Persistent late payment and termination in JCT contracts – cold comfort for contractors

This case review was co-authored by Emily Chetwood, Trainee Solicitor.

The Supreme Court have now handed down their judgment on the interpretation of clause 8.9 of the JCT Design and Build Contract 2016, which focuses on late payments.  The decision was on appeal from Hexagon Housing Association Ltd (Hexagon) and the full facts of the matter and Court of Appeal decision is outlined in our earlier article here.

The Supreme Court allowed Hexagon’s appeal and overturned the Court of Appeal’s decision, providing important clarification on the operation of the contractor’s termination rights for employer default under clause 8.9 of the JCT Design and Build Contract 2016.

The issue raised involved a significant point of contractual interpretation concerning persistently late payments: whether a contractor can terminate its employment under clause 8.9.4 for a repetition of a specified default (which in this case involved late payment) where no right to terminate had ever accrued under clause 8.9.3 because the earlier default had been remedied within the contractual cure period.

The dispute arose out of repeated late payments by the employer. Although the employer had previously paid a late interim payment within the 28-day cure period following a notice of specified default, the contractor later tried to terminate immediately under clause 8.9.4 when a subsequent payment was also made late. The contractor argued that clause 8.9.4 permitted termination for any repetition of a specified default, even if no earlier right to terminate had accrued.

The Supreme Court rejected this interpretation. Lord Burrows held that clause 8.9.4 is dependent on clause 8.9.3 and cannot operate independently of it. Clause 8.9.4 only applies where the contractor had previously acquired a right to terminate under clause 8.9.3 (i.e. because an earlier specified default had continued uncured for the requisite 28-day period), but for some reason did not exercise that right. Clause 8.9.3 therefore acts as a gateway to clause 8.9.4.

The Court placed particular emphasis on the opening words of clause 8.9.4 (‘If the Contractor for any reason does not give the further notice referred to in clause 8.9.3’), which would be made redundant if clause 8.9.4 were interpreted as allowing immediate termination whenever a specified default is repeated. The Court also rejected the argument that clause 8.9 should be interpreted symmetrically with clause 8.4 (termination by the employer), noting that the provisions are deliberately asymmetrical in both structure and wording.

From a commercial perspective, the Court considered that the contractor’s interpretation would produce an unduly extreme result, enabling termination for relatively minor or short-lived payment delays, provided a prior notice of specified default had been served. By contrast, the employer’s interpretation struck a more proportionate balance and was consistent with the contractual scheme as a whole.

Contractors seeking to rely on clause 8.9.4 of JCT 2016 must now ensure that an earlier specified default had persisted long enough for a termination right to accrue under clause 8.9.3; otherwise, immediate termination for a repeated default will not be effective.  Alternatively, contractors may draft amendments allowing for termination for persistent default in late payment.

Comment

While dependent on the wording of clauses 8.9.3 and 8.9.4 of JCT 2016, the judgment provides depressingly little comfort for contractors suffering from persistently late payments from employers, which remain an issue in the construction industry. Late payment remains a cause of many insolvencies in the construction sector, with the current low rate of growth of the economy, rising prices of labour and materials and low margins making matters worse.

Related item: Late payment, termination under JCT contracts and the lifeblood of the construction industry