Providence Building Services Limited v Hexagon Housing Association Limited

Last month, the Supreme Court heard the highly anticipated case of Providence Building Services Limited v Hexagon Housing Association Limited concerning whether a right to terminate under clause 8.9.3 of the JCT Design and Build Contract 2016 (“JCT DB 2016”) must have accrued before a contractor can terminate under clause 8.9.4.

The Supreme Court recognised that the question was a short but very important one. While awaiting judgment, we look at the principal points in dispute.

Background

In February 2019, Hexagon Housing Association Limited (“Hexagon”), as Employer, and Providence Building Services Limited (“Providence”), as Contractor, entered into an amended JCT DB 2016 (the “Contract”).

In December 2022, Hexagon missed a payment date. Clause 8.9 (Default by Employer) gives a contractor the right to issue a Notice of Specified Default to its employer for various defaults (i.e. failure to make a payment by the required final date for payment). Should that default continue for 14 days from receipt of the notice, the contractor can issue a further notice under clause 8.9.3 terminating its employment under the Contract.

Accordingly, following Hexagon’s default, Providence issued a Notice of Specified Default following which Hexagon made payment within the 28-day cure period under the Contract[1].

In May 2023, Hexagon missed another payment. Relying on clause 8.9.4 Providence issued a further notice terminating its employment.

Clause 8.9.4 reads:

“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 a reasonable time after such repetition, the Contractor may by notice to the Employer terminate the Contractor’s employment [..].” [emphasis added]

Providence interpreted clause 8.9.4 as allowing a contractor to terminate its employment even when the right to issue the further notice under clause 8.9.3 had not accrued because the breach had been remedied.

Hexagon disputed the lawfulness of Providence’s termination notice and referred the issue to adjudication. The Adjudicator found in Hexagon’s favour resulting in Providence issuing proceedings.

Clause 8.9.4: Rounds 1 and 2

The judge at first instance interpreted clause 8.9.4 as meaning that the right to give a clause 8.9.3 notice must have accrued before a termination notice could be issued.

Overturning the first-instance decision, the Court of Appeal found that a contractor can terminate under clause 8.9.4 even when the right to issue a further notice referred to in clause 8.9.3 has never previously accrued.

This was controversial: in practice, it means that an unamended JCT DB 2016 allows a contractor to terminate on repeat of an employer’s default, even when the employer has remedied that default.

Supreme Court – The Final Round

Counsel for Hexagon opened by arguing that the provisions of clause 8.9 operated as a series of “gateways”; the words “for any reason” in clause 8.9.4 were otherwise superfluous.

Hexagon argued there must be a reason for the difference in wording between clause 8.9.4 and the corresponding provision in clause 8.4 (Employer’s right to terminate). Clause 8.4.3 provides,

“If the Employer does not give the further notice referred to in clause 8.4.2 (whether as a result of the ending of any specified default or otherwise) but the Contractor repeats a specified default (whether previously repeated or not), then, upon or within a reasonable time after such repetition, the Employer may by notice to the Contractor terminate that employment.” [emphasis added]

Providence submitted that the difference was small and choice of words inappropriate for the imposition of a precondition. When asked, Providence responded that clause 8.9.4 was essentially an abbreviation intending the same meaning as clause 8.4.3.

Important points on interpretating standard forms were also raised. The parties disputed whether, when interpreting standard forms, greater weight should be given to the intention of the draughtsman or the contracting parties. The Court also queried the use of previous iterations of standard forms, guidance thereto and the reasonableness of expecting contracting parties to be aware of these. It will be interesting to see what the Supreme Court has to say on those points in its judgment.

Commercial Concerns

As to the parties’ commercial positions, the first-instance judge observed that a contractor has a battery of weapons available to protect its cash flow without resorting to termination; yet, the Court of Appeal found that none of these weapons provided a satisfactory and immediate solution to the typical case of late payment.

The Supreme Court also addressed mischief and the risk of enabling an employer to consistently pay at the end of a payment cycle.

Hexagon argued that the possibility of an employer getting rid of a contractor by forcing it into insolvency was extreme; much more likely was that a contractor would exploit termination under clause 8.9 for reasons other than addressing short-term cash-flow, such as to extricate itself from a contract or to renegotiate terms. The greatest mischief lay in allowing a contractor to terminate with relative ease, at great cost to the employer and immediately on the repetition of a specified default, in circumstances where the first default had been cured within the cure period, especially given a contractor has other remedies to resolve late payment including the right to suspend.

Providence disputed that suspension was a remedy to late payment; it related to individual late payments and would be a “chaotic” way to respond to repeated late payment. Providence argued that its case better served the aim of clause 8.9, being to incentivise compliance and remedy repetitive late payment. If an employer was able to consistently pay late provided that no delay exceeded the cure period, the remedy was worthless.

Looking Ahead

The judgment will be of significance to the industry, as contractors often work on fine margins and rely on timely payment. It will be interesting to see how the Supreme Court weighs the competing arguments regarding mischief and consequences.

The Supreme Court may also provide guidance on issues of interpretation of standard forms, on which the industry relies.

Whatever the outcome, employers and contractors will need to consider carefully whether, on any project, they are happy with the decided position or whether clause 8.9.4 needs to be amended.

If you would like to discuss the implications of this case for your projects, please contact Zoë Deckker, Brenna Baye or any other member of our Construction team.

[1] The parties had amended clause 8.9.3 of the JCT DB 2016 to allow for a 28-day, rather than the standard 14-day, cure period.