The problem has been so acute that the government has begun to introduce measures to stem the practice of late payments, whether intentional or not, which is estimated to cost the UK economy £11bn annually and cause 38 business closures daily.

A Supreme Court ruling on January 15th in the case Providence Building Services v Hexagon Housing Association has shed light on exactly what repercussions developers and contractors can expect when one party doesn’t strictly adhere to the contract’s rules.

The case revolved around late payments by housing association Hexagon, which in 2019 contracted Providence to build a housing scheme in Purley, south London.

Under the contract’s payment schedule, Hexagon was due to make a payment by December 15th 2022, but missed this date by two weeks. Providence served a notice of specified default just a day after the payment was due. When Hexagon again failed to make a payment due by  May 17th 2023, the very next day, Providence issued a notice of termination under clause 8.9.4 of the contract, relying on the notice of specified default for the December 2022 late payment.

The Supreme Court ruled unanimously in favour of Hexagon that Providence did not have the right to terminate the contract over these late payments, overturning a previous Court of Appeal decision. Many in the sector have welcomed the ruling for providing a common-sense solution to the problem of late payment.

Tim Healey, partner at law firm Herbert Smith Freehills Kramer, says the earlier Court of Appeal decision in favour of Providence “had made it much easier for the contractor to terminate, and many had found its decision surprising. This Supreme Court decision will be welcomed by employers [developers] who had been at risk from the earlier decision of being tripped up by more than a single administrative payment error during the period of the contract.”

Healey points out that on big projects with long construction periods, this risk of error “could cover very many payment cycles.

Certainty on termination provisions is key to both parties’ interests to avoid arguments that the contract has been repudiated,” he explains. “Contractors have several other options available to them under the Construction Act in the event of late payments.”

The issue the Supreme Court needed to grapple with in the case revolved around the interpretation of the termination clause in the Joint Contracts Tribunal (JCT) design-and-build contract, a standard document very widely used in the construction industry. The wording of the disputed termination clause remains unchanged in the latest 2024 edition of the JCT contract.