Supreme Court clarifies accrued rights of termination under JCT Design & Build Contract

The question before the court was narrow but significant:

Can a Contractor terminate under clause 8.9.4 for a repeated specified default if the earlier default was cured within the 28-day period and therefore did not give rise to a right to terminate under clause 8.9.3?

The Facts:

In February 2019, the Employer engaged Providence Building Services Limited ("Contractor") for the construction of a number of buildings in London under an amended JCT D&B 2016 (“Contract”). During the works, the Employer failed to make payments by the specified final payment date.

• Payment 27: The Employer failed to make the required payment by the final payment date, 15 December 2022. The Contractor served a notice of specified default under clause 8.9.1 of the Contract on 16 December 2022. The Employer, however, did make payment within the 28-day period on 29 December 2022, which allowed the default to be cured in the contract. This period had been amended by the parties from the standard form JCT D&B 2016, which allows 14 days.
• Payment 32: The Employer again failed to make the payment by the final payment date, 17 May 2023. On the 18 May 2023, the Contractor terminated the Contract under clause 8.9.4, arguing this was a repetition of the earlier specified default.

The Contractual Mechanics:

Clause 8.9 enables a Contractor to terminate where:

1. Clause 8.9.1 - The Employer commits a “specified default”, such as non-payment by the final payment date, and the Contractor issues a notice specifying the default.
2. Clause 8.9.3 - The default continues for 14 days, or in this case 28 days, from receipt of the notice and within 21 days of the expiry of the notice period the Contractor serves a further notice to terminate.
3. Clause 8.9.4 - If the Contractor does not give further notice, but the Employer repeats a specified default, then the Contractor can terminate within 28 days.

The High Court:

The High Court held that if the earlier breach was cured within the period, no right accrues, and clause 8.9.4 cannot be relied upon to terminate following a repeated default. The judge rejected the Contractor’s claim that the Employer could deliberately delay every payment by 27 days to stop the Contractor from terminating the contract. The judge pointed out that the Contractor had various other tools to protect its cash flow, such as suspending the works, claiming statutory interest, and using adjudication.

The Court of Appeal:

The Court of Appeal disagreed. It held that:

• The phrase “for any reason” in clause 8.9.4 is broad enough to include a situation where a clause 8.9.3 right never accrued.
• The structure and wording of clause 8.9 mirrored clause 8.4 (termination by the Employer), where repetition does not depend on a previously accrued termination right.

The Court of Appeal upheld the right to termination.

The Supreme Court:

The Supreme Court held that to rely on clause 8.9.4, a Contractor must have firstly gained an accrued right to terminate under clause 8.9.3 as they operate parasitically, there is not a free-standing termination right. If the Employer cures the earlier default within the 28-day period, in this case by making the payment, that gateway never opens and clause 8.9.4 cannot be triggered, even if the same default occurs again.

This interpretation avoids making the opening words of clause 8.9.4 meaningless. It also produces a sensible commercial outcome, where immediate termination is only available where the earlier breach was serious enough to remain uncured.

The Supreme Court focused on the contract’s structure and wording:

• The court explained that clause 8.9.4 depends on clause 8.9.3. This is clear because clause 8.9.4 begins by referring to the Contractor not giving the “further notice” set out in clause 8.9.3. If clause 8.9.4 were intended to operate independently, that introductory wording would be unnecessary; the clause would simply begin by stating that termination is permitted if the Employer repeats a specified default.
• There is no reason why the termination scheme should be symmetrical, because the contractual obligations of Employers and Contractors are very different. Clauses 8.4 and 8.9 operate differently: they prescribe different time periods; clause 8.4 includes failure to comply with clause 7.1 as a potential specified default; and the parties deleted the reference to clause 7.1 from clause 8.9, indicating an intention that the provisions operate differently. Clause 8.4.3 also expressly refers to the possibility that the default has ended, whereas clause 8.9.4 does not.
• The Court also noted that permitting termination for any repeated late payment would lead to commercially extreme outcomes.

Practical Implications:

1. Repeated late payments do not automatically justify termination - A Contractor faced with persistent late payments that are cured cannot rely on clause 8.9.4 to bring the contract to an end.  If the default is cured within the 14-day period, or any period agreed to by the parties, the Contractor cannot terminate immediately for a later repeated late payment.
2. Amendments to JCT D&B 2016 & 2024 - Parties will need to agree amendments to clause 8.9 if they intend to give Contractors wider termination rights for repeated late payment. Parties should consider amending the 28-day cure period or the threshold for what constitutes as a persistent late payment.
3. Termination remains a last resort - Contractors should rely on other remedies, including adjudication, suspension and statutory interest, where late payment produces cash-flow difficulties.
4. Unlawful termination attempts carry high risk - In this case, the Contractor’s purported termination was unlawful and amounted to a repudiatory breach, exposing it to substantial consequences including damages, loss‑of‑profit claims, and potential delay liabilities.