Late payment, termination under JCT contracts and the lifeblood of the construction industry

Cashflow is the lifeblood of the construction industry. The industry frequently suffers from issues of persistent late payment and this often has knock on effects with delivery, subcontractors, suppliers and, ultimately, the potential insolvency of those suffering from persistent late payments. 

In the case of Providence Building Services Ltd v Hexagon Housing Association Ltd [30.07.2024], the Court of Appeal was asked to consider whether a contractor was able to terminate its engagement under Clause 8.9.4 of a standard JCT contract. Here, an employer had failed to pay an application for payment on time, even though in a prior instance of late payment, the employer had paid up on receiving a previous default notice.

Facts

On February 2019, Hexagon and Providence entered into a contract for the construction of a number of buildings in Purley (the “Contract”).

The Contract incorporated the employer default provisions at clause 8.9 of the standard form, with only minor amendments, which provided that:

• Failure to make payment before the final date for payment would entitle Providence to give notice of a specified default (cl.8.9.1.1)
• Providence were entitled to issue a further notice to terminate its employment in the event a specified default continued for 28 days (amended from 14 days) from receipt of a notice under clause 8.9.1 on expiry of this 28 period, or within 21 days thereafter (cl.8.9.3)
• If Providence “for any reason” did not give the further (termination) notice referred to in clause 8.9.3, but Hexagon repeated the same specified default, then upon or within 28 days of such repetition, Providence became entitled to terminate its employment by notice (cl.8.9.4).

On 25 November 2022, the employer's agent issued Payment Notice 27, requiring Hexagon to pay £264,242.55 on or before 15 December 2022. Hexagon failed to pay the sum due by that final date. The following day, 16 December 2022, Providence served a notice under Clause 8.9.1 (the “December Notice”). On 29 December 2022, Hexagon paid the sum of £264,242.55 in full.

On 28 April 2023, the employer's agent issued Payment Notice 32, requiring Hexagon to pay £365,812.22 on or before 17 May 2023. Hexagon again failed to pay the sum due by that final date. The following day, 18 May 2023, Providence issued a further notice, this time under Clause 8.9.4 (the “Notice of Termination”).

The Notice of Termination referred back to the December Notice and relied upon Hexagon's non-payment of the sums due on 17 May 2023 as a repetition of the specified default that was the subject matter of the December Notice. Accordingly, Providence gave notice that Hexagon had repeated a specified default and terminated its employment under the Contract pursuant to Clause 8.9.4.

Providence alleged that 19 of the 32 required payments from Hexagon were made late. Providence also stated that the late payments constituted repudiatory breaches of contract so as to rescind the contract and terminate it in accordance with its common law rights. Providence further stated that it accepted these repudiatory breaches.

On 23 May 2023, Hexagon paid the sum of £365,812.22 in full. The next day, 24 May 2023, Hexagon disputed the lawfulness of the Notice of Termination, asserting that Providence had no right to terminate under cl.8.9.4 because no right to serve a further notice had accrued under cl.8.9.3. In doing so, Hexagon asserted that ProvReidence had repudiated the contract. A week later, on 31 May 2023, Hexagon wrote again to Providence, accepting what it characterised as Providence's repudiatory breach.

Hexagon referred the dispute to adjudication whereby the adjudicator found substantially in favour of Hexagon. In July 2023 Providence issued proceedings under CPR Part 8 seeking a declaration from the court. It identified the dispute between the parties as "whether a right to terminate under Clause 8.9.3 must first have accrued before Providence could have any right to terminate under Clause 8.9.4." Put another way, whether a specified default had been repeated because the notified sum was not paid by Hexagon on two separate occasions, or whether the rectification of the first default meant the second default didn't 'count' as a repeated default.

The Technology and Construction Court decided in Hexagon’s favour. Providence appealed to the Court of Appeal.

Decision

The Court of Appeal allowed the appeal and held that, where unamended termination provisions of the 2016 JCT D&B contracts apply, despite and in addition to the "battery" of other remedies available to contractors for non-payment, or late payment by employers (such as suspension of Works or adjudication), two late payments by the employer could lead to a valid termination by the contractor. Those two late payments can be months apart. A notice under clause 8.9.4 to terminate employment can be given for a repeated specified default irrespective of whether the first default had been rectified within the contractually prescribed period.

Comment

This judgment is interesting for a number of reasons as it addresses legal analysis of standard form contracts, the wording of which is unlikely to be affected by the context in which the parties had concluded the contract.

The Court of Appeal judgment can be seen as encouragement to both employers and main contractors, both of whom widely use JCT contracts, to pay on time. If payment is repeatedly not made on time, there could be a right to terminate the contract. For many in the construction industry suffering from issues arising from persistent late payment, this may come as welcome news.