When can a contractor terminate for repeated late payments?

The Court of Appeal’s decision in Providence Building Services Ltd vs Hexagon Housing Association Ltd on the workings of the termination provisions in JCT contracts and its interaction with cure periods was, it is fair to say, a surprise. Any party wishing to terminate a contract requires clarity on how to achieve this end.  

Then in January, the Supreme Court settled the short but important question: when can a contractor terminate for repeated late payments? This decision is a reversion to a position which most of the industry had assumed was the case all along. 

To recap, Hexagon (the employer) and Providence (the contractor) entered into an amended JCT Design and Build Contract 2016. 

Clause 8.9.3 of the amended contract provided that if a default continued for 28 days from the receipt of a notice of default, the contractor could terminate. Key to the case was clause 8.9.4, which provided that if the contractor “for any reason does not give the further notice referred to in clause 8.9.3” (to terminate the contract) and the employer repeats the specified default, the contractor may terminate upon such repetition.

Hexagon was required to pay around £260,000 to Providence by 15 December 2022 pursuant to a payment notice, but failed to do so. Providence served a notice of default under clause 8.9.1 of the JCT contract, following which Hexagon paid in full on 29 December 2022 – so, 14 days late but within the 28-day cure period specified in the contract. 

However, Hexagon again failed to pay around £360,000 on time in May 2023. The next day, Providence served a notice terminating the contract. Relying upon clause 8.9.4, it argued that this second late payment was a “repetition” of the previous default, therefore entitling it to terminate without the 28-day cure period being engaged. 

The dispute revolved around whether, as a matter of contractual interpretation, a party could terminate relying upon a prior specified default which had been remedied within the cure period, or whether the aggrieved party did have to go through the process of affording the defaulting party the ability to cure the subsequent default within the 28-day period. 

The message is clear: based upon the standard JCT wording, a contractor cannot terminate for repeated late payments unless the first late payment went unpaid beyond the 28-day period  

At first instance, the High Court found for Hexagon and held that the natural and ordinary meaning of clause 8.9.4 required that in May 2023 a termination notice under clause 8.9.3 should have been issued, giving Providence the option to pay within a further 28-day period. However, the Court of Appeal disagreed and considered that the words “for any reason” in clause 8.9.4 were broad enough to cover a situation where no right to terminate had previously accrued. This court seemed influenced by the parallel termination provisions for an employer under clause 8.4.3, which allowed termination for a repeated default even where the earlier default had been cured. 

The Supreme Court unanimously found in favour of Hexagon, in effect reinstating the first instance decision. 

The Supreme Court took a different view on the interpretation of clause 8.9.4 finding that, on the specific wording of the clause, and reading clauses 8.9.3 and 8.9.4 together, it was only if a contractor had had an accrued right to terminate under clause 8.9.3 (in other words the specified default had not been remedied within the 28-day cure period) that clause 8.9.4 bit. 

This decision was grounded firmly in contractual interpretation. Contrary to the Court of Appeal’s decision, the employer’s termination rights under a similarly structured clause 8.4 led to a different outcome, enabling the employer to terminate for a repeated specified default notwithstanding that the right to terminate had not previously accrued. This was because of slightly different wording. 

The Supreme Court observed that there was no reason why the right to terminate was symmetrical as between the employer and the contractor. It is purely a matter of the words used. The fact that a slightly different formulation was used when addressing the employer’s right to terminate illustrated the point that there could be divergent positions. 

The message is clear: based upon the standard JCT wording, a contractor cannot terminate for repeated late payments unless the first late payment went unpaid beyond the 28-day period. While interpretation is essentially based upon assessing the plain meaning of words, commercial sense does have a part to play. The Supreme Court observed that, based upon the contractor’s argument, two payments each only being a day late could entitle the contractor to terminate and this pointed away from a perceived extreme outcome. Although this specific issue has now been clarified, it can, of course, be subject to amendments either via the JCT or a bespoke amendment. 

Steven Carey is a partner in Charles Russell Speechlys’ construction, engineering and projects group