Late payment – Employers, you’ve been warned

You may be aware of the High Court decision in Providence Building Services Limited v. Hexagon Housing Association Limited from last year in which the Court provided clarification on a contractor’s right to terminate its employment under a JCT Design and Build Contract 2016 (“JCT D&B”). If you are, forget what it might have taught you as the Court of Appeal has now overturned the decision!

By way of reminder (or introduction for those new to the case), Providence, the contractor, was constructing a number of buildings at a site in Purley for Hexagon. A dispute arose in relation to Payment Notice 27, whereby the employer’s agent certified the sum of £264,242.55 with a final date for payment of 15 December 2022. Hexagon failed to make payment on time, and Providence served Hexagon, the following day, with a Notice of Specified Default pursuant to clause 8.9.1. Hexagon corrected its default within the required period and, as a result, Providence did not become entitled to terminate the contract under clause 8.9.3.

Five months later, the employer’s agent issued Payment Notice 32, certifying the sum of £365,812.22 as due, which was also not paid by the final date for payment. As a result, Providence issued a Notice of Termination pursuant to clause 8.9.4 which referred back to the earlier Notice of Specified Default and relied on Hexagon’s non-payment of Payment Notice 32 as a repetition of the specified default. Hexagon paid the outstanding sum the following day and alleged that Providence was in repudiatory breach of contract because of its wrongful termination.

Providence (the contractor) asked the court for a declaration as to the correct interpretation of clause 8.9.4.

In the first instance decision, the judge held that in order for Providence to be entitled to terminate under clause 8.9.4, it must have first become entitled to terminate under clause 8.9.3. As such, Providence’s termination was invalid – it hadn’t become entitled to terminate because Hexagon had cured the earlier default in time.

However, the Court of Appeal disagreed, and Lord Justice Stuart-Smith found that the “natural and probable meaning of Clause 8.9.4 is that it applies to a case where no right accrued to give a further notice under Clause 8.9.3”. According to the Court of Appeal, the first instance judge gave the words of clause 8.9.4 a meaning which went beyond the ordinary and natural. While Lord Justice Stuart-Smith did state that “the drafting could have been of better quality”, he said the clause was ultimately not ambiguous.

As such, even if a specified default has been rectified by an employer prior to the contractor accruing a termination right under clause 8.9.3, if the default is repeated then a contractor can still terminate under clause 8.9.4. That logic would apply to any specified default, but is particularly relevant in relation to late payment.

This appeal is good news for contractors. As soon as a certified payment is late, a warning notice can be issued under clause 8.9.1. Even if the employer pays the sum before the expiry of the warning period, the next time a payment is late, the contractor will have the right to terminate immediately under clause 8.9.4 because the default will have been repeated. This very substantially increases the contractor’s powers in relation to late payment – although they won’t have to terminate, this decision will give them considerable leverage by presenting the option.

However, the reverse is also true: employers in the construction industry won’t be happy about this decision. As it conflicts with the first instance decision and is a potentially important point for a lot of contracts, Hexagon may seek to appeal it to the Supreme Court. But for the time being it means that all employers under JCT D&B contracts with this provision unamended (as it often is) are at considerable risk should they make payment late and contractors take the protective approach of issuing a termination warning notice.

The judgment is likely to be significant for the foreseeable future given that the recently published 2024 edition of the JCT D&B uses the same language as the 2016 form (which was the version in this case). Unless and until it gets to the Supreme Court and a different decision is reached, if you are an employer and you repeatedly fail to make payments on time, you run the risk that a contractor has accrued the right to terminate (even if you have rectified the previous default).

Employers will therefore want to ensure that they are strictly adhering to the payment provisions in their contracts to avoid this risk – noting that termination would be for employer default and therefore leave them exposed to claims for lost profit, as well as delays to the project. For future contracts employers may want to consider negotiating an amendment to their JCT termination provisions in light of this appeal.