Late payment – Supreme Court overturns Court of Appeal in Hexagon v Providence

Supreme Court decisions on construction law matters aren’t all that common, so when they arise they unsurprisingly attract a lot of comment amongst construction lawyers.

Yesterday’s judgment will be no exception. This was the appeal in Providence Building Services Limited v. Hexagon Housing Association Limited, which concerned a contractor’s right to terminate for repeated non-payment.

Background

We wrote about the Court of Appeal’s decision in this case previously. That included a summary of the background, but in short:

• The Employer, Hexagon, was late on various interim payments to Providence, the contractor.
• For one of these late payments, Providence served a Notice of Specified Default pursuant to clause 8.9.1, which required the late payment to be remedied within 28 days. Hexagon ‘cured’ the default within the period by making payment, and so no right to terminate under clause 8.9.3 actually arose.
• Five months later, another payment was made late, and Providence chose to terminate immediately. It relied on clause 8.9.4, which allows for termination for repeated defaults.

That decision to terminate was hotly contested, and led to the proceedings here.

At first instance, the Technology and Construction Court sided with Providence. It said because there had been no actual right to serve a clause 8.9.3 termination notice, there couldn’t be a right to rely on that in future defaults. In short, the court said that “clause 8.9.4 requires that a clause 8.9.3 notice could have been given but the Contractor has decided not to do so for whatever reason”.

However, the Court of Appeal found differently, as we wrote about here. It said that a right to terminate did not actually need to have arisen: 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”. As we said at the time, this exposed employers to the risk of termination for very minor delays in payment.

The Supreme Court decision

Good news for employers – the Supreme Court overturned the Court of Appeal’s decision and went back to the original TCC position in finding for Hexagon, the Employer.

Lord Burrows, giving the unanimous judgment of the court, said that “clause 8.9.4 appears to be parasitic on clause 8.9.3 rather than being independent of it” – in other words, the right to terminate under clause 8.9.4 for repeated defaults was dependent on there being a right to terminate under clause 8.9.3 in the first place. Or as the court summarised: “it is only if the Employer has failed to cure any earlier specified default within 28 days that the Contractor can terminate for a repetition of the specified default”.

The logic behind this was that if Providence’s argument was correct, it would render the opening words of clause 8.9.4 – “If the Contractor for any reason does not give the further notice referred to in clause 8.9.3” – redundant, which cannot have been intended. The court also noted, as we warned in our article at the time, that the Court of Appeal’s interpretation would produce an extreme outcome: “if the Employer made two late payments, each being made one day late, the Contractor, on this interpretation, would be entitled to serve a notice terminating the contract (provided a specified default notice had been served in respect of the first late payment)”.

Other points to note

The judgment is not long – only 39 paragraphs in total – and is well worth a review in its totality for those that have time. It deals with the instant issue, that of termination for non-payment, but also makes some wider points which may be relevant in other disputes.

For example, there is a lengthy discussion of the relevance of the JCT being a standard form contract, and how that affected the parties’ subjective intentions when entering into contract. After considering the applicable principles of interpretation, the court noted interestingly that “where parties choose to use an industry-wide standard form, it can generally be taken that their objective intentions in the relevant context are that their respective rights and obligations should be consistent with those of other parties using the same form and should reflect the objective intentions of those who were concerned with the drawing up of that standard form agreement”. This supports consistency of interpretation where other cases have been decided on the basis of a JCT contract (or other standard forms for that matter).

The court also considered the differences between the JCT approach to employer termination (in clause 8.4) and contractor termination (in clause 8.9). The Court of Appeal was criticised for relying too heavily on clause 8.4, which has slightly different wording. In that case, the Supreme Court noted that “the different wording is explicable precisely because it was being clarified in clause 8.4.3, in contrast to clause 8.9.4, that there need be no previously accrued right to terminate”. This clarifies that the position for employer termination is different from that decided in this case: there, an employer would appear to be able to terminate even if no right to terminate had arisen.

That does mean that the risk of termination for contractors is arguably higher than for employers. But is that really that surprising? As the Supreme Court noted, the parties’ respective rights and obligations are already different, including that the employer already has greater scope to terminate. The court also commented that “If there is a problem for Contractors, which could be justifiably ameliorated by a differently worded termination clause, that is a matter for the JCT to consider, in the light of this judgment, in a future draft of the standard form contract”. Perhaps an amendment that may come, then, in a future JCT suite.

Conclusion

The Supreme Court’s decision is welcome primarily because it provides certainty: given the conflicting Court of Appeal decision from that at first instance, the industry has been waiting the outcome of this appeal to know where it stands. As such, regardless of the decision itself, that clarity is welcomed.

But the decision is also arguably the right one for the industry. Although every contract is different, generally providing a contractor with a very easy right to terminate for even minor cases of late payment (and potentially excusable ones – banking issues, weekend payments etc) is not necessary. And the existence of that right would certainly surprise many who had signed up to the standard JCT form.

The decision also does not leave contractors completely exposed to non-payment. They can still suspend after 7 days (a powerful and often underused right), claim interest, and terminate for longer delays – as well as to adjudicate in short order.

So all in all, a long and confusing saga for Providence and Hexagon, and for the industry as a whole, but one which ultimately ends up back where is probably right – and probably where everyone though they were before the Court of Appeal’s curveball.