Many mainstream construction contracts provide for termination of contract on grounds of repeated breach as well as for unremedied breach. So, what happens if a breach is remedied but is subsequently repeated? Is the “innocent party” entitled to terminate the contract immediately, without having first to give a cure notice (a notice threatening termination in default of remedy)?
This question was the subject of a dispute between two parties to a 2019 contract in which Hexagon Housing Association (Hexagon) engaged Providence Building Services (Providence) to design and construct several buildings in London, UK. They contracted on an amended version of JCT Design and Build 2016 – a published standard form. Relevant provisions were:
Clause 8.9.1: “If the Employer does not pay by the final date for payment the amount due to the Contractor [as calculated] the Contractor may give to the Employer a notice specifying the default or defaults.”
Clause 8.9.3: “if a specified default or specified suspension continues for 28 days from the receipt of notice under clause 8.9.1 or 8.9.2 the Contractor may on, or within 21 days from, the expiry of that 28 day period by a further notice to the Employer terminate the Contractor’s employment under this Contract”.
Clause 8.9.4: “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 28 days after such repetition the Contractor may by notice to the Employer terminate the Contractor’s employment under this Contract”.
As you guessed, things went wrong. Hexagon failed to pay an interim payment certificate (Payment Notice 21) which was due on 15 December, 2022. The next day, Providence sent a Notice of Specified Default stating:
“You have not paid us the amount due to us under Payment Notice No. 27, i.e. £264,242.55, by the final date for its payment, i.e. 15 December 2022. We therefore give you this Notice of Specified Default under clause 8.9.1 of the Contract.”
Hexagon paid Payment Notice 27 in full on 29 December 2022, thereby complying with the cure notice but later did not pay Payment Notice 32, due on 17 May 2023. Again, very assiduously, the following day Providence sent a Notice of Termination, purporting to effect an immediate termination of its employment under the contract. The Notice cited the earlier failure to pay Payment 27 on time, and relied on the Payment Notice 32 failure as a repeat of a specified breach, per cl.8.9.4. The notice also alleged (without prejudice to its contractual termination) that Hexagon was in repudiatory breach in having failed to make 19 of 32 payments on time, on which basis Providence said that it accepted such breach as having terminated the contract also at common law.
Hexagon paid Payment Notice 27 and stated that Providence’s actions (purported termination) were themselves repudiatory.
After an adjudication, Providence initiated a court action, asking for a declaration as to the meaning of cl.8.9.3 and 8.9.4. The English High Court found for Hexagon but the Court of Appeal found for Providence. Hexagon appealed finally to the Supreme Court, which decided in its favour.
The Supreme Court decided that the cl.8.9.4 right to terminate for repeated breach, was not an independent right but was parasitic on cl.8.9.3. This reasoning stems from the presence of the opening words in cl.8.9.4: “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) …”. An independent right to terminate for repeated breach would not have these words. It would begin simply: “If the Employer repeats a specified default..”
In short, cl.8.9.4 operates only if the contractor had the opportunity to give the second (termination) notice for an earlier uncured default. Of course, it’s arguable that not giving that notice “for any reason” includes the reason of not being able to, because the default was cured. But the court, correctly, went looking for the objective natural meaning of the words in the contract; in particular, to give purpose to those opening words in cl.8.9.4.
Also, the court noted that their interpretation produced a more “rational and less extreme outcome” than the one contended by Providence. That would amount to a hair trigger termination for any repeated breach, so long as an earlier breach had been notified as a default. The court said this would be “a sledgehammer to crack a nut.”
Before we all breathe easy, let’s remember that this decision examined just one form of wording. Repeat breach is very common. Some employers (and main contractors) never make an on-time payment. Some contractors continually fail on (for instance) health and safety obligations. And some contracts may, indeed, contain this hair trigger.
The outcome of this dispute under Middle Eastern legal principles, might well be the same as above, and partly for the same reasons. A party’s unilateral right to terminate by notice (i.e. without a court order) is more conditioned than under English Law. The extent of those conditions, of course, varies across the Gulf jurisdictions, but it’s possible to suggest that a “hair trigger” termination for repeat of a previous cured breach, might be open to scrutiny.
* Dubai-based Stuart Jordan is the Global Head of Construction for Baker Botts, a leading international law firm. He has extensive experience in the Middle East, Russia and the UK.