The Supreme Court has settled a crucial and ever-sensitive question: when can contractors actually terminate for repeated payment defaults? Tim Hillier and Avita Rajoo explain
The answer directly affects the interpretation of the termination provisions used in both the 2016 and 2024 editions of the JCT contract.
In February 2019, Hexagon Housing Association and Providence Building Services signed an amended JCT Design and Build Contract (2016 edition). The key termination clauses worked as summarised below.
For employer defaults:
- 8.9.1: If the employer does not pay on time, the contractor may serve a notice specifying the default.
- 8.9.3: If the specified default continues for 28 days (from the notice under 8.9.1), the contractor may terminate. (The standard-form JCT refers to 14 days.)
- 8.9.4: If the contractor does not terminate under clause 8.9.3 for any reason, but the employer repeats the specified default, the Contractor may terminate upon or within 28 days after such repetition. (The standard form JCT states “within a reasonable time” after repetition.)
For contractor defaults, the terms mirrored this structure, except for clause 8.4.3:
- 8.4.2: If the default continues for 14 days (from the notice under 8.4.1), the employer may terminate.
- 8.4.3: If the employer does not terminate under 8.4.2 “whether as a result of the ending of any specified default or otherwise”, the employer may terminate “within a reasonable time” after such repetition.
Essentially, the word “or otherwise” in 8.4.3 meant employer does not need a previously earned right to terminate, whereas clause 8.9.4 lacks this language and refers back to clause 8.9.3. This difference was important to the courts.
Background to the dispute
The dispute began in December 2022, when Providence served a notice of specified default (under clause 8.9.1). Hexagon paid – or “cured” – the sum within 13 days of that notice, and so the specified default did not continue for the 28 days referenced under clause 8.9.3.
Then, in May 2023, Providence terminated under clause 8.9.4 – one day after payment was due – arguing that this late payment was a repetition of the default in December 2022.
Hexagon later paid in full, but disputed the termination’s lawfulness and won at adjudication. Providence followed up with court proceedings, for clarity on the interpretation of clauses 8.9.3 and 8.9.4.
This case subsequently made full use of the appellate courts, with a turn at each level.
The central question is: can a contractor terminate for a repeated default when it never gained the right to terminate for the first default because it was cured within 28 days?
High Court: Employer 1-0 Contractor
The judge ruled that clauses 8.9.3 and 8.9.4 were “parasitic” – dependent upon each other. Therefore, before terminating under clause 8.9.4, the contractor must first gain the right to terminate under clause 8.9.3. Because Hexagon paid within 28 days in December, Providence never gained that right and could not rely on clause 8.9.4.
Court of Appeal: Employer 1-1 Contractor
The Court of Appeal disagreed. The words “for any reason” in clause 8.9.4 were “broad enough” to include situations where Providence did not gain the right to terminate. Therefore, the clauses did not depend upon each other – you can use one without the other.
Supreme Court: Employer 2-1 Contractor
Clause 8.9.4 does depend on clause 8.9.3, because:
- It is what the contract says: The opening words of clause 8.9.4 refer to clause 8.9.3 (“If the Contractor… does not give the further notice referred to in clause 8.9.3”). These words would be “superfluous” if the clauses can be invoked independently.
- It is the rational outcome: If, as Providence argued, the two clauses were independent, then a contractor could terminate even if two payments were one day late – a “sledgehammer to crack a nut”, which would leave employers with the sole (and difficult) route of defending terminations as unreasonable or vexatious.
Termination rights do not need to be symmetrical; comparing the employer defaults against the contractor defaults provisions, Providence argued that each should be interpreted with a degree of equivalence.
The Court of Appeal accepted this, but the Supreme Court clarified that termination rights can vary and there is no reason for symmetry in meaning or effect. The JCT termination clauses are deliberately and “plainly asymmetrical” (e.g. their differing time periods and specified defaults).
What this means in practice
Clause 8.9.3 is the gateway to terminating under clause 8.9.4. If an employer cures its default within the agreed period under clause 8.9.3, contractors cannot rely on that default as grounds for immediate termination.
Precision is key, and termination remains a risky business. Contractors must understand that once a default is cured, the slate is wiped clean, with the next late payment starting a fresh clock for the employer to cure. Misinterpret the contract’s terms for the grounds, timing or form of a termination notice, and you risk claims for wrongful termination.
Tim Hillier is a partner and Avita Rajoo is an associate at Trowers & Hamlins.
