Three TCC cases in the past 12 months have considered the JCT termination provisions for Contractor default (or similar). In each case the Employer failed to adhere to the strict procedural requirements of the contract leading to questions as to whether the Employer had itself repudiated the contract or whether its ineffective contractual notice could take effect as an acceptance of a repudiation at common law. In this Law-Now, we consider each part of the JCT termination procedure for Contractor default with reference to the pitfalls highlighted in these recent cases.
Termination for contractor default under the JCT
Clause 8.4.1 of both the JCT Standard Building Contract and the JCT Design and Build form (the “JCT Forms”) sets out the Employer’s right to terminate for certain specified defaults on the part of the Contractor. These specified defaults are listed in clause 8.4.1 and include a suspension of the works, a failure to proceed regularly and diligently and/or the failure to comply with a notice or instruction.
Under clause 8.4.1, the Architect/Contract Administrator or the Employer (depending on the form) may serve an initial notice on the Contractor setting out the defaults relied on. Under clause 8.4.2, the Contractor then has 14 days from this initial notice to cease the specified default(s). If it fails to do so, the Employer may on, or within 21 days from, the expiry of the 14-day period serve a further notice on the Contractor terminating its employment.
Three cases have come before the Technology and Construction Court in the past year considering the operation of this termination mechanism and in each case the Employer was found not to have complied with the contractual requirements. We consider each part of the JCT termination procedure below with reference to these recent cases.
Where and how should the termination notices be served?
Clause 1.7 of the JCT Forms sets out requirements for service of notices. In particular, this clause specifies that notices should be in writing (clause 1.7.1) and, unless otherwise agreed between the parties (in accordance with clause 1.7.2), be served by hand or pre-paid post to the recipient’s address in the Contract Particulars, or their registered or principal business address if the address specified in the Contract Particulars is not current (clause 1.7.3). Clause 1.7.4 states that, when sent by post, a notice should be sent by Recorded Signed For or Special Delivery.
In a decision last month (Thomas Barnes & Sons Plc v Blackburn with Darwen BC) the TCCmade it clear that “nothing less or different” than strict compliance with the requirements of clause 1.7 would suffice for the purposes of the Employer’s termination notice under clause 8.4.2. Given the drastic consequences of the notice, any “non-trivial” departure from the service provisions must invalidate the notice. In the Thomas Barnes case delivery of the termination notice to site, as a known address where the Contractor was based, was deemed to not be sufficient for service as the Contractor had not expressly notified the Employer that notices could be sent to that address. It was therefore determined that the Employer had failed to terminate the contract in accordance with the contractual termination provisions.
Who should serve the notice?
Clause 8.4.1 of the JCT Forms specify who should serve the initial notice of default on the Contractor. In the Standard Building Contract this person is the Architect or the Contract Administrator. In the Design and Build form the person specified is the Employer.
In February this year, the TCC in Struthers v Davies considered the validity of an initial notice of default when served by an incorrect entity. The dispute related to a RIBA Contract, but the wording of the relevant clause was materially the same as clause 8.4.1 of the JCT Standard Building Contract. The court found that termination clauses should be construed strictly and that whilst the language surrounding who serves the notice was not cast in mandatory terms, there were “sound reasons for requiring the initial notice to come from the Contract Administrator rather than the client.” As the initial notice had instead come from the Employer directly, both it and the subsequent attempt to terminate in reliance on the initial notice were invalid.
When should the required notices be served?
It is important to note when considering the timing of a notice in accordance with clause 8.4.2 that under clause 1.7.4 of the JCT Forms a notice sent by post is deemed served on the second Business Day after the date of posting. In Thomas Barnes v Blackburn the Employer sent a notice of termination under clause 8.4.2 by email and by post and removed the Contractor from site on the same day the notices were sent. The court determined that the email notice was contractually ineffective (email not being an effective method of service). The notice sent by post was found to be effective but, in accordance with the deemed service provisions in clause 1.7.4, only took effect two Business Days after posting, being two Business Days after the Employer had in fact removed the Contractor from site.
A further example of premature termination is provided by Manor Co-Living Limited v RY Construction Limited, which also came before the TCC last month. In this case, the Employer sought prematurely (i.e., before the expiry of 14 days of the Contractor’s receipt of notice specifying alleged defaults under clause 8.4.1) to serve a notice under clause 8.4.2 terminating the contract and locked the Contractor out of the site. The Employer’s termination notice was therefore ineffective.
What are the consequences of the Employer getting it wrong?
As noted in the current edition of Keating on Construction Contracts, “a wrongful termination by the employer or its agent normally amounts to repudiation on the part of the employer”, allowing the Contractor to terminate the contract itself and claim damages from the Employer. This was the position reached in Manor Co-Living v RY, where the Employer’s act in baring the Contractor from site after its ineffective termination notice was found by the adjudicator in that case to be repudiatory.
In some circumstances, however, an invalid termination may not amount to a repudiation. In Thomas Barnes, court found that the Employer’s premature removal of the Contractor from site did not constitute a repudiation. The court took into account a number of factors including that the Contractor had already ceased meaningful activity on site, that the Contractor was not in a position to carry out further work in any event and that there was no adverse effect on the Contractor having to leave site two days early, particularly when the Contractor already knew that the Employer intended to terminate.
An Employer might also seek to salvage an ineffective termination notice by claiming that it amounted to an acceptance of a repudiation by the Contractor at common law. In both Thomas Barnes and Struthers v Davies the Contractor was determined to be in such serious and significant breach of contract at the time the failed contractual notice was served as to be in repudiatory breach and therefore, although the contractual termination failed, the notice could still constitute acceptance by the Employer of the Contractor’s repudiation at common law.
This finding was assisted in Thomas Barnes by the Employer having expressly stated in its failed contractual termination notice that it was entitled to and did accept the Contractor’s repudiatory breach in the alternative to its contractual termination. In the absence of such drafting, the Contractor in Struthers v Davies accepted that the ineffective termination notice could operate as an acceptance of a repudiatory breach. However, the opposite conclusion was reached by the adjudicator in Manor Co-Living v RY.
Conclusions and implications
The trio of cases reported above highlight the care which is needed when seeking to administer the provisions dealing with termination for Contractor default in the JCT Forms. The contractual process must be adhered to for each of the two notices required, ensuring that service requirements, timings and the required notifying entity are all complied with. The consequences of failing to meet these requirements can be uncertain at best and nothing short of disastrous at worst.
Employers would also be well advised to ensure that any termination notice includes language which gives effect to alternative rights of termination, whether at common law or under other clauses of the contract.
References:
Struthers & Anor v Davies (t/a Alastair Davies Building) & Anor [2022] EWHC 333 (TCC)
Thomas Barnes & Sons Plc v Blackburn with Darwen Borough Council [2022] EWHC 2598 (TCC)
Manor Co-Living Ltd v RY Construction Ltd [2022] EWHC 2715 (TCC)
