Lena Barnes is a senior associate at Devonshires
Now the dust has settled following the Court of Appeal’s decision in Providence Building Services Ltd v Hexagon Housing Association Ltd [2024], it is worth reflecting on the impact this decision will have on existing and future construction projects.
The case turned on a contractor’s right to terminate for the repeat of a specified default under a JCT 2016 Design and Build Contract.
Clause 8.9.4 says: “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 a reasonable time after such repetition, the contractor may by notice to the employer terminate the contractor’s employment under this contract.”
“It is extremely unlikely that any sensible client will wish to retain clause 8.9.4”
Hexagon, the employer, argued that the right to terminate for a subsequent breach arose only if a previous right to terminate had arisen and did not include a situation where the contractor did not have the right to terminate in the first place. In other words, the right to terminate for a subsequent breach could only arise where the breach had not been remedied within the relevant cure period.
Providence, the contractor, argued the clause was drafted widely enough to allow a termination notice to be issued on the repetition of a second breach, even if the original breach had been remedied during the cure period (in this case 21 days).
The outcome
The Court of Appeal agreed with Providence and found that an employer that pays late and is in receipt of a notice of breach can have its employment terminated if it repeats that breach by paying later (if only by a day) on a second occasion. This is the case even though the initial late payment breach was cured before the right to termination arose.
The issue for employers is that the proverbial sword of Damocles hangs over them in the event they pay late once, resulting in a notice of default. If they pay late again then the contract can be terminated subject to any argument over whether that termination was reasonable or vexatious – neither of which provide an employer with any measure of security of comfort.
For both contractors and employers, it is important to note that the right provided by clause 8.9.4 is not linked in any way to a statutory obligation. It is for this reason that it is not uncommon for the clause to be deleted or substantially amended. For future projects it is extremely unlikely that any sensible employer will wish to retain clause 8.9.4 in its current form given its serious implications. Where it has not been removed then it provides a contractor with a powerful right to terminate – or at least threaten to terminate – in the event of a second late payment (no matter when it occurs during the construction programme).
The impact of this decision will only resonate in existing projects where the original clause 8.9.4 wording is still in play. In circumstances where there is no legal requirement to contain a clause 8.9.4-type mechanism in a construction contract, it is unlikely that any employer will wish to utilise a contract that retains it. Similarly, contractors will want to ensure their subcontracts prevent supply chain members from having the same right. This is entirely understandable. Payments in construction contracts can be unintentionally late for a variety of reasons and it is simply naive to assume that people are always going to get paid precisely on time. That is the aim, but with the best will in the world, it is not always achievable – recognising, of course, the significant difference between late payment and non-payment.
So, when you look at the decision from a little distance, the main takeaway is that clause 8.9,4 is unlikely to trouble anyone in the future.
