‘Providence Building Services Limited v Hexagon Housing Association Limited’: What are the practical consequences for parties engaged in JCT Design & Build Contracts?

The recent decision offers a powerful new tool for contractors to terminate JCT contracts when faced with non-payment…

The unanimous decision of the Court of Appeal ('CA') in Providence Building Services Limited v Hexagon Housing Association Limited has provided clarity on a contractor's entitlement to terminate the JCT Design & Build 2016 (D&B) Contract (‘the Contract’) for repeated specified breaches.

The facts

The case concerned multiple late payments by the employer, Hexagon Housing Association Limited ('Hexagon'). The contractor, Providence Building Services Limited ('Providence'), issued a specified default notice for the first non-payment by the due date, which Hexagon remedied within the relevant cure period. However, a failure to pay on time under a subsequent payment notice meant Providence sought to terminate, by serving notice to Hexagon pursuant to Clause 8.9.4 of the Contract, for repeated breach of the specified default.

The ruling

The decision hinged on the interpretation of Clauses 8.9.3 and 8.9.4 of the Contract, with the CA concluding that a contractor does not need to accrue a right to terminate under Clause 8.9.3 before being able to exercise its termination rights under Clause 8.9.4. Please see this clause in further detail below:

Standard form JCT D&B 2016 clause 8.9:

Default by Employer

8.9.1 If the Employer:

.1 does not pay by the final date for payment the amount due to the Contractor in accordance with clause 4.9 and/or any VAT properly chargeable on that amount […] the Contractor may give to the Employer a notice specifying the default or defaults (a ‘specified’ default or defaults).

8.9.3 If a specified default or a specified suspension event continues for 28 days* from the receipt of notice under clause 8.9.1 or 8.9.2, the Contractor may on, or within 21 days from, the expiry of that 28 day** period by a further notice to the Employer terminate the Contractor’s employment under this Contract.

8.9.4 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):

.1 the Employer repeats a specified default; [… ] then, upon or within 28 days*** after such repetition, the Contractor may by notice to the Employer terminate the Contractor’s employment under this Contract.”

* standard wording "14 days"

** standard wording "14 days"

*** standard wording "a reasonable time"

The CA determined that the wording in Clause 8.9.4 "if for any reason [Providence] does not give the further notice referred to in clause 8.9.3" was sufficiently broad to allow termination where a specified breach is repeated (e.g., late payment), even if the initial breach was remedied within the cure period meaning that the option under Clause 8.9.3 was never available. This interpretation underscores the clause's purpose: to encourage compliance with contractual obligations and provide the wronged party with an enforceable and immediate remedy for repeated breaches.

Implications for contractors

1. Enhanced termination rights: Contractors can seek to terminate a Contract under Clause 8.9.4 upon a repeated specified breach without having to rely on the uncertainties of alleging and proving that the repeated non-payment was a repudiatory breach (allowing termination at common law and without risking a repudiatory breach themselves). 
2. Protection of cash flow: The CA determined that Clauses 8.9.3 and 8.9.4 represent a contractual allocation of risk that is commercially acceptable and therefore its decision seeks to balance out the power dynamic and provide greater protection of contractor's cash flows.
3. Tactical default notices: This ruling could be a powerful weapon in the armoury of a contractor seeking to exit an unprofitable project. However, Clause 8.2.1 of the Contract prevents such notices being given unreasonably or vexatiously and so contractors should seek legal advice as to the available and most appropriate avenues of redress in the event that multiple late payments are received.

Implications for employers

1. Heightened risk of termination: At a minimum, two nonsequential default events in respect of non-payment can enable a contractor to terminate in default if it so chooses. This 'two strikes and you're out' regime presents a potentially troublesome prospect for employers and their cash flow as they are on thinner ice from the outset.
2. Potential disputes: The standard wording in Clause 8.9.4 of "reasonable time" could lead to disputes over what constitutes a reasonable timeframe for issuing a notice of termination. While that might be determined in the future, employers may wish to negotiate a set period for more certainty of where the parties stand.
3. Project management: It is crucial that those managing projects and Employer's payment cycles comply with the relevant payment regimes, as even minor delays could quickly give rise to termination rights.

Wider Industry Impact

It is unlikely that this ruling will result in a floodgate of contractors exercising termination powers under Clause 8.9.4 at the first viable opportunity. Termination remains the nuclear option, has the potential to damage relationships and standing within the construction industry, and could give rise to further disputes as to its validity in any event. A contractor seeking to terminate a funded project may also encounter the added complication of a funder exercising its step-in rights.

Notwithstanding the parties' bespoke amendments in this case as to the specified timeframes under clause 8.9 of the Contract, this decision is likely to have a determinative effect on the relevant termination provisions of the ubiquitous JCT Design & Build Contract 2016, as well as other contracts within the JCT suite.

Practical Considerations

While the ruling empowers contractors, it underscores the need to:

• Review payment practices and ensure compliance with agreed timelines;
• Consider amending the Contract (and other JCT form) standard wording to clarify termination rights and timeframes. It is worth noting that clause 8.9 is included in other Editions of the JCT Design & Build Contract; and
• Seek legal advice when issuing or responding to specified default notices to mitigate the risk of disputes.

How we can help

At Foot Anstey, our construction team regularly advises on JCT contracts and their practical application. If you would like to discuss the implications of this ruling, or require assistance with construction contracts or dispute resolution, please do get in touch with our team of experts.