A Lidl reminder that construction contract payment provisions require to be Act compliant

Those tasked with drafting - and administering - contractual payment provisions in construction contracts, will be all too familiar with the requirement for those provisions to be compliant with the Housing Grants, Construction and Regeneration Act 1996. Indeed, over the years we have seen a steady stream of cases examining precisely what 'compliance' means in practice. The latest of these to come before the TCC is the case of Lidl Great Britain Limited and Closed-Circuit Cooling Limited T/A 3CL.

Lidl, a household name and retailer, and 3CL, an industrial refrigeration and air-conditioning contractor, entered into a framework agreement which enabled the parties to enter into individual work orders each of which was to constitute a separate contract. The first order was the subject of the dispute. The framework agreement and order entitled 3CL to submit a payment application where certain milestones were met. As a result of meeting milestones, 3CL sought payment in the sum of £781,986.22.

Lidl argued that the payment application was invalid; the response submitted by Lidl was a valid payment notice; and that the terms of the contract (including the necessity for a valid invoice to be submitted – which it said 3CL failed to comply with) were compliant as regards to the final date for payment. The dispute was initially referred to adjudication in April 2023 following which 3CL were successful. Lidl then issued a Part 8 claim in which it sought declaratory relief that 1) the adjudicator's findings in law were wrong; and 2) the adjudicator's decision in any event breached natural justice and was unenforceable. 3CL in turn issued a Part 7 claim seeking summary judgement enforcing the adjudicator's decision. Both claims were heard together by His Honour Judge Stephen Davies in the TCC.

The judgement touches on a number of areas of payment law that have proved fertile ground for disputes over the years; including arguments compliance with certain provisions were condition precedent. It also serves as another reminder of the high bar that it to be overcome for those seeking to overturn a decision on the basis of a breach of natural justice. For the most part, it suffice for the purpose of this note to say that all Lidl's arguments both in pursuance of its Part 8 claim and defence of 3CL's Part 7 enforcement claim were unsuccessful.

Of particular relevance though was the court's interpretation of Section 110(1)(b) of the Act as it applies to determination of the final date for payment. By way of reminder, section 110(1)(b) provides that:

"Every construction contract shall— provide for a final date for payment in relation to any sum which becomes due. The parties are free to agree how long the period is to be between the date on which a sum becomes due and the final date for payment."

The payment mechanism in question (which had of course been agreed as between the parties) provided that 3CL were to submit a valid VAT invoice and that the final date for payment would follow thereafter. Accordingly, (on Lidl's case) where no VAT invoice had been submitted, the final date for payment had not occurred.

The question for the court was whether a contract term which provides for a final date for payment other than by reference to a specified period between the due date and the final date for payment is compliant with s.110(1)(b).

The court found that it was not:

"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, constrained only by the requirement that it be an adequate mechanism and the specific anti-abuse provisions of s.110(1A) and (1D), 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.

I can see that the potential for abuse is not present to anything like the same extent where, as in this case …., the only additional requirement is for the contractor to serve a VAT invoice as well. However, if the way in which Parliament has decided to address this problem is to introduce a blanket prohibition on party autonomy as regards the ascertainment of the final date for payment save as to the length of the period, it is not for the courts to allow parties to agree terms which go beyond that narrow limit simply because they do not appear to have the same potential for abuse."

The linking of the final date for payment to provision of a VAT invoice is an amendment that regularly crops up in contracts we see. We would recommend reviewing your standard amendments to ensure that future contracts do not contain such provisions and instead specify a fixed period between the due date and final date for payment.

For those with such provisions in existing contracts, the effect of this decision is that the non-compliant clause cannot be relied on and the final date for payment will instead be as provided for by the Scheme for Construction Contracts – namely 17 days from the due date.