Late payments in the construction industry have long been a source of tension between contractors and employers. The recent legal battle between Providence Building Services Limited and Hexagon Housing Association Limited has brought renewed clarity to how termination rights under JCT contracts apply when payments are repeatedly delayed. This article explores the background, legal arguments, and broader industry implications of the Court of Appeal’s decision, which overturns a prior High Court ruling and strengthens contractors’ ability to protect their cash flow.
Background of the Dispute
The dispute centers on a £7.2 million construction contract between Providence Building Services Limited, a contractor based in East Grinstead, and Hexagon Housing Association Limited, for building works in Purley. The contract was governed by the Joint Contracts Tribunal (JCT) standard terms introduced in 2005.
The conflict arose when Hexagon failed to pay two invoices on time: one for £264,000 in November 2022 and another for £366,000 in April 2023. Under the contract, if a payment was late by more than 21 days, Providence could suspend work, and if payment remained outstanding after an additional seven days, it could terminate the contract.
Providence issued a formal default notice after the first late payment, which Hexagon cured by paying within the 28-day grace period. However, after the second late payment, Providence terminated the contract, citing repeated breaches of payment obligations.
Legal Arguments and High Court Decision
Hexagon contested the termination, arguing that since the first late payment was remedied within the contractual grace period, Providence was not entitled to terminate after the second late payment. They maintained that termination rights should only arise if the first default itself was incurable or unremedied.
In November 2023, the High Court sided with Hexagon, ruling that Providence could not terminate the contract based solely on a second late payment if they had not already been entitled to terminate after the first. The judge emphasized that Providence had alternative remedies available, such as suspending work, claiming statutory interest on late payments, and adjudication to resolve disputes.
The High Court viewed these remedies as sufficient to protect the contractor’s interests without resorting to termination.
Court of Appeal Overturns High Court Ruling
Providence appealed the decision, arguing that the contract’s wording allowed termination upon a repeated default, regardless of whether the initial default had been cured within the grace period.
The Court of Appeal agreed with Providence, interpreting the contract language as permitting termination after a second late payment even if the first was rectified. The court clarified that the contract did not require the contractor to be able to terminate after the first default to exercise termination rights after a subsequent default.
Lord Justice Stuart-Smith, delivering the judgment, rejected the High Court’s reliance on alternative remedies, noting that these options often involve delays, costs, and uncertainties that do not adequately address the immediate harm caused by late payments.
This ruling establishes a 'two strikes and you’re out' principle under the JCT contract, meaning that a contractor can terminate the contract after a second late payment, even if the first was remedied.
Industry Perspectives and Implications
Mark London, a partner at Devonshires representing Hexagon, highlighted the ruling’s potential impact on employers, warning it introduces significant risks. Employers who make even a single late payment risk facing termination if a second late payment occurs, regardless of prompt rectification of the first.
This interpretation marks a shift from longstanding industry practice under JCT contracts, where termination rights were generally exercised only after persistent or unremedied breaches.
From the contractor’s viewpoint, this ruling strengthens their position to protect cash flow and exit unprofitable contracts more decisively. Darren Tancred, managing director of Providence, explained that late payments had strained the company’s cash flow and affected its performance on multiple projects. He welcomed the decision as crucial not only for Providence but for the wider construction industry, including main contractors and subcontractors relying on JCT contracts.
The judgment underscores the importance of timely payments and may encourage employers to improve payment practices to avoid contract termination risks.
Understanding the Remedies Under JCT Contracts
JCT contracts provide contractors with several remedies when employers fail to pay on time. These include the right to suspend work after 21 days of non-payment and the right to terminate if payment remains outstanding after a further seven days.
Additionally, contractors may claim statutory interest on late payments and refer disputes to adjudication, a faster dispute resolution process.
However, the Court of Appeal noted that these remedies, while helpful, do not fully compensate for the immediate financial harm caused by late payments. Suspension can delay project progress and increase costs, and adjudication involves time and expense.
The ruling thus affirms that termination can be a necessary and justified response to repeated payment defaults, reflecting the contractual balance of rights and obligations.
What this means
The Court of Appeal’s decision in the Providence v. Hexagon case marks a significant development in construction contract law, particularly regarding payment defaults under JCT terms. By affirming contractors’ rights to terminate contracts after repeated late payments—even when initial defaults are cured—the ruling emphasizes the critical importance of timely payments and clarifies the scope of termination rights. For employers, this judgment serves as a cautionary reminder to maintain rigorous payment discipline to avoid jeopardizing contractual relationships. For contractors, it provides a more robust legal tool to safeguard their financial stability and operational viability. As the construction industry continues to navigate complex contractual landscapes, this decision will likely influence contract management practices and dispute resolution strategies going forward.
This article was curated with AI assistance and reviewed according to Tamfis editorial settings.