Termination

In our August 2024 article (Court of Appeal decides on JCT DB 2016 termination provisions), we reported on the recent Court of Appeal case, Providence Building Services Limited v Hexagon Housing Association Limited [2024] EWCA Civ 962.

This case should act as a warning to parties that termination provisions, and the related notice requirements, always need to be approached with caution and considered carefully.

With this in mind, we thought it would be useful to provide a brief reminder on how Employers can terminate under JCT contracts.

Terminating a JCT building contract

Under the unamended JCT suite of contracts (namely the 2016 and 2024 editions of the Standard Building Contract (“SBC”) and Design and Build Contract (“DB”)), the Employer may terminate for:

• Contractor default;
• Contractor insolvency;
• Contractor corruption; or
• Under the Public Contracts Regulations 2015 (“PCR”).

Termination by Employer for Contractor default

Clauses 8.4.1.1 to 8.4.1.5 set out the grounds for which an Employer may give notice of default. They are:

• Unreasonably suspending the works, wholly or substantially (or, if applicable, the Contractor’s Designed Portion).
• Failing to proceed regularly and diligently with the works (or, if applicable, the Contractor’s Designed Portion).
• Refusing or neglecting to comply with a notice or instruction from the Architect/Contract Administrator (under SBC 2016 and SBC 2024) or Employer/Employer’s Agent’s (under DB 2016 and DB 2024) to remove works not in accordance with the building contract that materially affects the works.
• Sub-contracting or assigning without consent.
• Failing to comply with the applicable requirements of the Construction (Design and Management) Regulations 2015 and, in relation to the 2024 Editions only, Part 2A of the Building Regulations 2010 being the new building regulations dutyholder roles introduced by the Building Safety Act 2022.

In order for termination to be effective, the Employer must comply with the required notice provisions set out in the contract. Termination by the Employer for Contractor default requires two notices to be given.

If a ground for termination arises and the Employer intends to terminate the Contractor’s employment, clause 8.4 requires a first formal notice to be issued specifying the default(s).

Care should be taken to check each contract to confirm who has authority to issue this first notice, for example, in SBC 2016 and SBC 2024, it is the Architect or Contract Administrator who gives this notice whereas in DB 2016 and DB 2024 it is the Employer.

If the Contractor continues the specified default referred to in the first notice for 14 days from receipt of the first notice, then the Employer must serve its second (termination) notice on, or within 21 days from, the expiry of the 14-day period.

Note that for this second notice, it is the Employer that serves it, even under the SBC 2016 and SBC 2024 (i.e. the Architect or Contract Administrator issues the first notice and the Employer issues the second notice).

It is only if the Employer (or Employer’s Agent if one is appointed under Article 3 of DB 2016 and Article 4 of DB 2024) serves a second (termination) notice under clause 8.4.2 that the Contractor’s employment under the building contract terminates.  The Employer must take care to not be too early or too late with this notice, as either may invalidate it.

If the Contractor remedies or halts the specified default set out in the first notice, then the Employer is not entitled to serve a second (termination) notice – although, it is worth noting that in Providence, the Court of Appeal held that a Contractor was entitled to terminate its employment under clause 8.9.4 on the basis that its Employer had repeated a “specified default” (by twice failing to pay on time).

This was despite the fact the Employer’s original default had been remedied. Whilst this case relates to a Contractor terminating for Employer default, potential arguments could to be raised in the same way for other default events.

If the Contractor does repeat the specified default in the first notice, the Employer may terminate the Contractor’s employment under clause 8.4.3 of the building contract.

The Employer does this by giving a termination notice “upon or within a reasonable time after” the Contractor’s repetition of that default. In this scenario, there is no need for a first (specified default) notice to be given again.

Therefore, any Employer needs to ensure that issuing this notice is not unreasonably delayed under the circumstances. This will be fact specific but note that delaying issuing a notice may expose an Employer to an argument that it was not issued within a reasonable time.

