Non-Payment: can you terminate the contract?

Re: Providence Building Services Ltd v Hexagon Housing Association Ltd [2024] EWCA Civ 962

A key concern for any contractor is dealing with cash flow into the business: therefore, when an employer persistently makes late or even non-payments, do you have the option to terminate the contract?

This position was considered in the case of Providence v Hexagon in reference to a JCT 2016 Design and Build Contract entered into between the parties in February 2019. The contract provided the following key provisions:

Clause 8.9.1 dealt with the position if Hexagon failed to make payment by the final date, and provided that Providence could give notice of a “specified default” which was required to be remedied by Hexagon within 28 days.

Clause 8.9.3 provided that Providence could serve further notice to terminate the contract if Hexagon failed to comply with the 28-day notice period.

Clause 8.9.4 stated that if the termination notice under clause 8.9.3 was not served “for any reason”, and if Hexagon continued the specified default, Providence had the option to serve notice to terminate the contract.

The factual position of the dispute resolved around Hexagon’s failure to make payment which started in December 2022, amounting to an agreed specified default: however, the default was subsequently remedied by Hexagon making a late payment and therefore the right to terminate under Clause 8.9.4 could not be applied.

Thereafter, Hexagon again failed to make payment in April 2023, and Providence issued a notice pursuant to Clause 8.9.4 to terminate the contract due to Hexagon repeating the specified default.

In the first instance, The Technology and Construction Court ruled in favour of Hexagon, primarily on the basis that a right to terminate under Clause 8.9.4 was conditional on the requirements of Clause 8.9.3. Therefore, the right to terminate had not arisen and the termination by Providence was deemed invalid.

Providence appealed the decision, and the Court of Appeal found in favour of providence, using a strict interpretation of Clause 8.9.4 it was held that the inclusion of “for any reason” was broad enough to cover scenarios notice under Clause 8.9.3. Considering this, Providence’s termination of the contract was deemed valid.

The decision of the Court of Appeal reinforces the strict requirement for employers under JCT contracts to comply with the payment schedules and the consequences of failing to make payment, even if subsequent payment is made, can be significant.

It is important to note that the JCT 2024 suite includes the same provisions and therefore moving forward contractors will be afforded a greater deal of protection, with the ability to terminate without a risk of repudiatory breach, and the ability to deal with the cash flows implications stemming from an employer’s failure to make payment.

The decision only reinforces the benefits to employers and contractors of obtaining proactive legal advice in order to pre-empt and prevent disputes from arising.

Contact Details

If you have any questions in reference to the above or any issues you are currently dealing with, do not hesitate to contact our Construction Litigation team using the details provided below.

Andrew Dickinson and Zoe Allen

AndrewDickinson@chadlaw.co.uk 0113 225 8830

ZoeAllen@chadlaw.co.uk 0113 225 8837