UK Supreme Court clarifies JCT contractors’ termination rights

The case concerns an issue that has vexed the construction industry, finally providing the definitive answer on contractors’ legal rights in standard form JCT contracts where an employer repeatedly pays late, but ultimately makes payments before the end of the contract’s specified period. This applies to the JCT 2016 and 2024 contract families which use this drafting, which is also used widely in other construction contracts.

The dispute relates to the interpretation of a specific clause regarding late payment within the JCT Design and Build 2016 contract that Hexagon Housing Association Ltd and Providence Building Services Ltd entered into in February 2019 for works related to a housing development in Purley, London.

Three sub-clauses of the standard form provide a mechanism for the contractor to terminate for late or non-payment. Clause 8.9.1 required the contractor to give a "specified default notice" if payment is not made by the final date for payment. Clause 8.9.3 entitled the contractor to terminate its employment under the contract if the employer failed to pay within the requisite period of that notice. Finally, clause 8.9.4 gave the contractor the right to terminate immediately if the employer repeated a specified default. The contract was only modified in relatively minor ways by the parties.

In December 2022 Hexagon paid the contractor, Providence, 14 days late for works related to the development. In May 2023, Hexagon failed to pay Providence on time for a second time.

On this second occasion, the next day Providence issued Hexagon with a notice to terminate the contract, arguing that it was entitled to do so on the basis that it was the second payment that was late and that it had already served a specified default notice in December 2022 in response to the first late payment.

Hexagon rejected Providence’s interpretation, arguing that the first late payment was paid within 28 days and therefore did not entitle the contractor to terminate the contract with immediate effect.

The judge at first instance in the High Court found in favour of Hexagon, but this decision was later overturned by the Court of Appeal, which held that the Providence was entitled to terminate the contract even though the first payment was paid within 28 days.

The case was then referred to the Supreme Court. In its judgment (PDF 17 pages / 282KB), the Supreme Court said the Court of Appeal had erred when it determined that the phrase “for any reason” in clause 8.9.4 was “broad enough” to mean that Providence, as the contractor, could terminate the contract despite the fact that the first late payment had been paid within 28 days.

Overturning the Court of Appeal's decision, the Supreme Court unanimously held that clause 8.9.4 is parasitic on clause 8.9.3 rather than independent of it. Lord Burrows, delivering the lead judgment, stated that "the Contractor must have had an accrued right to terminate under clause 8.9.3 before clause 8.9.4 applies … clause 8.9.3 is the 'gateway' to clause 8.9.4". The Supreme Court rejected the Court of Appeal's reasoning that clauses 8.9.4 and 8.4.3 should be given the same meaning due to their similar structure, noting that the different wording used in these clauses indicated different intended meanings.

The court ruled that the contractor can only validly terminate under clause 8.9.4 if four conditions are met. Firstly, the employer must commit one of the defaults specified in clause 8.9.3, such as late payment. Secondly, the contractor must give notice of the specified default. Thirdly, the employer must fail to correct this default within the period specified in clause 8.9.3 – usually 21 days in the standard JCT terms but, in this contract, modified to 28 days – thereby crystallising the right to terminate under clause 8.9.3. Finally, the employer must repeat the specified default without the contractor having exercised its right to terminate under clause 8.9.3.

Although a new edition of the JCT contract family has been published (JCT 2024), the wording of the termination clause remains the same as in the 2016 edition. The decision therefore clarifies how termination clauses should be interpreted in both the 2016 and the updated 2024 edition.

The Supreme Court also considered whether different principles of interpretation apply to standard form contracts such as JCT or NEC, which are widely used across the UK construction industry. In interpreting such a standard form the admissible background context may include past court decisions on, and practice in relation to, clauses in an earlier version of the standard form. It may be clear that a standard form has been amended to address a court decision or to reflect a change in legislation. However, the general position taken by the courts is that it is generally not appropriate to compare versions of a particular contract form as a particular aid to interpretation.

The court concluded that the established approach based on the objective intentions of the contracting parties should still be applied to the interpretation of an industry-wide standard form contract. Where parties choose to use a standard form, the court is more likely to focus on the background generally known to participants in the industry as a whole and not on the background known to the individual parties to the particular transaction

Commenting on the significance of the Supreme Court’s ruling for the wider construction industry, Michael Allan, a construction law expert at Pinsent Masons, said: “This judgment was eagerly awaited because these termination provisions are replicated across most of the contracts in JCT's 2016 and 2024 suite of contracts and their Scottish equivalents. This issue has generated much debate across the industry about how clauses 8.9.3 and 8.9.4 should operate.”

He said the ruling provided necessary clarity, but that the court’s decision may place many contractors “in a less advantageous position to persuade employers to pay on time”.

James Ladner, a construction law expert at Pinsent Masons, said: “The Supreme Court's comments that it would be wrong to distort the correct interpretation of the disputed termination clause to protect contractors from cash flow difficulties caused by late payments indicate the judges’ reliance on what they felt was clear drafting in the JCT forms.”

He added that current legislative proposals to tackle late payments and improve cash flow for small and medium-sized businesses (SMEs) may “go some way” to reducing the potential impact of the decision on contractors. “In the meantime, contractors who may have been considering terminating contracts will need to make sure they can legally do so as the consequences of wrongful termination are very significant,” he said.