In addition, clause 8.2.1 prohibits unreasonable or vexatious termination notices. In the case of Reinwood Ltd v L Brown & Sons Ltd [2007] BLR 10, HHJ Gilliland summarised the court’s approach to determining if a termination is unreasonable or vexatious confirming that unreasonable conduct is objective and the fact that the individual party may have thought that its conduct in terminating the building contract was reasonable is not conclusive.

The Court, in part, will look at whether the parties had an ulterior motive as well as considering how a reasonable person would have acted in the circumstances.

Termination by the Employer for Contractor Insolvency

Clause 8.5 allows the Employer to terminate the Contractor’s employment under the building contract “at any time” if the Contractor is Insolvent (clause 8.5.1).

Note that the notice requires the Contractor to be Insolvent as defined in the contract. The fact that the Contractor under clause 8.5.2 is obliged to notify the Employer of any proceedings or appointments relating to any matters referred to in the definition of Insolvent does not mean that this in itself satisfies the requirements for the Employer to be able to serve an effective notice under clause 8.5.1.

The definition of ‘Insolvent’ has been expanded in the 2024 JCT suite of contracts to now also include moratoriums under Part A1 of the Insolvency Act 1986 and compromises or arrangements pursuant to Part 26A of the Companies Act 2006.

Clause 8.5 requires only one notice to terminate the Contractor’s employment under the building contract.

Clause 8.5.3 also grants the Employer additional rights from the date the Contractor becomes Insolvent, even if a notice of termination has not been given by the Employer, namely:

• No additional sums fall due to the Contractor;
• The Contractor’s obligation to perform the Works is suspended; and
• The Employer can take “reasonable measures” to protect the Site and to retain Site materials (which the Contractor may not hinder).

Termination by the Employer for Contractor corruption or under the PCR

Clause 8.6 permits the Employer to terminate on three possible grounds:

• An Employer may terminate the Contractor’s employment under the building contract “or any other contract with the Employer” if the Contractor commits an offence under the Bribery Act 2010 relating to the building contract or another such contract.
• A local or public authority Employer may rely on an offence under section 117(2) of the Local Government Act 1972 (i.e. that an officer of a local authority shall not, under colour of his office or employment, accept any fee or reward whatsoever other than his proper remuneration) as grounds for termination.
• A public body dealing with a contract to which the PCR applies may terminate when, at the time of contract award, one of the mandatory exclusion criteria applied and the supplier should therefore have been excluded from the procurement procedure. Similarly, under clause 8.11.3, the Employer may also terminate a contract to which the PCR applies if the contract has been subject to a substantial modification that required a new procurement procedure to be started.

Clause 8.6 requires only one notice to terminate the Contractor’s employment under the building contract.

It is important to note that both the 2016 and 2024 editions of JCT only refer to the PCR. As we know the Procurement Act 2023 and the Procurement Regulations 2024 will be in force from 24 February 2025.

This will mean that the 2016 and 2024 editions will likely require some drafting modifications to ensure this change in legislation is accurately reflected in the contract.

Things to consider

If you are considering your options for termination, think about the following:

• What are the reasons for termination and is termination really necessary under the circumstances?
• Have there been any amendments to the JCT standard form? If so, you should review the amendments to see if they change the termination process or its consequences.
• What will happen after the contract has been terminated? The consequences of termination are set out in clause 8.7 and should be considered prior to termination.
• What are the notice provisions that apply to termination under your contract? What form are these notices required to be in, who must they be issued by and to whom?  You should review the notice provisions under clause 1.7 and check if there have been any amendments. Remember the 2024 editions now have the option to include email as a form of service.
• What are the timings for the service of any notices? Are the timings going to be affected by any Public Holidays (e.g. Christmas Day, Good Friday or bank holidays) which will have to be taken into account under clause 1.5 (reckoning periods of days) or with regard to deemed dates of receipt under clause 1.7.4 (Public Holidays are not taken into account when calculating the date a notice is deemed to have been received).

This article is for general awareness only and does not constitute legal or professional advice. The related law and guidance is continually being updated and it may have changed since this page was first published. If you would like further advice and assistance in relation to any issues raised, please contact us by telephone or email.