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Key Points
The decision in Lidl Great Britain v 3CL will be of interest to those responsible for operating the contract payment mechanisms in the UK construction industry.
The TCC held that the practice of linking the final date for payment to the service of a VAT invoice was non-compliant with the Construction Act and thereby invalid. The final date for payment must be a fixed period of time after the due date.
The TCC also held that ‘hybrid’ payment and pay less notices are invalid. Liquidated damages and the like must be withheld in a subsequent pay less notice.
Finally, the paying party was estopped by convention from strictly enforcing the terms of the contract as it had failed to do so for any of the previous payment cycles. Parties seeking to rely on the strict interpretation of payment provisions must do so consistently, otherwise they may lose the right.
Background
In a previous article, we wrote about the practice of linking a final date for payment in any given construction contract to the service of a VAT invoice and whether this was compliant with the minimum requirements of the Construction Act [1]. Whilst strictly obiter, comments made by the Technology and Construction Court (TCC) had cast that practice into doubt [2].
This issue has now been directly addressed by the TCC in Lidl GB v 3CL [3] and the decision could have significant implications for payments in the construction industry. The TCC also considered the use of ‘hybrid’ payment and pay less notices and whether these could be effective for the purposes of the Construction Act.
Lidl Great Britain Limited v Closed Circuit Cooling Limited t/a 3CL
3CL sought summary judgment to enforce an adjudicator’s decision in relation to a payment dispute between the parties. The adjudicator had ordered Lidl to make payment to 3CL with respect to 3CL’s application for payment 19 (“AFP19”) on the basis that Lidl had failed to serve a valid payment notice.
Prior to said enforcement proceedings being commenced, Lidl commenced Part 8 proceedings seeking the determination of certain issues arising out of the adjudicator’s decision. Amongst other things, Lidl sought declaratory relief on a number of points including:
3CL’s application for payment was not valid;
Lidl’s payment notice was valid; and
the payment provisions in the relevant contract, which sought to link the final date for payment to the service of a VAT invoice, were compliant with the Construction Act.
Each of these points is discussed below.
Was 3CL’s application for payment invalid?
In deciding whether 3CL’s AFP19 was valid, the court had to consider a number of issues. First, it considered whether a failure to comply with certain contractual requirements was a condition precedent to the validity of the payment application or simply a contractual obligation, a breach of which would not prevent the application being valid. The requirements in question included the submission of evidence of insurance renewals, photographic evidence and any other information reasonably required by the Employer.
The court held these requirements were not conditions precedent and it was influenced by a number of factors including the absence of clear words that such non-compliance would render the application invalid, the imprecision of some of the requirements and the uncertainty this may cause and the absence of any compelling reason for the requirements to be treated as a condition precedent.
The court also considered an argument from 3CL that Lidl was estopped by convention from arguing that the format of AFP19 was non-compliant with the contract as it had accepted the previous 18 applications which were in substantially the same form. Had 3CL needed to rely on this argument, it would have been successful. The court also noted that Lidl would have been estopped by convention from contending that 3CL’s application was invalid due to the incorrect method of service, because Lidl had not raised the same as grounds for treating any previous payment applications as invalid.
Was Lidl’s payment notice valid?
In its payment notice, Lidl had deducted liquidated damages but had also specified 20 reasons for “withholding payment” in relation to certain milestones, including instances where the milestone was allegedly incomplete or defective. The purported payment notice also described itself as being a pay less notice. Accordingly, 3CL argued that it was clearly intended to be a pay less notice and thereby incapable of being deemed a payment notice. The court agreed with the adjudicator’s determination that it was in content and substance a pay less notice. Furthermore, the court provided some further comment on whether a hybrid payment and pay less notice could be treated as a valid payment notice. It referred to an extract from Coulson on Construction Adjudication 4th edition which, in comparing the original and amended payment provisions of the Construction Act, states:
“The original provisions, which entitled a payer to serve a notice, operating as both a payment notice and a withholding notice, have been deleted in their entirety. Thus the payer must serve both the payer’s notice and a payless notice in accordance with the new s111 in the periods identified”.
Consequently, the court considered the adjudicator was “plainly and incontrovertibly right” in deciding that the deduction of liquidated damages in a payment notice was contrary to the express terms of the contract.
This decision could have significant consequences for Employers and Contractors in the construction industry. Liquidated damages and contra charges are regularly deducted in payment notices. The court appears to suggest this would render such payment notice invalid and leave the paying party vulnerable to a ‘smash and grab’ adjudication. Accordingly, care should be taken to ensure that any sums being withheld are clearly set out in a subsequent pay less notice, rather than the payment notice itself.
Were the payment provisions compliant with the Construction Act?
Section 110(1)(b) of the Construction Act requires every construction contract to provide for a final date for payment in relation to any sum which becomes due. 3CL relied on Rochford Construction Limited v Kilhan Construction Limited [4] in support of its assertion that the payment provisions in the contract between Lidl v 3CL, at least as far as they related to the final date for payment, were non-compliant with the Construction Act and, therefore, invalid. The provision in question set the final date for payment as 21 days following the due date or receipt of a valid VAT invoice, whichever is later.
The court said:
“…there is a very obvious and compelling difference between the wording used and the plain intent of s.110(1)(b) when compared with that of s.110(1)(a) and, that on a proper analysis, that is because the only discretion intended to be and actually given in the former case is for the parties to agree the length of the time period between the due date for payment and the final date for payment. If it was open to a paying party to include a provision which required the fulfilment of some further condition between the due date for payment and the final date for payment, that would have the effect of driving a coach and horses through the wording and the clear intention of this part of the Act, which is to allow the parties a wide discretion as regards when payments become due under a contract…but in contrast a much narrower and more circumscribed discretion as regards the final date for payment - only as to the length of the period between the due date and the final date.”
Accordingly, the court held the contract provisions for determining the final date for payment were non-compliant with the Construction Act. In such circumstances, the default payment provisions of the Scheme [5] apply instead. Paragraph 8 of Part II of the Scheme provides that the final date for payment shall be 17 days from the due date.
This is likely to have significant repercussions as it is common for the final date for payment to be linked to the service of a VAT invoice. Parties working under existing contracts that contain such provisions would be well advised to consider how the decision in Lidl v 3CL affects their payment dates, otherwise they may fail to issue a pay less notice in time and thereby become obliged to pay the sum contained in an application for payment and/or payment notice in full, even though it may be incorrect.
[1] Housing Grants, Construction and Regeneration Act 1996 (as amended)
[2] See Rochford Construction Limited v Kilhan Construction Limited [2020] EWHC 941 (TCC)
[3] Lidl Great Britain Limited v Closed Circuit Cooling Limited t/a 3CL [2023] EWHC 2243
[4] [2020] EWHC 941 (TCC)
[5] The Scheme for Construction Contracts (England and Wales) / (Scotland) Regulations 1998 (as amended)