What is a specified default termination provision in construction law?

In a recent case, a judgment was handed down in the Court of Appeal which has provided clarification concerning termination for repeat of a specified default by an employer under a JCT contract. Alex Walmsley, associate solicitor in our construction team, looks at the significance of this clarification, and what happens when an employer repeats, rectifies and then repeats a previous breach of contract.

What is a specified default?

Under the JCT standard forms of contract, there are a number of mechanisms which permit both the employer and the contractor to terminate the contract in certain scenarios, including due to a specified default being a persistent and material breach of contract by the other party.

Typical examples of such breaches include the default of the employer in making payment when due, or a default by the contractor to proceed regularly and diligently with the completion of the contract works. Both examples are types of a specified default under the JCT standard suite of contracts.

In the scenario of a specified default occurring, there is a two-step process that evolves such a default to establishing valid grounds for termination of the contract.

This involves serving a notice of the specified default, and subsequently if certain conditions are met, a notice of termination of the contract.

The case: Providence v Hexagon

Providence brought a claim seeking a declaration against Hexagon concerning whether the right to terminate the contract had validly arisen.

Hexagon employed Providence pursuant to an amended JCT design and build contract 2016 for the construction of multiple buildings in London, with a contract value of approximately £7.2 million (the contract).

Clause 8.9 of the contract listed specific grounds of employer default which entitled Providence to serve a specified default notice under clause 8.9.1.1, which further entitled Providence to serve a termination notice if not remedied as follows:

• Any failure by Hexagon to make payment by the final date for payment entitled Providence to serve a specified default notice under clause 8.9.1.1;
• Providence was entitled to serve a termination notice in the event that the specified default continued for 28 days from receipt of a notice under clause 8.9.1 on the expiry of this period, or within 21 days thereafter.
• If Providence did not serve a termination notice, but Hexagon repeated the same specified default within 28 days, Providence was entitled to terminate the contract.

Part way through the project, Providence issued an application for payment which was certified by Hexagon’s employer’s agent. Hexagon were obliged to make an interim payment of £260,000 by 15 December 2022.

Hexagon failed to make payment and the following day, so Providence served a specified default notice pursuant to clause 8.9.1 of the contract.

Hexagon made payment 13 days after service of the specified default notice, therefore the right to terminate did not arise under clause 8.9.3 and the project continued.

Some months later, the scenario repeated itself, with Hexagon failing once again to make payment of sums due under the contract by the final date for payment. Providence proceeded to serve a termination notice, pursuant to clause 8.9.4, relying on the first specified default in December 2022.

Hexagon made payment of the amounts outstanding and accepted, what it interpreted to be, Providence’s repudiatory breach of contract in service of the purported termination notice.

A dispute arose as to whether the contract had been validly terminated by Providence. The matter was referred to adjudication, in which Hexagon were successful in arguing that Providence had no right to terminate the contract. Providence then issued a part eight claim in the TCC to have the decision reconsidered.

The decision

Providence issued a claim for a determination as to whether the right to terminate under clause 8.9.3 of the contract needed to arise before a termination notice under clause 8.9.4 could be utilised.

The judge in the original TCC case, Adrian Williamson KC, sided with Hexagon and held that a contractor could not give valid notice under clause 8.9.4 of the contract in circumstances where the right to serve a termination notice under 8.9.3 has not yet accrued.

He held that nothing in the wording of clauses 8.9.3 or 8.9.4 envisaged that, where a specified default had been remedied within the 28-day period, a right to terminate for a repeat default outside of the 28-day period would arise.

Circumstances where a termination notice under clause 8.9.3 could have been given, but the contractor deciding against serving such notice, did not allow a termination notice to be validly served in the event of a repeated specified default, as the wording of the clauses envisages an active step being taken by the contractor.

However, upon further appeal by Providence to the Court of Appeal, a different view was adopted. On appeal, Lord Justice Stuart-Smith disagreed with the TCC’s strict interpretation of the clauses and concluded that the words allowing a termination notice to be served for any reason in clause 8.9.4 were broad enough to cover situations where a contractor had not previously served a termination notice because it had not accrued a right to do so under 8.9.4.

It was held that the natural and probable meaning of clause 8.9.4 allowed for notice of termination to be served upon a repeated specified default notwithstanding that the right to terminate on the basis of the first specified default under 8.9.3 never arose. Providence was therefore successful in their appeal.

Implications moving forward

This Court of Appeal decision is an interesting one as it goes against the norm that we often see by the courts of applying an extremely strict interpretation of contractual terms, particularly those of this nature surrounding rights of termination, which have the most severe consequences under a contract.

This decision will be welcomed by contractors who are plagued with repeat poor paying employers, as this gives rise to a right to terminate for non-payment as soon as a specified default which has been subject to a specified default notice is repeated, even if the original default was immediately remedied upon service of that original notice.

However, this judgment puts contractors at greater risk if they are served with a specified default notice relating to the progress of the contract works. There are certainly more scenarios where this decision could work against contractors, rather than work for them, as normally the only default employers fall foul of is its payment obligations.

Parties will now be more likely to utilise the specified default notice procedure to facilitate the early termination of contracts due to repeated and persistent breaches of contract. Contractors and employers should pay close attention to the list of specified defaults when negotiating their contracts, particularly in light of this most recent decision.

The right to terminate for repeatedly missed interim payments is a powerful tool for contractors.  Whilst it is open to a contractor to run a smash and grab adjudication to obtain payment of a missed interim payment, there was previously always the risk that the employer would pay up following an adjudication but the simply not pay the next interim payment putting the contractor to significant cost of running consecutive smash and grab adjudications where the costs are not recoverable.

Now the contractor has a new powerful tool in terms of the right to terminate for repeated failure by the employer to make payment when due.

When faced with a non-payment we would now advise the contractor to immediately serve a specified default notice and then commence a smash and grab adjudication if payment is not made.  If the Employer then defaults on a subsequent payment, the contractor can terminate forthwith.

Harrison Drury has a dedicated team who can advise and represent you on similar matters. To make an appointment, please contact us on 01772 258 321.