In December 2022, the Employer failed to make an interim payment by the requisite date (Initial Default). Accordingly, the Contractor served a notice of specified default (pursuant to clause 8.9.1). The Employer subsequently made payment within the 28-day cure period, meaning the Contractor’s right to terminate, pursuant to clause 8.9.3 (which would have accrued had the Employer’s default persisted beyond 28 days), did not fully materialise.
In May 2023, the Employer missed a further interim payment. The Contractor, treating this as a repetition of a specified default, issued a Notice of Termination under clause 8.9.4.
The Employer challenged the Notice of Termination, arguing that a right to terminate under clause 8.9.3 for the Initial Default must have fully accrued before the Contractor could exercise its termination rights under clause 8.9.4 for a repeated default.
Journey through the Courts
- Adjudication and High Court (TCC): The Adjudicator and High Court (Adrian Williamson KC) sided with the Employer, agreeing that a right to terminate under clause 8.9.3 must have first accrued.
- Court of Appeal: The Court of Appeal (Lord Justice Coulson, Lord Justice Popplewell and Lord Justice Stuart-Smith) reversed the decision of the High Court concluding that the Contractor could terminate under clause 8.9.4 for a repeated default, even if the Initial Default was remedied within the cure period and a full right to terminate under clause 8.9.3 had not accrued, stating that the Employer’s interpretation would allow “a serial defaulter to escape any meaningful consequences” if they consistently paid ‘just’ within the cure period.
Supreme Court Decision
The Supreme Court unanimously allowed the Employer’s appeal. They favoured an interpretation that led to a more “rational” and “commercial out-come” whilst emphasising the importance of interpreting industry-wide standard form contracts consistently.
Focussing on the “objective and natural meaning” of the words in clause 8.9.4, the Supreme Court held that because of the opening words of clause 8.9.4, it is “parasitic” on clause 8.9.3. The Supreme Court determined that such wording makes clear that the Contractor must have had an accrued right to terminate under clause 8.9.3 before 8.9.4 applies; in other words, clause 8.9.3 is the “gateway” to clause 8.9.4.
The Supreme Court held that the contrasting interpretation put forward on behalf of the Contractor would “put forward an extreme outcome” meaning that any breach by late payment (provided a specified notice of default was issued), if repeated by any subsequent late payment, would entitle the Contractor to terminate. The Supreme Court considered that clause 8.2.1 (which requires that termination of a contractor’s employment should not be given unreasonably or vexatiously) would give “scant comfort” to an Employer in such a scenario.
In respect of the principles of contract interpretation, the Supreme Court confirmed that the established approach, based on the objective intentions of the contracting parties, should still be applied. However, where parties utilise an industry-wide standard form, it can generally be assumed that their objective intentions are that their respective rights and obligations should be consistent with (i) those of other parties utilising the same form; and (ii) those responsible for the drafting of that standard form.
The Supreme Court noted that contractor defaults are treated differently in the standard form – the equivalent termination clause for contractor default (clause 8.4.3) uses different words to clause 8.9.4 and the two clauses do not have the same meaning.
Impact of Judgment
