A "lidl" confusion over the final date for payment

As highlighted in our previous article following the case of Rochford Construction Ltd v Kilhan Construction Ltd [2022] EWHC 1947 (TCC) (Rochford), the use of an invoice as a trigger for payment under a construction contract can create confusion. This has now been directly addressed by the Technology and Construction Court (TCC) in the recent case of Lidl Great Britain Ltd v Closed Circuit Cooling Ltd (t/a 3CL) [2023] EWHC 2243 (TCC).

Background

• Lidl engaged 3CL (an industrial refrigeration and air-conditioning contractor) to provide certain works under a framework agreement and subsequent orders (the contract).
• The contract included provisions for interim applications for payment. In due course, 3CL issued its 19^th interim application for payment (AFP19) in the sum of £781,986.22. Lidl issued its own notice in response and declined to pay this sum.
• On 26^th April 2023 3CL referred the dispute over its entitlement to payment under AFP19 to adjudication. The adjudicator ordered Lidl to pay the whole of APF19 together with interest.
• Lidl failed to pay and instead issued a Part 8 Claim requesting various declarations (see further below). In response 3CL issued a Part 7 Claim seeking enforcement of the adjudicator’s decision.
• The court considered a number of questions, including:
  1. Was AFP19 a valid application for payment? Lidl argued that it was not, as it failed to comply with one or more requirements of the contract as to its content and/or the method of service.
  2. Was Lidl’s response to AFP19 a valid payment notice? Or was it (as argued by 3CL) an invalid pay less notice?
  3. Did the contract payment terms comply with the requirements of the Housing Grants Construction and Regeneration Act 1996 (the act)? This included a contractual requirement for a compliant VAT invoice to be delivered to Lidl to trigger the final date for payment. Lidl argued that in the absence of a fully compliant invoice, the final date for payment had not yet been triggered.

What did the court decide?

Much of the judgment turns on the facts of the case and the particular terms of the contract and notices used by the parties. However, the court made various helpful comments which are of more general application.

Probably the most interesting part of the judgment to the construction industry generally is in relation to question 3 above. Here, the court specifically upheld the previous comments made in Rochford and confirmed that for the purposes of the act, while a due date can be fixed to an event (such as an invoice or notice) the final date for payment has to be a set period of time following the due date and cannot be fixed to an event or mechanism. So in this case, as the contract was not compliant with the act, the provisions of the Scheme for Construction Contracts (England and Wales) Regulations 1998 (the scheme) could be incorporated to the extent necessary to secure compliance, which mean that payment of AFP19 was overdue.

The court also found that in this particular case:

• The notice issued by Lidl was an invalid pay less notice, not a valid payment notice and that a party could not issue a combined payment and pay less notice under the act.
• The contractual requirement for 3CL to include certain items within/with its payment application was not a condition precedent to payment.
• The payment application did not need to be served in accordance with contractual provisions for the services of notices, where the contract did not specifically require this.

However, note that these findings were specific to the particular contract terms and circumstances and parties should carefully check their own contract terms before assuming that the above would apply.

Ultimately, the court held that the adjudicator’s decision should be enforced and Lidl was liable to pay the whole of AFP19.

Key takeaways

It is not unusual to see the due date and/or final date for payment in a construction contract being linked to the submission of a valid VAT invoice and there are commercial reasons why this is desirable for the parties. However, parties need to be aware that:

• To comply with the act, the contract should have a clear due date and the final date for payment must be linked to the due date, not to any other event or mechanism.
• If the contract is not compliant with the act, the provisions of the scheme can be incorporated to the extent necessary to obtain compliance. It is worth noting that the scheme provides that the final date for payment shall be 17 days from the due date – a much shorter period of time than seen in most commercial construction contracts.

This case has helpfully clarified the law in this area following the comments in Rochford, giving all parties more certainty around payment provisions under the act and the relationship between invoices and "due" and "final" dates for payment.