Cashflow is critical in the construction industry. We commonly see situations where an Employer or Contractor repeatedly make late payments to their Contractor or Sub-Contractors, causing massive cashflow issues and financial strain.
A recent judgment has strengthened the ability of parties receiving payments under JCT contracts to take the drastic step of terminating their construction contracts where there is repeated late payment.
Here we explain why the judgment is so important and key points to consider. If you are considering terminating a contract or have received a notice of termination it is crucial to get advice. Getting termination wrong is a very costly mistake.
Providence Building Services v Hexagon Housing Association [2024] EWCA Civ 962
In Providence v Hexagon, Hexagon and Providence entered into a contract for the construction of several buildings in Purley. It was based of the JCT 2016 Design and Build Contract. There was an argument about whether the contract had been properly terminated or not.
The JCT included a version of the common two-stage termination process for breaches . ITtalso allowed termination for repeated breaches (but note that some of the specific time periods in this case had been amended):
- If the Employer (Hexagon) committed one of the defaults under clause 8.9.1, which included failure to pay an amount due by the final date for payment, then the Contractor (Providence) could give a notice specifying the default (a specified default).
- If the specified default continued for 28 days after the notice (i.e. the Employer did not pay within 28 days of the notice), then the Contractor could give a further notice which would terminate the contract (a clause 8.9.3 notice).
- If the Contractor did not give that clause 8.9.3 notice to terminate but the Employer then repeats a specified default which had been notified previously, then clause 8.9.4 says that upon the date of that repeated default, or up to 28 days after that repetition, the Contractor can terminate the contract.
Hexagon’s first default – late payment 1
On 25 November 2022, the Employer’s Agent issued Payment Notice 27. This required Hexagon to pay £264,242.55 on or before 15 December 2022. Hexagon failed to pay the sum due by that date. The following day Providence served a default notice under clause 8.9.1.
On 29 December 2022 Hexagon paid the £264,242.55 in full.
The parties agreed in the court proceedings that, because payment was made on that date, the specified default did not continue for 28 days from the receipt by Hexagon of the default notice. Accordingly, Providence was not entitled to terminate in respect of that late payment.
Hexagon’s second default – late payment 2
Several months later, on 28 April 2023, the Employer’s Agent issued Payment Notice 32. This required Hexagon to pay £365,812.22 on or before 17 May 2023.
Again, Hexagon failed to pay the sum due by that date. The following day, Providence issued a further notice, but this time under clause 8.9.4. It stated that Providence had repeated a specified default and it was terminating the Contract.
Why this issue was important
If a party wrongly terminates, then it is in breach of contract and liable for damages. Whether a termination has been carried out correctly is therefore very important:
- If the Contractor terminates incorrectly, then the Employer is entitled to all the damages it incurs as a result. These are likely to include the delay of engaging another Contractor and the extra over cost of completing the work.
- If the Contractor terminates correctly, then the Employer is not entitled to any of those claims. Instead the Contractor is entitled to damages. These will often include the overhead and profit it would have earned on the work.
The argument
The key issue was what happens if the Employer pays in the 28 days after receiving the specified default notice, but is then late with another payment. Does the contract entitle the Contractor to terminate under clause 8.9.4?
Hexagon argued that because the non-payment of Payment Notice 27 had ended less than 28 days after the default notice, then Providence could not issue a further notice under clause 8.9.4 for another late payment. In other words, Hexagon said Providence could only issue a notice under clause 8.9.4 for a repeated default where it would have been entitled to terminate by issuing a notice under clause 8.9.3 (i.e. if the first breach had gone on for more than 28 days).
Hexagon therefore argued that Providence had terminated wrongfully which was a breach of contract.
The TCC decision
The first instance court, the Technology and Construction Court, agreed with the Employer that the Contractor had wrongfully terminated.
The Court of Appeal
The Court of Appeal reached the opposite decision.
After closely examining the precise wording of the relevant clause in the JCT contract, the Court of Appeal decided that the Contractor was entitled to give the clause 8.9.4 following the second late payment. This was even though the first late payment had been paid within the 28 days of the default notice.
The Court of Appeal’s reasoning included that:
- The intention of the clauses is to encourage and cause the party concerned to comply with their obligation to pay by the final date. A repetition of a previous specified default is the trigger entitling the wronged party to terminate.
- The commercial consequences of this interpretation represent a contractual allocation of risk that is commercially acceptable.
- The TCC judge had said that the Contractor had “a battery of weapons available to him to protect his cash flow position” including a right to suspend the Works, statutory interest, and adjudication. The Court of Appeal was not impressed with that argument. It said that these ‘weapons’ are of little or no comfort to a Contractor faced by an Employer who claims the extra time to pay (falling just short of 28 days from receipt of the notice of the specified default).
- The Contractor’s argument had the benefit of certainty. Without it, the parties would have been left with the uncertainties of alleging and proving that the repeated non-payment was a repudiatory breach allowing termination at common law. Frustratingly for parties faced with repeated late payment by the other party, late payment is unlikely to be a repudiatory breach unless it adds up to an abandonment of the contract or a refusal to perform it.
Key points
- The Court of Appeal’s judgment is likely to give Contractors and Sub-Contractors faced with repeated non-payment under an unamended JCT contract a much more powerful option than previously thought to be available to them.
- Any party to a construction contract that is responsible for making payment may risk the other party being able to terminate.
- The Court of Appeal’s judgment was based on a close consideration of the words used in the particular JCT contract. If the termination clause had been amended in other ways, a different conclusion might have been reached. This may be given more thought in contract amendments in the future.
- Parties still need to be extremely careful when exercising termination rights, such as making sure that notices are given strictly in accordance with the contract.
How CCC can help you
Terminating a contract is an extremely serious step and the consequences of getting it wrong are severe. Professional advice should be sought whenever termination is an issue.
You might be considering terminating a contract, have received a notice of intention to terminate, or your contract might already have been terminated. CCC has considerable experience in assisting parties in these situations. We can provide the advice and support that you need, including:
- Providing advice to help you make sure that you are taking the right steps at the right time.
- Drafting termination notices or drafting responses to termination notices.
- Helping parties quantify their claims following termination.
- Assisting parties with dispute resolution following termination.
