‘Skating on thin ice’ – Court of Appeal rules that contractor can terminate for repeated late payment

Providence Building Services Ltd v Hexagon has generated significant interest since the High Court’s decision in favour of the Employer was reversed by the Court of Appeal. The case concerns the Contractor’s ability to terminate for a repeated breach by the Employer – particularly in respect of late payment.

The Contractor could terminate its employment under cl.8.9.4 of the JCT Standard Form D&B Contract 2016 even where it had not previously warned the Employer of that particular default under cl. 8.9.3.

The case pivots on the interpretation of a clause in the popular JCT 2016 Design & Build Contract. The same provision, however, applies in most of the other JCT forms (Standard, Intermediate, Minor Works) and is also applicable to the new 2024 editions, as well as the previous 2005 forms, and in the Scottish SBCC versions. The wording in similar form dates back as far as the 1998 editions.

The issue in the case therefore could be applicable to the majority of live commercial construction contracts in the UK.

The CoA upheld the Contractor’s right to terminate the Building Contract without warning in certain circumstances. Developers and contract administrators have expressed surprise and may consider that it significantly shifts risk from the Employer to the Contractor.

However, digging deeper into the decision reveals the situation is more complex than first meets the eye.

Background facts

Housing provider Hexagon entered into a contract with Providence for the development of a £7.2m accommodation project in Purley, London, in 2019. The Contract was based on the frequently used JCT Design & Build 2016 edition.

Payment application No.27 of £264,000 was finally due for payment on 15 December 2022, and Hexagon failed to pay. Providence responded with a “warning” notice under clause 8.9.1 requiring payment within 28 days. Hexagon responded by paying in full on 29 December.

At this point, it is helpful to set out the clauses involved:

Default by Employer (relevant extracts):

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). […] [the “Warning Notice”]

8.9.3 If a specified default… continues for 28 days from the receipt of notice under clause 8.9.1… 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. [the “Termination Notice”]

The Warning Notice had Providence’s desired effect and the late payment was rectified two weeks later, resolving the specified default.

The story took a twist four months later. Payment Application No.32 of £365,000 was finally due on 17 May 2023. Hexagon failed to make payment in time. In response to this, Providence chose not to issue a further warning notice under 8.9.1 but went straight to issuing a termination notice under clause 8.9.4 on the basis this was a repeat of the specified default.

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.

This could certainly be described as a bold move by Providence – terminating a contract without a right to do so is itself a breach of contract. Hexagon contested the termination notice and claimed Providence was in repudiatory breach.

Adjudication

Hexagon referred the dispute to adjudication, obtaining a favourable decision in July 2023, which it sought to enforce on summary judgement under CPR Part 7.

On 28 July 2023, Providence sought to have the dispute reheard in the Technology & Construction Court under CPR Part 8, questioning:

“whether a right to terminate under Clause 8.9.3 must first have accrued before Providence could have any right to terminate under Clause 8.9.4.”

TCC decision

Deputy Judge Mr Adrian Williamson KC found in favour of Hexagon, considering that the words “for any reason”, and clauses 8.9.3 and 8.9.4 didn’t envisage that the Contractor could terminate where the original specified default had been rectified.

He considered that the Contractor has “a battery of weapons available to him to protect his cash flow position” comprising the right to suspend the works, payment of statutory interest, and the right to refer to adjudication.

It was not necessary to read into clause 8.9 a right to terminate where the Employer makes every payment 27 days late.

Providence appealed.

Court of Appeal decision

Lord Justice Stuart Smith considered that interpretation of the wording in a standard form contract should naturally focus on the wording rather than its single use in a specific commercial context.

His analysis of 8.9.3 and 8.9.4 was that the wording “does not give notice for any reason” was broad enough to include that the Contractor hadn’t accrued a right to terminate under 8.9.3.

He went on to compare the Contractor’s right (8.9) and the Employer’s right (8.4) to terminate for the other’s default. It was significant that the clauses were structured in the same way:

“If the [Employer/Contractor] does not give the further notice referred to in clause [8.4.2/8.9.3]”.

In Clause 8.4.3 the words “for any reason” are not used. In their place are: “whether as a result of the ending of any specified default or otherwise”.

Since the words “for any reason" are at least as broad as the words “whether as a result of the ending of any specified default or otherwise”, the same result must follow for Clause 8.9.4.

Looking at the plain meaning of the words, and the similarities between the Contractor and Employer termination clauses, the Court held that Providence’s termination was valid.

The court was not persuaded that the commercial context was sufficient grounds to interpret the contract differently. While the Employer may complain this creates a hair-trigger termination, equally the Contractor could complain that the Employer shouldn’t be capable of paying 27 days late without consequence.

The “battery of other remedies” cited by the TCC did not provide a satisfactory and immediate solution to the typical case of late payment.

Judicial criticism is often extremely subtle, as can be seen by Lord Justice Stuart Smith taking aim at the Joint Contracts Tribunal with “though I would accept that the drafting could have been of better quality”.

Analysis

This decision has prompted a level of surprise – particularly amongst developers and contract administrators – that could best be described as “no one really thought it worked like that”. The lack of reaction to the earlier TCC decision perhaps supports that.

The Court of Appeal generally discouraged a journey down “the archaeology of the forms”, but it is a quick task to note that this wording originated in the JCT 2005 forms, and comparable wording was in the JCT 1998 forms. So why is this a surprise after 25 years of use?

The short answer is that it shouldn’t be. Providence identified two cases where this point was considered under the JCT 1998 form:

• In Reinwood Ltd v L Brown & Sons Ltd [2007] the Contractor terminated the contract, and the Employer argued this was unreasonable and vexatious. This was rejected:

...since the employer has already received a warning in respect of the previous default and must be taken to know that if he repeats the default he runs the risk that the contract may be determined either forthwith or within a reasonable time after the repetition of the specified default.

• In Ferrara Quay Ltd v Carillion Construction Ltd [2009], HHJ Toulmin CMG QC noted:

I note in relation to [ Reinwood ] that the specialist editors of the Building Law Reports … says that an employer who has defaulted once on his payment obligations is skating on thin ice.

The purpose of the provision is to ensure that the contractor is paid in accordance with the payment provisions. The provisions give the contractor the power to terminate if the payment terms are not complied with...”

An economics explanation?

The real explanation perhaps lies in economics and market forces. In the age of Reinwood, lending on property development was cheap and plentiful, inflation was steady, and tender lists were long. Contractors may have always had the right to terminate in this situation, but there are good reasons not to exercise that right, if the job would still prove to be profitable, and their reputation remained undamaged.

The economics of the construction industry have changed significantly. Even before Covid-19, contractors were chasing higher margins over volume, and with high profile contractor insolvencies, high construction inflation, labour and skill shortages, contractors can afford to be far more selective.

Risks to contractors have also increased, particularly in respect of supply chain insolvency, which may be a contractor’s risk in the contract, but not one over which they have much control. Where a job becomes loss-making, and the employer presents an opportunity to terminate, the temptation to exercise that right is powerful.

Consequences

The obvious reaction from employers will be to seek to amend the JCT contract to reverse this interpretation. That is straightforward to draft, however contractors would be justified in objecting to a position where the employer could delay every payment by 27 days.

For contracts that are already signed, employers and their agents need to be aware of this, and ensure they have processes in place to avoid unintended late payment. Account systems, banking issues and administrative errors could all potentially result in a terminated JCT contract.