The Providence v Hexagon ruling: implications for JCT contracts

A notable case has recently been decided in the Supreme Court, centred on the interpretation of JCT contract provisions about an employer's delayed payments and the contractor's right to terminate.

Many construction projects are delivered under JCTs and so the principles emerging from this case are very relevant, and encompass contract interpretation, strict compliance with contractual terms and the option to amend standard form contracts to reflect commercial objectives.

What were the facts?

In brief, Hexagon Housing Association Limited (the Employer) entered into an amended JCT Design and Build Contract (2016 edition) (the Contract) with Providence Building Services Limited (the Contractor). 

The dispute started when the Employer made a late interim payment due under the Contract, leading the Contractor to issue a specified default notice under clause 8.9.1 of the Contract, which required payment in 28 days or the Contractor could terminate under clause 8.9.3. The Employer made payment in this time. The Employer later went on to miss a second payment. The following day the Contractor served a notice to terminate the Contract under clause 8.9.4 which provided for termination in the event of repetition of a specified default (late payment).

Different views in the High Court, Court of Appeal, and Supreme Court

The question the courts faced was whether a right to terminate under clause 8.9.3 needs to have accrued before a Contractor becomes entitled to terminate under clause 8.9.4.

The High Court initially sided with the Employer, finding no right to terminate where the earlier breach had been remedied.

In contrast, the Court of Appeal adopted the Contractor's position.

The Supreme Court had the final say and ultimately reversed that decision. The Supreme Court determined that as long as the Employer remedies late payment within the 28-day window, the Contractor cannot terminate solely on the basis of a subsequent late payment.

This outcome offers greater security to employers; the ruling ensures that a single late payment, if rectified within the specified days set out in clause 8.9.3, does not automatically give rise to a contractor's right to terminate upon a subsequent payment default.

Practical guidance following Supreme Court ruling

So, what does this mean for construction?

1. Contract interpretation: the importance of natural and ordinary meaning

At the heart of the Providence v Hexagon ruling lies the courts' commitment to interpreting contracts according to their "natural and ordinary meaning". This approach reinforces the message that parties will be held to the language of their agreements, highlighting the importance of precision and clarity in contract drafting and negotiation. In practice, this means that parties entering into contracts (and those involved in the negotiation of contracts including employers, contractors and practitioners advising on construction risk and liability) must ensure that the terms accurately reflect their intentions at the drafting stage.

2. Strict compliance with contractual terms

The judgment underscores the necessity for compliance with contractual terms, particularly payment and notice procedures. Employers benefit from a standard 14 day grace period after a specified default notice is served (which was amended to 28 days in Providence v Hexagon) to rectify late payments before contractors have a right to terminate. However, this protection is contingent on diligent monitoring of payment cycles and swift action if defaults occur. Contractors, on the other hand, must remain vigilant, as their right to terminate for repeated payment delays does not arise unless a payment is outstanding for more than 14 days (or otherwise amended) after the specified notice. This creates a practical balance, reducing the risk of disproportionate consequences for employers while still upholding the contractor's rights in cases of persistent default.

3. Utilise schedules of amendments

Schedules of amendments allow parties to adapt JCT contracts to meet their needs. Employers may extend the 14 day grace period to further shield themselves, while contractors might negotiate to keep the shorter window to protect their cash flow. The ability to amend standard contract terms enables both parties to allocate risk in line with their commercial objectives and risk appetite. In fact, we have seen JCTs being amended at clause 8.9 to address employer-party concerns raised by this case and, despite the Supreme Court's decision, this drafting may well remain in contracts going forward as "belt and braces".

4. Termination rights

Parties should take care when assessing termination rights, be aware of any conditions or pre-requisites to exercising a termination right, and ensure all necessary conditions have accrued prior to issuing a notice of termination. At the contract negotiation stage, parties should careful consider their rights to terminate and whether any specific terms need to be included or amendments need to be made to address their particular concerns, subject to commercial discussions.

The much anticipated Supreme Court's ruling has finally determined the position regarding a contractor's right to terminate for employers late payments under clause 8.9 of the JCT Design and Build Contract. This judgment is especially pertinent given the widespread use of the JCT Design and Build Contract 2016, and the continuation of identical wording in the 2024 edition.

More broadly, the decision reinforces the need for careful contract drafting and diligent payment administration, whilst striking a fair balance between the rights and obligations of both employers and contractors. For all parties, it is essential to clearly understand the contract’s intended meaning and the consequences of default, supported by early legal advice for successful project delivery and dispute avoidance in the construction industry.