Shedding new light on late payment

This Provident Building Services Ltd vs Hexagon Housing Association Ltd case is one hell of a palaver. It’s all about one thing… employer Hexagon didn’t pay the builder on time. In 32 interim accounts, 19 of them were paid late – paid yes, but on time, no. In the end the builder packed his whole kit and caboodle and quick marched away forever. This wasn’t a mere pause or work suspension; it was divorce.

Forgive me if I reminisce at this point. I recall falling out big time with my boss when I was a mere lad. I announced that all we had to do, as the employer, was pay the amount due to the contractor on time. “Never… never…” – my boss sounded here like Ian Paisley at the top of his voice – “NEVER”. Paying up was a yes. Paying on time was a “never”. But, said little me, that’s what the contract says: just pay on time. My boss and I never did see eye to eye on that simple burden on the employer.

Hexagon and the builder, Provident, entered into a JCT design and build contract for 32 flats in Purley, near Croydon, price £7.2m. Monthly interim accounts were the norm. By interim #27 the builder was fed up with late payment and sent a note saying so. The note didn’t label itself a “default notice”; it doesn’t have to, but that doesn’t stop it being one.

A fortnight went by and the £264,000 turned up. My boss would have gleefully said, “That keeps the buggers in line.” The Court of Appeal in Hexagon said something different; they said the employer that pays late is “skating on thin ice”. Then interim #32 was late, this time to the tune of £366,000. That’s when the builder reached the end of its tether, and walked.

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Hexagon called for its lawyers, who looked up the rules in the JCT contract for “termination by the contractor”. Then they called for the adjudicator. The referring party (Hexagon) and responding party (Provident) argued the clauses and subclauses. The adjudicator decided that the builder had put its foot in it. The termination was wrong – ouch! So the builder went to the High Court and rehearsed the JCT rules all over again. The judge agreed with the adjudicator: builder in the wrong. So Provident went to the three-judge Court of Appeal. This court reversed the earlier decisions. The builder was, after all, entitled to walk away for good and forever. Pause to note: it would have been far easier, for the employer, to just pay the bills on time.

The JCT contractual mechanism for termination for late payment drew an aside remark from the Court of Appeal, “I would accept that the drafting could have been of better quality.” Yes, well… er, no comment.

Hexagon is taken to have been warned by the interim #27 default – call it a yellow card. interim #32 was the second yellow card, and there is no leeway, no time lapse to make good; it’s all over

Bear with me while we cut through the thicket of the document. Look at late payment in two parts; the first being the first time it happens, then the contractor has a whinge. It should complain within 28 days of the final date for payment. Then, if still no cash turns up, it has 21 days to press the nuclear button and terminate. The next time there is late payment, the palaver is truncated. It is immediately open to the aggrieved builder to give notice of termination and pack up.

That’s what happened in Provident Building Services Ltd vs Hexagon Housing Association Ltd. That late payment #27 was the first specified default. It doesn’t matter that the employer paid up interim #27 within days. Interim #32 was a repeat of the default. Hexagon is taken to have been warned by the #27 default – call it a yellow card. Then #32 was the second yellow card, and there is no leeway, no time lapse to make good; it’s bang all over if the contractor elects for that.

Hexagon argued that the termination idea by the builder’s lawyers was too brutal. After all, there is a right to suspend; there is a right to penal interest on the sum due; there is a right to adjudicate. Yes, yes, said the Court of Appeal, but there is also the standalone right to clear off altogether. This ice is mighty thin!

It wouldn’t be a surprise if Hexagon Housing had no intention to deprive the builder of cash flow. Instead, it is probably in a regime of “pay when paid”. Its website explains that its development programme is 400 new homes over a four-year period “utilising a grant from the government (the Greater London Authority) together with a moderate shared-ownership programme”. My suspicion is that Hexagon’s funds are dependent upon the cash coming down from some steep government mountain.

It is exactly the same, wrongful behaviour that arose in the late 1980s when the developer at Canary Wharf went bust. The big builders were deprived of money owed and so refused to pay the hundreds of small subcontractors by pointing to that naughty device, “pay when paid”. The government of the day witnessed many a one-man plasterer, roofer and floorer go bust, losing their pension and savings too. That’s how, eventually, we got the Construction Act and “pay up, pay now, argue later”.

Hexagon would do well to ring-fence the money due before it builds. And if you don’t like that… then don’t build.

Tony Bingham is a barrister and arbitrator at 3 Paper Buildings, Temple