Contractor’s Termination Rights for Repeated Late Payment

Does a Contractor have the right to terminate its employment for repeated late payment?

Sometimes the answer will be yes.

The matter of Providence Building Services Limited v Hexagon Housing Association Limited [2024] EWCA Civ 962 clarifies the termination rights given to contractors under the 2016 Edition of the JCT Design and Build Contract.

The background facts

Hexagon Housing Association Limited (the Employer) contracted with Providence Building Services Ltd (the Contactor) for the design and construction of five blocks of social housing in Purley, London.

The standard JCT Terms as to termination were unamended with the exception of extending the final date for payment from 14 to 28 days. In particular, Clause 8.9 stated:

“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) […] 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.”

Pursuant to Payment Notice 27, Hexagon was obliged to pay a sum of circa £260,000 on or before 15 December 2022, but it failed to do so. In response, Providence served a notice of specified default under clause 8.9.1 of the contract on 16 December 2022. Hexagon subsequently paid the sum claimed on 29 December 2022.

On 28 April 2023, a further relevant Payment Notice, number 32, was issued in the sum of circa £360,000 which Hexagon was obliged to pay on or before 17 May 2023. Again, Hexagon failed to make payment and Providence issued its Notice of Termination under clause 8.9.4 the following day.

Providence’s case was that had it had become entitled to issue a notice of termination given Hexagon had repeated a specified default under clause 8.9.3 and had committed a repudiatory breach.

Hexagon disputed the validity of Providence’s notice of termination.  It was Hexagon’s position that it had remedied the specified default before Providence’s right to terminate had arisen by making the outstanding payment before the end of the 28 day period.

The Court’s decision

In November 2023, the High Court found Providence’s notice of termination to be invalid.

It was held that as Hexagon had remedied the specified default before a right to terminate had arisen, Providence could not lawfully terminate its employment under clause 8.9.4 of the contract.

This decision was subsequently overturned by the Court of Appeal in August 2024.

The Court of Appeal applied the ordinary meaning of the wording in clause 8.9.4, and held that Providence was within its rights to terminate its employment under the contract, despite the right to terminate not having previously accrued.

Key takeaways for construction professionals

In light of the Court of Appeal’s decision, a repeated failure to make payment on time exposes an employer to the risk of termination. It is therefore important for employers seeking to mitigate this risk to remain alive to the agreed contractual payment terms and understand the serious consequences of inefficient payment management.

Whilst this decision affords contractors better protection when terminating a JCT contract following the employer’s late payment, contractors should be aware of the risk of themselves unwittingly committing a repudiatory breach of contract by purporting to terminate when they are not entitled to do so.  Repudiatory breaches of contract can result in very serious consequences for the defaulting party.

Further detail on the termination of construction contracts and the effect of repudiatory breaches can be found here.

Speak to our specialist Construction and Engineering Lawyers

We recommend seeking specialist legal advice prior to any termination rights being exercised to ensure that any contractual provisions are complied with, and notices are served correctly to avoid arguments later down the line and allegations of repudiatory breach arising.

If you have any questions about this blog, speak to one of our construction team on 03456 381381 or email construction@ibblaw.co.uk.