Resolving disputes under the new JCT 2024: a closer look at payments after termination

This is the third in a series of articles on how the changes introduced by the 2024 JCT (Joint Contracts Tribunal) contracts will impact the practical administration of the JCT contractual mechanisms and the resolution of disputes going forward.

In this article, we look specifically at changes to the termination provisions in the 2024 Design and Build (D&B) contract and the 2024 Intermediate Building Contract with Contractor’s design (ICD) contract. We address the updates to the termination payment provisions, the revised Construction Act compliant mechanism for payments made after termination, and the potential pitfalls and areas of contention created by the changes.

1. Updates to termination payment provisions

The 2024 D&B and ICD contracts have introduced ‘Termination Payment’ as a new defined term, however this is largely an administrative change as the 2016 JCT contracts had previously provided for the making of payments after termination but without reference to a defined term. As with all things, the devil is in the detail and the updates made to the 2024 JCT contracts relate to the process and timing of the Termination Payment.

As there are a number of situations in which a termination payment may arise we have explored each of these in turn and the impact of the changes to the 2024 JCT contracts:

Option 1: Termination by the Employer where the Employer decides to complete the Works (Clause 8.7)

The calculation of sums due after termination remains largely as per the 2016 edition, with the usual position under JCT remaining that payment after termination will only be calculated and paid after completion of the Works and the making good of defects. However, there are key updates to the timing that payments become due and the basis upon which they are payable.

Previously the 2016 edition had required the Employer to provide a statement of account within 3 months of completion of the Works and making good defects. The 2024 D&B and ICD contracts have shortened this period to 2 months from the date of completion, with this becoming the “due date” for the Termination Payment. The change in terminology between the 2016 to the 2024 edition to reference the ‘due date’ for the Termination Payment is part of a wider move to ensure that the process for payments made after termination under the 2024 D&B and ICD are Construction Act compliant.

Under the 2016 edition, sums due after termination were recoverable immediately as a debt from the paying party, however this is no longer the case. A new Clause 8.13 included in the 2024 editions sets out new Construction Act compliant timings for payment notices, pay less notices and final dates for payment. These Termination Payment timings and the potential impact of the changes to ensure Construction Act compliance are explored in more detail below.

Option 2: Termination by the Employer where the Employer decides not to complete the Works (Clause 8.8)

The calculation of sums due after termination remains the same as the 2016 edition, but the drafting has been tightened to clarify and give certainty as to the period the Employer has to decide whether or not to complete the Works.

The 2024 D&B and ICD contracts set out in clearer terms that if the Employer does not notify the Contractor or make arrangements for the completion of the Works within 6 months of the date of termination, then the Employer will be treated as having decided not to complete the Works. The result of this is that the parties will be required to calculate the Termination Payment in accordance with Clause 8.8 rather than Clause 8.7. This will be a less favourable position for the Employer should they subsequently decide to complete the Works as they will not be able to take into account costs incurred to complete the Works in the calculation of sums due in any Termination Payment.

The terminology has also been updated to align the payment process with the Construction Act, where previously a statement of account was due within a reasonable time of giving notice or at the latest within 2 months of expiry of the 6-month decision period, the 2024 editions now specify a fixed due date of 2 months after the last day of the 6-month decision period in all instances.

Option 3: Termination by the Contractor or by either party for a neutral event (Clause 8.12)

Again, the calculation of sums payable after termination remains broadly the same between the 2016 and 2024 editions with the key updates focussing on and clarifying which party is responsible for providing documents and preparing the account, and when payment becomes due.

Previously, under the 2016 edition there were some instances where the Contractor was required to prepare and submit the statement of account following termination and other instances where the Contractor was to provide documents to the Employer to enable the Employer to prepare the statement of account. The 2024 D&B and ICD have streamlined and clarified this position, placing the obligation on the Contractor to provide documents necessary for calculating sums due within 2 months of termination, and on the Employer to prepare and issue the statement of account no later than 3 months after receipt of the relevant documents from the Contractor.

The 2024 edition has also set the ‘due date’ as the last date for issue of the Employer’s account (i.e. the date 3 months after all relevant documents have been received from the Contractor). This has also aligned the payment process with the Construction Act, where previously payment was due 28 days after issue of the statement of account and recoverable as a debt.

2. The Construction Act compliant payment mechanism (Clause 8.13)

As noted above, one of the significant changes made in the 2024 D&B and ICD is to ensure the termination payment provisions are Construction Act compliant, rather than sums becoming payable on demand as a debt. This has been achieved by the specification of due dates for each Termination Payment instance, and the inclusion of a new Clause 8.13 which specifies the corresponding Payment Notice, Pay Less Notice and Final Date for Payment required under the Construction Act.

Under Clause 8.13, the key Termination Payment dates are as follows:

• the date the Employer is required to issue a Payment Notice is no later than 5 days after the due date. If the Employer fails to issue a timely Payment Notice, the Contractor may issue its own Payment Notice at any time after the 5 days are up;
• the paying party may issue a Pay Less Notice at any point up to 5 days before the Final Date for Payment; and
• the Final Date for Payment is 14 days after the due date (or in the event the Employer fails to issue a Payment Notice the final date for payment will be delayed by the same period between the date the Employer should have issued the Payment Notice and the date the Contractor issued its Payment Notice.

3. Impact of the changes to payment on termination

These changes to the termination payment mechanism are likely to give greater certainty to the parties as to when payments are due and also give the paying party the ability to challenge the statement of account via issue of a Pay Less Notice. A by-product of this, however, may be an increase in adjudications and/or disputes concerning termination payments.

In particular, parties will need to be aware of and pay close attention to the due dates, payment notice dates, pay less notice dates, and final dates for payments as a failure to engage with these timings may leave a party vulnerable to ‘smash and grab’ adjudications. This in turn could lead to the need for a ‘true value’ adjudication to recover any sums a party considers it has overpaid. However, perhaps more importantly is that with the clarification and increased certainty offered by the revised payment mechanism it will be readily apparent when a dispute as to a Termination Payment has crystallised, leaving the parties free to adjudicate at any time after the final date for payment.

Overall, the changes in the new 2024 D&B and ICD contracts are welcome. The new termination payment mechanism aligns more closely with the payment provisions of the Construction Act, providing greater clarity and consistency across the industry. However, with that certainty comes the increased risk of key dates being missed and the crystallisation of disputes becoming more apparent. As a result, parties should take note of the updated JCT provisions and ensure careful compliance so as not to be at risk of being the subject of unnecessary ‘smash and grab’ and ‘true value’ adjudications.

Look out for the next article in the series and please get in touch with the team if you have any questions.

This article was written by Karen Paley and Andy Sheppard.