Liam McKay: What the Supreme Court ruling has reminded contractors about terminating standard contracts

We’re all familiar with the saying that “two wrongs don’t make a right,” and this month that wise adage came through in a ruling from the Supreme Court that may have a lot of contractors reviewing their paperwork.

The case concerned a long-running dispute under JCT Design and Build contract terms between Providence Building Services Ltd and client Hexagon Housing Association Ltd. The contractor terminated the contract after two late payments from Hexagon and a warning about breach of payment obligations. While that argument initially found favour in the Court of Appeal, the Supreme Court ultimately disagreed, overturning the earlier decision.

The Supreme Court held that, under the relevant JCT terms, the contractor did not have an automatic right to terminate instantly. Instead, the contract set out a clear procedural pathway, often referred to as “conditions precedent,” that had to be followed before the right to terminate could be exercised. Those steps included serving specific notices, in the correct form, and allowing defined periods of time for the employer to remedy the breach.

At first glance, this could be seen as an incredibly high-level court ruling for an interpretation of wording, but this is a serious and consequential decision on a contract, and the ruling could act as a catalyst for change in this area. Standard form construction contracts have, for a long time, contained quite detailed provisions about when and how termination can occur. What the Supreme Court has done is reinforce the principle that those provisions matter and must be followed.

Late or non-payment is a familiar and frustrating issue in the construction industry. Interim payments are typically made monthly, reflecting the value of work completed, and delays can have a serious knock-on effect on cash flow. Contractors are often investing heavily upfront with high costs for mobilising on site, hiring plant and machinery, and purchasing materials, often long before they see any return. So anyone can understand that repeated late payment can push a contractor towards termination.

However, as this decision makes clear, commercial frustration does not override contractual procedure. Even where an employer is plainly in breach, a contractor who fails to comply with the notice and timing requirements risks terminating unlawfully. In that scenario, it’s the contractor and not the employer who may end up being the party in breach, with potentially significant financial consequences. Two wrongs don’t make a right, especially when a contract is involved.

During this ruling, the Supreme Court emphasised that its role is to interpret the contract the parties agreed, not to rewrite it in the name of commercial fairness. The JCT contract is drafted by industry bodies and professionals, and if its termination provisions are seen as overly rigid, that is ultimately a matter for those bodies to address in future editions. While the case arose under an English JCT contract, its implications are not confined to England. Scottish contractors frequently use the SBCC suite of contracts, which are closely aligned to JCT forms. Although the terminology may differ, the underlying message is the same: termination rights are conditional and procedures must be agreed and followed.

Whilst large-scale contractors may be able to take this ruling in their stride and instruct in-house legal teams to review contracts, smaller and medium sized businesses should take stock. Before taking the drastic step of terminating, contractors should pause, check the contract, and take advice if necessary. DIY termination is strongly discouraged. The construction sector is known for often relying on information communications such as verbal assurances of project timelines, progress and payment, but this case shows why it’s important to have the right legal advice to help you understand your agreements.

So if you’re thinking of just “walking away” from a job – check your contracts first. If you get it wrong, you may be walking into an even bigger problem. 

• Liam McKay is an associate in Anderson Strathern’s Contentious Construction team