The relatively recent Court of Appeal decision of Providence Building Services Ltd v Hexagon Housing Association Ltd (2024) sets out a strict interpretation of the termination provisions within JCT Design and Build Contracts. The decision may have commercial implications for employers utilising this standard form. More broadly, it highlights the court’s approach of strict interpretation of contracts between commercial parties. Construction professionals must be aware of this when signing up to their appointments, collateral warranties, and letters of reliance.
What happened in Providence v Hexagon?
Hexagon (the Employer) had appointed Providence (the Contractor) under the JCT Design and Build Contract 2016. The termination provisions with this JCT contract set out remedies in the event of late payment of fees.
Hexagon was late with a payment in December 2022. The contract allowed Providence to issue a notice of a ‘specified default’ under clause 8.9.1. If Hexagon had not remedied this within 28 days of the notice, then Providence could have given notice of termination under clause 8.9.3. However, Hexagon shortly made the payment, remedying the situation. Providence therefore could not serve the termination notice since it was remedied.
Several months later, Hexagon was again late with a payment. Clause 8.9.4 states that if the Contractor, for any reason, fails to give the further notice referred to in Clause 8.9.3, and there is subsequently a repeated specified default, then the Contractor may issue a termination notice. Providence immediately served a termination notice.
Hexagon objected to this on the basis that a right to terminate never arose under clause 8.9.3 since the situation was remedied within the 28-day period.
The Court of Appeal held that, upon interpreting clause 3.9.4 in its natural and ordinary meaning, the right to issue the termination notice only requires that: (1) the notice of specified default is given via clause 8.9.1; (2) the Contractor fails to issue the notice of termination via clause 8.9.3 for any reason, and; (3) the specified default is repeated. There is no mention of the need for a right to terminate to have arisen under clause 8.9.3, only that the Contractor did not issue the termination notice in the first instance for any reason. It was irrelevant that the reason that the Contractor had not issued the notice under clause 3.9.3 is because they didn’t have the right.
As such, Providence had legitimately terminated the contract.
The lower court had decided against this decision on the basis that this would result in an uncommercial right to terminate for the Contractor in the event that the Employer is only very slightly late in payment. Effectively, an Employer could be one day late in payment, then the next payment could be one day late again, and the Contractor could terminate the contract. This was not likely to be what the parties had in mind. However, it is the natural and ordinary meaningof the words, and it is what the parties had agreed. It is not for the courts to step in and ‘fix’ ambiguous wordings in contracts to fit what one thinks it should mean.
It is worth noting that the termination provisions set out in the 2024 version of the JCT Design and Build Contract are the same as the 2016 version. Therefore, this matter is relevant to any parties utilising the present form in its off-the-shelf condition, and is an additional string to the Contractor’s bow to protect their cash flow.
Courts will take you at your word
All professionals entering into contracts should be mindful of the courts’ willingness to interpret contracts in their natural and ordinary meaning. The situation under inappropriate contractual terms may not be saved on the basis that one party ‘would never do that’ or ‘that is not how it would work on site’. Long-form contracts frequently supersede informal agreements, previous exchanges of email and original shorter-form contracts, wiping out any limits that may have been agreed previously.
Unintended duties can also arise when the parties are not alive to the natural and ordinary meaning of the obligations in contracts. For example, parties may agree informally that no supervisory duties are involved in the engagement. They may even ensure that no such obligations are included within the scope of services. However, contractual terms may create this obligation regardless, which could then be exploited by an opportunistic claimant later down the line (particularly if the contract is assigned).
Consider this clause: ‘An obligation on a party not to do something includes an obligation not to allow that thing to be done’. While it may appear innocuous, it may actually create a duty to supervise other parties. To not allow a party to do something involves active engagement: likely a site presence, likely across the lifespan of a project. This one word, ‘allow’, drastically changes the meaning of the clause.
What are the impacts for Professional Indemnity Insurance?
Parties signing up to formal contracts should be mindful of the natural and ordinary meaning of the terms to which they agree. Contracts should clearly and unambiguously set out the duties of the parties, and service-based obligations should be drafted in terms of reasonable skill and care to avoid arguably inequitable and therefore uninsured claims.
Recommendations:
Employers utilising a JCT Design and Build contract should be careful to make payments on time to avoid the contractor being entitled to terminate the contract.
On the flip side, contractors should be aware of their options built into JCT Design and Build contracts.
Contracts should clearly set out the intent of the parties, without any ambiguity to avoid outcomes that neither party intended.
Care must be taken to avoid introducing additional duties in contract that the parties did not intend (e.g., supervisory duties).
Seven steps to getting your contract right | Lockton (opens a new window)
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