In Providence Building Services Ltd v Hexagon Housing Association Ltd, it was held that a contractor could terminate its employment under an amended Joint Contracts Tribunal (JCT) Design and Build Contract due to the employer making a second late payment, thereby repeating a “specified default”, even though the first late payment did not give rise to a right to terminate.
The Contract
In 2019, Providence Building Services Ltd (“the Contractor”) and Hexagon Housing Association Ltd (“the Employer”) entered into a construction contract to build social housing (“the Contract”). The Contract incorporated the 2016 JCT Standard Form of Design and Build Contract, with amendments.
The following clause of the Contract was considered by the Court:
“Default by Employer
8.9 .1 If the Employer:
.1 does not pay by the final date for payment the amount due to the Contractor in accordance with clause 4.9 and/or any VAT properly chargeable on that amount…
…
the Contractor may give to the Employer a notice specifying the default or defaults (a ‘specified’ default or defaults).
8.9.2 …
8.9.3 If a specified default or a specified suspension event continues for 28 days from the receipt of notice under clause 8.9.1 or 8.9.2, the Contractor may on, or within 21 days from, the expiry of that 28 day period by a further notice to the Employer terminate the Contractor’s employment under this Contract.
8.9.4 If the Contractor for any reason does not give the further notice referred to in clause 8.9.3, but (whether previously repeated or not):
.1 the Employer repeats a specified default;
…
then, upon or within 28 days after such repetition, the Contractor may by notice to the Employer terminate the Contractor’s employment under this Contract.”
Clause 8.9.1 of the Contract therefore entitled the Contractor to give the Employer a “notice of specified default” if the Employer failed to pay by the final date for payment. If the Employer then did not make payment within 28 days of this notice, Clause 8.9.3 entitled the Contractor to terminate employment by serving a further notice.
The focal point of dispute was Clause 8.9.4 – this provided that if the Contractor “for any reason” did not issue a termination notice under Clause 8.9.3, but the Employer repeated a specified default, the Contractor could terminate by serving a further notice.
Background
In 2019, The Contract was entered into as above. In December 2022, the Employer failed to meet the final date for an interim payment.
The Contractor served a “notice of specified default” under Clause 8.9.1 of the Contract. However, payment was made by the Employer within the 28-day period outlined in Clause 8.9.3, so the Contractor was not entitled to terminate.
In May 2023, the Employer made a second late payment. The Contractor terminated swiftly on the basis that the Employer had repeated a specified default under Clause 8.9.4.
The Employer disputed the lawfulness of this termination and referred the dispute to adjudication. Following a finding substantially in favour of the Employer, the Contractor issued court proceedings. At first instance, the Employer successfully argued that Clause 8.9.4 only applied where the original specified default gave rise to a right to terminate. The Contractor appealed.
Decision of the Court of Appeal
On appeal, the Employer argued that Clause 8.9.4 entitled the Contractor to terminate only where a prior right to terminate had arisen under Clause 8.9.3. The Court dismissed this argument.
It was held that the natural meaning of Clause 8.9.4 was clear. The words “if the Contractor […] does not give the further notice referred to in Clause 8.9.3” were broad enough to cover any situation other than one where the Contractor did give a notice of termination.
The words “for any reason” reinforced this, meaning that a repeated late payment would entitle the Contractor to terminate regardless of why the Clause 8.9.3 notice of termination was not given. This naturally included the situation where no notice of termination was given because the Contractor was not entitled to terminate after the first late payment.
The Employer further argued that there are adverse commercial consequences to allowing termination by contractors even when the repeated specified default may be minor. The Court was not persuaded by these submissions and held that an interpretation in favour of the Contractor would represent a contractual allocation of risk that is commercially acceptable even if it "renders the Employers' ice thinner from the outset".
The Court also rejected the notion that the “battery” of other remedies available to the Contractor should prevent there being this right to terminate. While other remedies such as suspension or adjudication were available, the Court noted those come with “additional cost and uncertainty for the contractor”, while the right to terminate provided a “satisfactory and immediate solution” to the late payment.
The Court of Appeal unanimously decided in favour of the Contractor.
Comparison of JCT provisions in this case to NEC
Unlike the 2016 edition of the JCT Design and Build Contract, the 2017 New Engineering Contract 4 (NEC4) Design Build and Operate Contract contains no provisions on specified defaults. There are no comparable rights of the contractor to terminate where the employer has made successive late payments.
Clauses 90 – 93.2 of the above NEC4 contract provide the procedure for termination by the Client and Contractor. Clause 91 lists 22 reasons for termination, with Clause 91.4 providing that "the Contractor may terminate if the Client has not paid an amount due under the contract within eleven weeks of the date that the Contractor should have been paid (R16)".
This provides a straightforward right to terminate where the employer has not paid or makes a payment later than eleven weeks past the due date, but makes no reference to repeated late payment.
Key takeaways
This case provides a number of key takeaways:
- Parties should consider carefully their termination rights at the time of entering into contract.
- Contractors employed under JCT contracts potentially have a quick route to termination where the employer makes repeated late payment.
- Employers should be very wary not to repeat specified defaults.
- Any specified default, even if it is minor or has been remedied within the appropriate timeframe, can potentially entitle the contractor to terminate if the default is repeated.
- The provisions considered in this case are found across various standard JCT contracts (including the 2024 editions), though please note that the position under NEC4 contracts is different and provides less robust protection for contractors who suffer repeated late payments.
If you have any questions or would like to discuss any of these matters with our team, please contact Leigh Herd, Lindsay Robinson, or another member of our Construction, Engineering and Infrastructure Disputes team.
This article was co-authored by Trainee Valentin Pyataev.