The dust is starting to settle now, more than a month on from the landmark decision in the case between Providence Building Services Ltd v Hexagon Housing Association Ltd, which could have serious ramifications for the way contractual relationships are navigated, especially with regard to late payment and early termination.
But is this ruling such a seismic shift in the grand scheme of contractual relations between parties to construction projects?
Recap
In February 2019 Hexagon and Providence entered into a contract for the construction of several buildings in Purley. The contract was a 2016 JCT Design and Build Contract, incorporating specific amendments which were agreed by both parties.
The dispute concerned Providence's right to terminate the contract in light of repeated late payment by Hexagon.
Relevant provisions of the contract
Clause 8.9.1 of the contract provided that if Hexagon failed to make payment by the final date for that payment, Providence could give Hexagon a notice of a "specified default". If Hexagon failed to remedy that default within 28 days, Clause 8.9.3 said Providence could serve a further notice to terminate the contract.
Clause 8.9.4 said that if Providence did not "for any reason" serve the termination notice under Clause 8.9.3, and if Hexagon repeated a specified default, Providence may serve notice to terminate.
Key issues
The core issue revolved around the interpretation of clauses 8.9.1 to 8.9.4 of the contract.
In December 2022 Hexagon failed to pay the sum due per Payment Notice 27 by the final date for payment. Providence duly served a Clause 8.9.1 notice of a specified default.
Hexagon subsequently paid up, and it was common ground that the specified default did not continue, and so Providence was not entitled to terminate under Clause 8.9.3.
In April 2023 Hexagon again failed to pay the sum due in respect of Payment Notice 32 by the final date for payment. The following day Providence issued another notice – this time under Clause 8.9.4, giving notice that Hexagon had repeated a specified default, and Providence was therefore terminating.
Hexagon later paid in full. It thereafter disputed the lawfulness of Providence's notice of termination, and asserted that Providence had repudiated the contract.
First Instance Decision
The Technology and Construction Court (TCC) initially ruled in favour of Hexagon. It held that Providence could not terminate the contract under clause 8.9.4 unless a right to terminate under clause 8.9.3 had first accrued. This meant that Providence’s notice to terminate was deemed invalid, as the “right to terminate” had not been established pursuant to the conditions within clause 8.9.3.
Court of Appeal decision
The Court of Appeal disagreed with the TCC’s interpretation. It found that the natural and ordinary meaning of clause 8.9.4 allowed Providence to terminate the contract, even if the right to terminate under clause 8.9.3 had not previously accrued.
The Court of Appeal adopted a strict, literal interpretation of the contract, with an "intense focus on the words used", rather than the commercial context in which the parties concluded the contract.
Implications?
The initial reporting of the Court of Appeal decision was that it served as a warning to employers under JCT contracts, and stressed the importance of closely adhering to contractual payment procedures. Further commentary reinforced the potential consequences of repeated late payments, even if those payments are subsequently made. In short, contractors now have a clearer pathway to terminate contracts in the event of persistent employer default.
But, is this really an option for contractors, practically or commercially?
The reality in the industry
Whilst this ruling will undoubtedly cause some concern amongst employers using JCT Design and Build contracts (and notably, the ink is now dry on the 2024 JCT suite, which contain the same termination provisions at Clause 8.9) – it remains to be seen the extent to which contractors will avail themselves of the right to terminate in the event of delays to payment.
This course of action is very much the "nuclear option", and risks damaging commercial relationships, and generating disputes on the validity of the termination, and the costs and losses which flow.
Conversely, the decision may provide relief to contractors – particularly when working in economically straitened times, or on projects which are not commercially viable. Whether or not a contractor will ultimately decide to go nuclear, the Court of Appeal's decision will provide a lever to exert pressure, to try and secure timely payments.
Employer risks/conclusions
If the employer is not alive to the risks of regularly not paying its contractor, it risks the consequences of early termination. This decision could have serious implications for employers, and it therefore becomes important for employers to ensure they have robust payment mechanisms in place, and that deadlines are not missed for certifying payments, issuing pay less notices and/or paying sums due.
Suppose a contract is terminated due to employer default. In that case, employers will be exposed to claims for the costs arising from early termination (as is standard in JCT contracts), including demobilisation costs and loss of profit on the remaining works.
Again, whether or not this risk becomes reality or common-place within the construction industry remains to be seen.
Parties wishing to mitigate against the risk of non-payment and/or termination rights would be well advised to:
- Undertake due diligence at the point of contract in order to form a view on the ability of its counterpart to deliver its side of the bargain – whether that is delivery of or payment for the works;
- Understand the risk allocation in the contract, and seek to negotiate positions which best protect their interests; and
- Actively manage the contract to ensure that payment processes are adhered to, notices given, and any termination rights are exercised carefully and precisely.
To find out more or for any queries, please contact James.Grinstead@dwf.law or Katherine.Doran@dwf.law
