Late Payers Face Cold Turkey – Providence v Hexagon

It is the Construction team's turn to open the Yule Blog advent calendar today. As is customary for an end of year blog, we're looking back at one of the most interesting cases of the year. There were several contenders, but we've chosen a decision from the Court of Appeal, which some felt was a surprising interpretation of the termination provisions in the JCT Design and Build Contract. The decision means that developers need to be very careful to avoid making late payments under JCT contracts – as one failure to pay on time can open the door to the Contractor terminating its employment under the contract if another late payment is made during the project for any reason.

The contract

Providence Building Services Limited (Providence), entered into a contract with Hexagon Housing Association Limited (Hexagon) on an amended form of the JCT Design and Build Contract 2016.

Clause 8.9.1 of the JCT contract provides that if the Employer does not pay amounts due to the Contractor by the final date for payment, the Contractor may give the Employer a notice specifying the default or defaults (a "specified default").

Clause 8.9.3 goes on to provide that if a specified default continues for 28 days from the receipt of notice under clause 8.9.1, 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 the Contract. Providence and Hexagon had amended the time periods in clause 8.9.3, but otherwise the clause reflected the JCT printed provision.

The JCT form then allows that 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". Again, the parties had updated the time periods in clause 8.9.4, but otherwise followed the provisions of the JCT form.

The late payments

In November 2022, a payment notice issued by the employer's agent confirmed that Hexagon was required to make an interim payment. Hexagon failed to pay on time, and Providence issued a notice of the specified default under clause 8.9.1. Hexagon made the payment before the 28-day period would have expired under clause 8.9.3, so it was not open to Providence to serve a further notice to terminate its employment at that point.

Hexagon subsequently failed to make a further interim payment within the required period in May 2023. Providence served another notice on Hexagon, but this time under clause 8.9.4, purporting to terminate its employment citing the May 2023 non-payment as a repetition of the previous specified default. Hexagon then paid the outstanding sum and disputed the lawfulness of Providence's notice under 8.9.4, asserting that Providence had repudiated the contract.

Can the Contractor terminate for a repeated default under clause 8.9.4 where the right to terminate never arose under clause 8.9.3?

The High Court decided in Hexagon's favour – the Contractor's right to terminate for a repeated breach under clause 8.9.4, would arise only if a right to terminate under clause 8.9.3 had previously arisen but not been exercised by the Contractor. When considering if this produced an uncommercial result (because the Employer could therefore delay payment by 27 days, but still avoid the possibility of termination), the judge noted the "battery of weapons" available to the Contractor to protect its cashflow position other than rights to terminate, including the right to suspend performance of its obligations, to claim interest or to adjudicate.

The Court of Appeal unanimously took the converse view, holding that clause 8.9.4 allows the Contractor to terminate if a specified default is repeated even where no right had accrued to give a termination notice under clause 8.9.3 (e.g. where a late payment is rectified)¹. The court did not think that the battery of other potential remedies available to the Contractor should affect the application of the provisions. This therefore means that if there are two or more late payments, the Contractor can terminate on the second occurrence of late payment without giving a warning notice.

What should developers be aware of?

The Court of Appeal's decision confirms that the Contractor's right to terminate under clause 8.9.4 arises immediately upon a repeat occurrence of a specified default (provided that a notice of the original default was receive under clause 8.9.1), even where the original default was corrected before the right to terminate arose under clause 8.9.3. Where an Employer receives a notice of a specified default it should be very vigilant of making any future default. Likewise, Contractors should be alive to the similar wording in clause 8.4, which allows the Employer to terminate where the Contractor repeats a specified default.

Employers using JCT contracts therefore need to be aware of the risks associated with making late payments (there are other potential grounds for specified defaults under clause 8.9.1, but late payment is the most common). The wording of the relevant provisions has not been changed in the 2024 JCT editions. Also, though not expressly dealt with in the JCT form, Employers should also note that to rectify a specified breach for non-payment it is likely that the Employer would also need to pay the interest accruing on the late payment at the contractual rate.

Administrative oversights that lead to late payments could still qualify as a specified defaults which may lead to termination under these provisions. The requirement in clause 8.2 that notices of termination should not be given unreasonably or vexatiously might come to the Employer's aid, but the application of this is uncertain and would need to be considered on a case by case basis.  

Hexagon has received permission to appeal to the Supreme Court.

Come back tomorrow to open the door to Day 11 of our advent calendar which will focus on sustainable finance products.

1       Providence Building Services Ltd v Hexagon Housing Association Ltd [2024] EWCA Civ 962