In August 2024, the Court of Appeal handed down its judgment in which it held that a contractor was entitled to terminate its employment based on just two late payments, each of which was rectified within 14 days. In our blog at the time, we explained how the decision was a stark warning to employers, with the Court of Appeal itself noting how the decision left them on thin ice in respect of late payments. However, the Supreme Court has now overturned the Court of Appeal’s decision and restored the leeway afforded to employers under the JCT contract.

Background

Hexagon Housing Association Limited (“Hexagon”) engaged Providence Building Services Limited (“Providence”) to construct a number of buildings under a contract (the “Contract”) incorporating the 2016 JCT Design and Build Contract as amended by the parties.

Clause 8.9 of the Contract set out the circumstances in which Hexagon could terminate its employment under the Contract as follows:

“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 the 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… continues for 28 days from the receipt of the notice under clause 8.9.1… 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."

In December 2022, Providence issued a notice under clause 8.9.1 in respect of Hexagon’s failure to pay the amount specified under Employer’s Agent Payment Notice 27 by the final date for payment. Hexagon paid the amount due to Providence in full before the 28 day period under clause 8.9.3 had expired.

In May 2023, Hexagon failed to pay the amount specified under Employer’s Agent Payment Notice 32 by the final date for payment. Providence gave notice that Hexagon had repeated a specified default and stated that it had terminated its employment under clause 8.9.4 of the Contract.

It was common ground between Hexagon and Providence that:

1. Hexagon’s specified default in failing to pay against Payment Notice 27 did not continue for 28 days and therefore it was never open to Providence to issue a notice pursuant to clause 8.9.3; and
2. The repetition of a specified default under clause 8.9.1.1 in respect of late payment referred to a late payment in a subsequent month and not repetition of the same month’s late payment.

At first instance, it was held that Providence was not entitled to terminate its employment under clause 8.9.4. The Court of Appeal held that Providence was entitled to terminate its employment.

The sole question for the Supreme Court was if Providence could terminate its employment under cause 8.9.4 where the right to give the further notice referred to in clause 8.9.3 had never previously accrued.

Principles of Interpretation

Lord Burrows gave the leading judgment with which the other Supreme Court judges all agreed. In interpreting an industry-wide standard form, Lord Burrows stated that it should usually be interpreted consistently for all contracting parties using that form and, subject to bespoke amendments, that interpretation is unlikely to be contradicted by the objective intentions of the particular contracting parties.

He explained that whilst the guidance notes to a contract may be admissible evidence as an aid to interpretation, he did not derive any assistance from the relevant JCT guide. Similarly, Lord Burrows did not derive any assistance from previous versions of the JCT form or past judicial decisions on those previous forms, though they were both admissible background context.

The Right to Terminate

Lord Burrows decided that the words “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)” made clear that clause 8.9.4 was parasitic on clause 8.9.3. Clause 8.9.3 was a gateway to clause 8.9.4 and it was only if the Employer failed to cure an earlier specified default within 28 days that the Contractor could terminate for a repetition of the specified default. Providence had not therefore been entitled to terminate its employment under clause 8.9.4.

Lord Burrows also explained that the Court of Appeal had, in interpreting clause 8.9 of the Contract, misplaced its reliance on clause 8.4 of the Contract which addressed the Employer’s right to terminate. There was no reason why the right to terminate should be symmetrical as between Employer and Contractor, especially when clause 8.4 and clause 8.9 included different time periods and used different wording.

Concluding Thoughts

This case has highlighted the tension between on one hand the possibility of an Employer being able to make serial late payments and in effect extend its payment terms without the risk of termination or other significant consequences, and, on the other, the possibility of a Contractor being able to terminate its employment based on just two defaults where either the underpayment could be very small or the delay very short. Neither may be considered satisfactory outcomes. In respect of the former, the Court of Appeal was persuaded that the other protections afforded to the Contractor, such as the right to suspend, were inadequate to counter late payment. In respect of the latter, Lord Burrows said it might be a “sledgehammer to crack a nut” and that the requirement that notice of termination should not be given unreasonably or vexatiously would offer scant comfort to the Employer. However, Lord Burrows ultimately concluded that clause 8.9 had to be interpreted free from such considerations.

Lord Burrows’s comments on the interpretation of standard forms highlight the significant and wide application of this judgment. Whilst the Supreme Court has therefore provided finality and certainty on the interpretation of clause 8.9.4, there may be questions as to the position of any Contractors who have purported to terminate their employment based on the decision of the Court of Appeal.

Finally, we noted in our previous blog that the 2024 version of the JCT standard form retained the same wording in clause 8.9 but it was not clear if this was because the JCT agreed with the decision at first instance or if that decision was published too late for the JCT to respond. The Supreme Court also noted that if its decision presented a problem for Contractors, it would be for the JCT to consider in a future draft. Given the 2024 edition has been available for fewer than 2 years, it may be some time before a future draft provides insight into the JCT’s thoughts.