Earlier this year, contractor Providence Building Services appealed a High Court (TCC) ruling that declared it was not allowed to terminate a contract following repeated late payment by its employer, in circumstances where the employer had cured its previous breach by making payment within the period allowed for remedying a specified default.

The Court of Appeal has now handed down its decision. In what may be seen as a big win for contractors, the court overturned the TCC’s decision and found that Providence was entitled to terminate its employment without further warning where the employer again failed to pay on time, notwithstanding the employer’s earlier default had been remedied within the 28 days allowed.

What happened?

The contract was based on the 2016 JCT Design & Build form, save that the standard 14-day ‘cure’ period within clause 8.9.3 was extended to 28 days.

The employer/contractor relationship had deteriorated because of repeated late payment by Hexagon. In total, 19 out of 32 interim applications were paid late.

The sum notified by payment notice no.27 was to have been paid by 15 December 2022. When Hexagon missed the deadline, Providence issued a notice of specified default—essentially a warning shot—under clause 8.9.1 of the contract, requiring payment within 28 days on pain of termination. Hexagon paid before the ‘cure’ period was up, which meant that Providence’s right to terminate under clause 8.9.3 did not arise.

Four months later Hexagon again failed to pay, this time in respect of payment application no.32. Instead of firing off another warning notice, Providence took the bold step of terminating the contract under clause 8.9.4 which permitted termination for repeated breach.

Challenging the validity of the termination notice, Hexagon referred the dispute to adjudication and won. Providence’s response was to apply to the Technology & Construction Court under CPR Part 8, to determine whether a right to terminate under Clause 8.9.3 needed to have accrued before Providence could terminate under Clause 8.9.4 (i.e. whether it was a precondition to termination that the initial default was not cured within the 28-day grace period).

The TCC ruled in Hexagon’s favour. Providence appealed, contending that if the TCC’s interpretation was correct, the contractor’s right to terminate would never accrue even if Hexagon made every payment 27 days late.

What did the Court of Appeal decide?

The Court of Appeal disagreed with the TCC and overturned its decision. It found that on a “natural and ordinary” reading of Clause 8.9.4, the contractor is entitled to terminate a JCT Contract where an employer repeatedly fails to make payments on time, even if the initial default is remedied before it triggers a right to terminate under Clause 8.9.3. There is no requirement to give further notice to achieve this.

What can contractors – and employers – learn from this?

Clauses in construction contracts are to be interpreted based on the plain meaning of the wording used. In the case of Clause 8.9.4, a simple interpretation enables contractors to terminate a contract where an employer repeatedly fails to make payments on time, and there is no requirement to give further notice under clause 8.9.3 to achieve this.

While contractors may still be reluctant to use the ‘nuclear’ option of termination, the confirmation provided by the appellate court provides contractors with valuable leverage, and we expect clause 8.9 may now become a focal point of negotiation as employers seek to lessen the impact of this ruling.

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This article contains information of general interest about current legal issues, but does not provide legal advice. It is prepared for the general information of our clients and other interested parties. This article should not be relied upon in any specific situation without appropriate legal advice. If you require legal advice on any of the issues raised in this article, please contact one of our specialist construction lawyers.

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