In potentially welcome news for building contractors, the Court of Appeal has now clarified the position regarding a contractor’s right to terminate its employment for non-payment under a JCT building contract.
The Court of Appeal has decided that it is not necessary for a contractor’s right to terminate for non-payment under clause 8.9.4 of the JCT Design and Build Contract 2016 (JCT DB 2016) to have arisen before the contractor can terminate its employment under the contract.
The decision is significant because it clarifies how the termination provisions under the widely used JCT DB 2016 operate. It will also inform the interpretation of other JCT contracts which share the same/similar terms and so is worth noting for all those operating JCT contracts.
The parties in this case had entered into a contract for the construction of a number of buildings at a site in Purley in February 2019. The contract was based on the JCT DB 2016, as amended by the parties, and was valued at just over £7 million.
More than two years into the contract, the employer’s agent issued a payment notice, which required payment of approximately £260,000 to be made by 15 December 2022. The employer failed to make payment, and the contractor issued a notice of specified default under clause 8.9.1 of the contract on 16 December 2022. That clause permits a notice to be issued when a certified amount is not paid by the final date for payment. The employer made the payment on 29 December, 14 days after it became due.
The following year, the employer’s agent issued another payment notice, which required payment of approximately £360,000 by 17 May 2023. The employer again failed to make payment and the following day, on 18 May 2023, the contractor issued a notice of termination under clause 8.9.4 of the contract, which stated that:
“If the Contractor for any reason does not give [notice to terminate following notice of non-payment under clause 8.9.1] 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 under this Contract.”
The employer made payment on 23 May 2023 and argued that the notice to terminate was invalid, because the employer had remedied the December 2022 non-payment.
The question for the Court of Appeal was whether the process in the JCT clause required the right to terminate to have arisen in respect of the December 2022 non-payment (even if that right was not exercised by the contractor) in order for the contractor to terminate following the subsequent May 2023 non-payment.
The Court concluded that the right to terminate for the second non-payment arose even though the right to terminate for the first non-payment hadn’t arisen (because the employer had remedied the first non-payment within the 28-day rectification period). Once the employer had committed the first default, even though it was later rectified, the contractor then became entitled to terminate immediately in the event of a second default. While this situation may not happen that often in practice it is an important point for the parties to JCT to remember.
It should be noted that decisions such as these tend to turn on the interpretation of the express words of the clauses in question, viewed in their context, and that the English courts are reluctant to apply a wider “commercial common sense” interpretation.
Finally, whenever a party considers terminating a contract for the other party’s breach, care must be taken to ensure that the contractual termination process is followed to the letter – otherwise the purported termination could itself amount to a breach of contract.
