the Contractor for any reason does not give the further notice referred to in clause 8.9.3, but (whether previously repeated or not) 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 under this Contract.”

Hexagon failed to make a payment no. 27 by the final date for payment, and Providence gave it a notice of specified default. Hexagon corrected its default within the 28 days stipulated in clause 8.9.3 i.e. before Providence became entitled to terminate under clause 8.9.3.

Hexagon then failed to make payment no. 32 by the final date for payment. Providence purported to terminate the Contract under clause 8.9.4, on the basis that Hexagon had repeated a specified default. Hexagon argued that Providence was not entitled to terminate the Contract under clause 8.9.4, in circumstances where an entitlement to terminate under clause 8.9.3 had not previously arisen. 

Judgment

This case is about how clauses 8.9.3 and 8.9.4 should be construed, and the High Court and Court of Appeal came to different views on the “ordinary and natural meaning” of the words.

The judge at first instance disposed of the issue in four short paragraphs of his judgment. In his view, the condition in clause 8.9.4 that the Contractor “does not give” a clause 8.9.3 termination notice meant that in order to be entitled to terminate under clause 8.9.4 (for repeated specified default) the Contractor must first have become entitled to terminate under clause 8.9.3 (for failure to remedy a specified default within 28 days) but had chosen not to exercise that clause 8.9.3 entitlement. 

This was, the judge decided, because the phrase “does not give” a clause 8.9.3 termination notice includes, as part of its ordinary and natural meaning, that the Contractor could have given (or was entitled to give) such a notice. The judge also decided the ordinary and natural meaning of the words “for any reason” did not extend to the Contractor not being entitled to provide such a notice.

Lord Justice Stuart-Smith (and Lord Justices Coulson and Popplewell) in the Court of Appeal disagreed.

In the view of the Court of Appeal, the meaning of the phrase “does not give” means no more and no less than that a clause 8.9.3. notice of termination must not have been given. It does not extend to such a requirement having arisen but not been exercised. If that was what the parties had meant they would presumably have said so. 

Equally, the Court of Appeal decided the meaning of the phrase “for any reason” meant any reason. In their view, “any reason” extends to a clause 8.9.3 notice of termination not having been given because no such entitlement had arisen. 

Discussion

In the view of the Court of Appeal, the judge at first instance appears to have given the words of clause 8.9.4 a meaning which went beyond the ordinary and natural. Such an approach can of course be justified, for example if there is ambiguity and business common sense requires such a meaning.

However, as the Court of Appeal noted, “the gloss for which Hexagon contends is not supportable”. Although the drafting of the JCT “could have been of better quality”, it was not ambiguous. As to business common sense, as is so often the case when Rainy Sky considerations come into play, although there were competing arguments “neither argument is compelling; but neither is without any commercial sense”. And so neither argument was of much assistance to the Court. 

What does not appear to have been part of the submissions, or the judgment, is the fact that clause 8.9.4 is fundamentally concerned with giving the innocent party a right to terminate when the guilty party repeats a specified default. It is not about ensuring the guilty party must first be ‘given a life’, by the innocent party previously accruing but electing not to use an entitlement to terminate.

This does beg the question, if it is not given the meaning on which the High Court alighted, what is the purpose of the phrase:  

“If the Contractor for any reason does not give the further notice referred to in clause 8.9.3 […]”

The phrase could be construed as intending to make clear that if the innocent party declines to exercise a clause 8.9.3 right to terminate, this does not amount to a waiver of the right to terminate when the same specified default is repeated. The phrase is about preserving the right to terminate, rather than imposing preconditions.

The Court of Appeal’s judgment has practical implications for both employers and contractors. The first point to note is that although the judgment concerns the contractor’s right to terminate for the employer’s repeated specified default, the same rationale would apply to the employer’s right to terminate for the contractor’s repeated specified default.

The second point is that this can place both the employer and the contractor on thin ice. Once a specified default has been committed and notified, the guilty party is liable to be on the wrong end of a termination if it repeats the same specified default at any time. For employers, this can have drastic consequences (for example) in relation to the interim payment regime, as illustrated in the present case. For contractors, the same applies (for example) in relation to a failure to proceed regularly and diligently.

That is what the JCT D&B contract provides for, although whether the parties wish to amend the termination regime as part of contract negotiations will no doubt come under increased scrutiny in the light of this judgment.