Supreme Court contract ruling brings certainty for construction industry says Clarke Willmott

A second late payment occurred in May 2023, and Providence immediately purported to terminate the contract under clause 8.9.4 on the basis that it constituted a repetition of the earlier specified default. Hexagon challenged the validity of the termination, arguing that clause 8.9.4 could only be invoked where a right to terminate had first accrued under clause 8.9.3. Because the first late payment had been remedied within the cure period, no such right had arisen.

The Technology and Construction Court (TCC) agreed with Hexagon, the Court of Appeal reversed that decision, and the matter ultimately proceeded to the Supreme Court.

Supreme Court Ruling

The Supreme Court unanimously restored the decision of the TCC and found for Hexagon. The Court held that clause 8.9.4 is “parasitic” upon clause 8.9.3. In other words, the contractor must first acquire an accrued right to terminate under clause 8.9.3 before it may then rely on clause 8.9.4 to terminate for a repeated default.

The Court rejected the contractor’s argument that clause 8.9.4 operated independently and could be triggered by any repeated specified default, even if the earlier default had been cured. Such an interpretation, the Court noted, would produce commercially disproportionate results, permitting termination for two trivial delays in payment even where the employer had acted promptly to remedy the first breach.

The Court emphasised the structural logic of the termination regime: clause 8.9.1 creates the mechanism for a specified default; clause 8.9.3 sets a cure period after which an accrued right to terminate arises; and clause 8.9.4 allows termination for repetition of the same default only where the earlier breach was sufficiently serious to first give rise to a termination right.

“The Supreme Court’s ruling needs to be widely understood and known because it reverses the stance which was taken by the Court of Appeal,” says Mark Christie, partner in the construction team at national law firm Clarke Willmott in Manchester.

“As the same wording is replicated in the 2024 edition of the JCT, it will continue to be important. Ultimately, employers will now benefit from protection against opportunistic termination based on minor administrative errors or short delays in payment.

“Conversely, contractors will need to take greater care when relying upon the JCT termination provisions to ensure that an accrued right to terminate has properly arisen.

“What also interested me was the Supreme Court’s wider comments with regards to how its decision sits with the wider philosophy regarding the ‘notified sum’ regime and the cash flow protections which are already provided by that existing statutory regime.

“The Supreme Court made it clear that legal protections are already in place to provide contractors with recourse for late payments/failure to certify payments, and that the termination provisions in the JCT should not normally be used for ‘cash flow’ protection.

“That makes sense, as termination is obviously a ‘nuclear option’ which should be a last port of call under any commercial contract.”