When can a contractor terminate a JCT Contract for late payment?

An article on the Court of Appeal’s decision in Providence Building Services Limited v Hexagon Housing Association Limited by Anthony Albertini, Partner of Clyde & Co, who acted for the successful contractor.

Introduction

Despite Parliament’s passage of the Housing Grants, Construction and Regeneration Act 1996, which requires employers to make interim payments to contractors by their final dates for payment, late payment of contractors continues to be a real problem in the UK construction industry.  Contractors, who generally operate on slender profit margins, often struggle to pay their own staff and supply chains and meet their other financial commitments when they experience late payments.  The reality is that proper cashflow remains the lifeblood of most contractors.

The Facts in the Case

In the Providence case, the Employer, Hexagon, engaged a modestly sized Contractor, Providence, to design and build five blocks of social housing under an amended JCT 2016 Design and Build Form of Contract (the Contract). It then proceeded to make many of the monthly payments due to Providence late, i.e. beyond their final dates for payment. Some were very late.

Given the history, after another late payment occurred, Providence decided to give Hexagon a notice of specified default, which formally specified that late payment as a contractual default. When, in a subsequent monthly payment cycle, another late payment occurred, Providence served a termination notice upon Hexagon, to end its employment under the Contract. Hexagon then challenged the validity of Providence’s termination notice.

The Interpretation Issue

The issue, initially heard by the Technology and Construction Court (TCC), was whether Providence was entitled to serve a termination notice upon Hexagon as a result of the further late payment, after a notice of specified default had been given, and the specified default had been repeated.

Providence maintained that, on the true interpretation of the termination provisions in the Contract, it was entitled to serve a termination notice, once the specified default had been repeated.

Hexagon, on the other hand, denied Providence’s interpretation of those provisions. It contended that it was only in certain, limited circumstances that Providence could serve a termination notice, following the repetition of the specified default.  To understand Hexagon’s argument, one needs to consider the termination provisions in the Contract closely.

The Relevant Termination Provisions

The provisions which provided for Providence to terminate its employment were set out in clause 8.9 of the Contract. 

Clause 8.9.1 provided that if Hexagon did not pay a monthly payment to Providence by the final date for its payment, i.e. Hexagon made a late payment, then Providence could give Hexagon a notice of specified default.

Clause 8.9.3 stated that if the specified default continued for 28 days from Hexagon’s receipt of Providence’s notice of specified default, then Providence could, within a period of 21 days, give Hexagon a further notice terminating its employment. The 28-day period was therefore a “cure period”, within which Hexagon could make the relevant payment, before Providence would acquire the right to terminate its employment for a continuation of the late payment.

Clause 8.9.4 provided that if for any reason Providence did not give the further notice under clause 8.9.3, but Hexagon repeated the specified default (whether previously repeated or not), then Providence could within 28 days of such repetition serve a notice upon Hexagon which terminated its employment.

The wording of clause 8.9.4 was different from the wording in clause 8.4.3, which contained the provisions by which Hexagon could terminate Providence’s employment, for a repetition of a specified default by Providence. The words in clause 8.4.3 confirmed that if Hexagon did not give a further notice to Providence “whether as a result of the ending of any specified default or otherwise…” but Providence repeated a specified default, then Hexagon could serve a termination notice upon Providence.

The late payment which was the subject matter of Providence’s notice of specified default had been paid by Hexagon within the 28-day “cure period” following Providence’s notice of specified default. It was therefore common ground between the parties that Providence did not acquire a right to give a termination notice under clause 8.9.3 for that particular late payment.

Hexagon’s argument was that Providence’s right to operate clause 8.9.4 and give a termination notice under that clause could only arise where a late payment by Hexagon had occurred, and Providence had given a notice of specified default, and Hexagon had then failed to make that payment within the 28-day “cure period”. According to Hexagon, it was evident from the words in clause 8.9.4 referring to clause 8.9.3 that Providence’s right to terminate under clause 8.9.4 could only arise where the following pre-conditions were satisfied: (i) a late payment from Hexagon had occurred and Providence had given Hexagon a notice of specified default in relation to it; (ii) Hexagon had failed to make the late payment within the 28-day “cure period”; and Providence had thus acquired a right to terminate its employment under clause 8.9.3; and (iii) Hexagon made another late payment and repeated the specified default.

