Be careful when terminating due to late interim payments!

The case of Providence Building Services Limited v Hexagon Housing Association Limited concerns the interpretation of a termination clause in a JCT Design and Build Contract. The decision from the Supreme Court reverses the decision made by the Court of Appeal around termination in the context of repeated late payments, and provides clarity on the interpretation of the specific clause as well as the court’s approach to the interpretation of construction contracts generally.

The background to the appeal

Hexagon Housing Association Limited (the “Employer”) and Providence Building Services Limited (the “Contractor”) entered into a contract to build social housing.

A dispute arose which centred on the Employer’s late payment of two interim payments. The Contractor served a ‘notice of specified default’ in relation to the first late interim payment. The Employer subsequently paid the outstanding sum within the 28 day notice period under Clause 8.9.3, meaning the Contractor was not permitted to terminate. The Employer then failed to make the second interim payment timeously and the Contractor terminated the contract. The contract was terminated on the basis that the Employer had repeated a specified default under Clause 8.9.4.

The Employer disputed the termination, arguing that the termination was invalid as the first late payment had been remedied timeously. The Employer argued termination for a repeated specified default was not permissible as the Contractor had never previously been entitled to terminate the contract.

The validity of the termination was initially subject to adjudication proceedings. The Contractor subsequently referred the decision to the court which favoured the Employer at first instance. The Court of Appeal overturned the first instance decision, with the judge affirming the Contractor’s view that termination was valid, despite the first late payment being remedied within the 28 day period.

The Court of Appeal’s judgment focused on the ‘for any reason’ wording within the termination clause. The court interpreted it widely to allow the Contractor to terminate for a repeated late payment. Termination was permitted even though the earlier default was remedied and that no termination right had previously accrued. The Court of Appeal also drew a comparison between each party’s right to terminate and justified its reasoning as it created symmetry between the provisions.

You can read more about the Court of Appeal’s decision in our article here.

The Supreme Court decision

The Supreme Court has now considered the matter, and rejected the Court of Appeal’s interpretation, overturning the decision.

The court interpreted the ‘for any reason’ wording within the termination provision in light of its “objective natural meaning”. The Employer’s argument was favoured meaning for termination to be valid, the right to terminate must have previously accrued under the contract. The referral to the preceding clause within the provision confirmed the ability to terminate is dependent on a specified default first occurring under Clause 8.9.3. This interpretation enables an Employer to repeatedly make late payments without giving the Contractor the right to terminate, provided the payment is made within 28 days of the notice period.

The outcome produced by the Contractor’s argument, if it was held to be successful, was considered by the court. It was held to be undesirable if contractors were permitted to terminate merely due to receiving two separate payments late by a small margin. The court acknowledged a sensible approach would be to allow termination for a second late payment where the first late payment was a substantial breach.

The weight placed by the Court of Appeal on the symmetry of the termination rights between the parties was not accepted. It was noted the Employer and Contractor have substantially differing contractual obligations, and therefore, it does not follow that they must have similar termination rights.

The court provided useful guidance regarding the interpretation of construction contracts generally. The principle that interpretation should be based on the objective intentions of the parties when contracting received clarification. The court acknowledged the background context and explanatory notes to a standard form contract are able to be considered for interpretation.

Key takeaways

This case provides a number of key takeaways:

If you are an Employer, make payments timeously to avoid any similar issues.
If you are a Contractor, think carefully before terminating a contract due to late payment, and check the relevant notices that will need to be issued before doing so.
To exercise the right to terminate for specified default, the previous default must have been material and/or resulted in a right to terminate. The repetition of a specified default alone, where the earlier default was remedied, is not sufficient.
The background context of other contracting parties using an industry standard contract can be a useful guide for interpretation.

This case highlights the difficultly of interpreting the provisions of construction contracts. If you have any questions or would like to discuss any of these matters with our team please contact a member of our Construction, Engineering and Infrastructure Disputes team.

This article was co-authored by Trainee Ruaridh Brown.

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