In short, Hexagon argued that the wording of clause 8.9.4 pre-supposed that Providence must have acquired a right to terminate under clause 8.9.3 for a continuing late payment first, before it could exercise its right to terminate under clause 8.9.4 for a repetition of the specified default.

Providence denied that that was the true interpretation of clause 8.9.4. It maintained that the wording of clause 8.9.4 was clear and that the words “if for any reason Providence did not give the further notice under clause 8.9.3” were broad and embraced a situation where Providence had given a notice of specified default in respect of a late payment and Hexagon had then made the late payment within the 28-day cure period. Thus, according to Providence, it was not necessary for Providence to acquire a right to terminate its employment under clause 8.9.3, before it could terminate under clause 8.9.4.

The TCC Judgment

To determine this interpretation issue, the TCC decided that it had to ascertain the natural and ordinary meaning of clauses 8.9.3 and 8.9.4 of the Contract, set in the context of the Contract as a whole.

It found that the words “does not give” in clause 8.9.4 envisaged that Providence would be able to make a choice as to whether or not to take the active step of serving a further notice under clause 8.9.3, and that Hexagon’s interpretation of clauses 8.9.3 and 8.9.4 was therefore to be favoured.

In coming to its conclusion, the TCC was not persuaded by arguments from Providence that such an interpretation would produce unbusinesslike results, because an employer could make every payment 27 days after receiving notices of specified default and avoid the possibility of termination by the contractor. The TCC considered that the contractor would have a “battery of weapons” available to protect its cashflow position, including rights to suspend the works, to statutory interest, and to adjudicate.

Providence appealed the TCC’s judgment.

The Court of Appeal Judgment

The Court of Appeal decided in Providence’s favour unanimously and overturned the judgment of the TCC.

In its judgment, the Court of Appeal initially considered the meaning of the words in clause 8.9.4 in isolation, and then construed them in the context of the other relevant provisions in the Contract, i.e. clauses 8.4 and 8.9. In its view, on both approaches, Providence’s interpretation prevailed.

Viewed in isolation, the Court of Appeal found that the conditional words at the beginning of clause 8.9.4 were broad enough to cover any state of affairs other than one where the contractor had already given a further notice under clause 8.9.3. The fact that an employer, which had received a notice of specified default, had made a late payment within the cure period, which prevented the contractor from gaining a   right to terminate its employment under clause 8.9.3 fell within the meaning of the phrase “for any reason” in clause 8.9.4.

The Court of Appeal observed that clauses 8.4.3 and 8.9.4 were structurally similar and that the conditional words in them were the same. It also noted that those clauses only differed in their reasons as to why a further notice had not been given. It found that the words “for any reason” in clause 8.9.4 were at least as broad as the words “whether as a result of the ending of any specified default or otherwise” in clause 8.4.3.

The Court of Appeal found that Providence’s interpretation was commercially acceptable, and consistent with two TCC decisions on the similar, albeit differently worded, 1998 Edition of the JCT Form. It was unpersuaded by the TCC’s reference to the “battery” of other remedies available to a contractor, considering that they did not provide an immediate solution to a case of late payment, and would involve delay, uncertainty and additional cost.

Commentary

Contractors who are employed under JCT Forms will be breathing a sigh of relief following the Court of Appeal’s decision.

Many contractors still experience late payments as a regular trading occurrence. It is important that they have effective remedies to redress such situations. As the Court of Appeal remarked, the “battery of weapons” referred to by the TCC, often proves to be slow, costly and ineffective remedies.

The Court of Appeal’s decision allows contractors who receive late payments to give notices of specified default, knowing that that they will acquire rights to terminate if, having given such notice, the specified default is repeated, and late payment occurs again.

That said, contractors should not be too “trigger happy” with termination notices. The JCT Contracts stipulate that they may not be given “unreasonably or vexatiously”. Consequently, contractors should take advice if they find themselves receiving late payments, as to how to obtain effective redress and in particular whether it is appropriate to give notices of specified default and termination.