In Lidl Great Britain Limited v Closed Circuit Cooling Limited t/a 3CL, the Technology and Construction Court (TCC) considered whether reference to the issue of a VAT invoice could determine the final date for payment in a construction contract. We summarise some of the issues arising in the case relating to payment under a construction contract.
- Lidl entered into a framework agreement (FA) with 3CL, a contractor providing industrial refrigeration and air-conditioning services. The FA enabled the parties to enter into specific work orders, each constituting a separate contract.
- 3CL was entitled to make applications for interim payments after achieving defined milestones.
- Under the 19th interim application (AFP19) of the first order issued under the FA, 3CL applied for payment of £781,986.22. Lidl responded to AFP19 by issuing a payment notice 2011-PAY-7 (PAY-7), valuing the works at nil.
- 3CL commenced an adjudication against Lidl, which was decided in 3CL's favour. Thereafter, Lidl and Aldi commenced Part 8 and Part 7 proceedings respectively, which were heard together on 23 August 2023.
- Davies J identified the three major disputes as follows:
- Whether AFP19 was a valid payment application under the contract;
- Whether PAY-7 was a valid payment notice; and
- Whether the payment terms complied with the Housing Grants, Construction and Regeneration Act 2011 (as amended) (the Act), specifically the terms relating to the computation of the final date for payment.
What are the requirements for a valid interim payment application or payment notice?
Davies J confirmed:
"It is common ground before me, as it was before the adjudicator, that the construction of PAY-7 is to be undertaken objectively, and the issue is how a reasonable recipient would have understood the notice…"
The judge's comments follow a line of case law that establishes the need for clarity in interim payment applications and notices. In Caledonian Modular Ltd v Mar City Developments Ltd3], the court highlighted the importance of making interim payment claims "with proper clarity". Then, in Henia Investments Inc v Beck Interiors Ltd, the court ruled that a payment application must be "…in substance, form and intent an Interim Application…and it must be free from ambiguity."
In Severfield (UK) Ltd v Duro Felguera UK Ltd, Coulson J neatly set out the requirements of the Act and the common law confirming that a payment notice must: (i) "set out the sum due"; (ii) "set out the basis on which that sum is calculated" and (iii) "be set out with proper clarity and be free from ambiguity".
In Jawaby Property Investment Ltd v The Interiors Group Ltd, Carr J concluded:
"…If a contractor wishes to have the benefit of the interim payment regime such as that contained in the contract, then its application for interim payment must be in substance, form and intent an interim application stating the sum considered by the contractor as due at the relevant due date and it must be free from ambiguity…"
It is worth noting that in Kersfield Developments v Bray and Slaughter, as well as confirming the above principles, the court confirmed that parties can agree additional requirements as to form, content and substantiation, provided there is no conflict with the Act.
Can a payment notice and pay less notice be the same document?
Davies J sought authority on whether a notice that describes itself as a pay less notice, which is "in substance" a combined payment and pay less notice, could be treated as a valid payment notice however, there was no such authority. Davies J then cited Coulson's Construction Adjudication (4th Edition), which provides that the original provisions in the Act enabling a combined payment and pay less notice had been deleted such that separate payment notice and pay less notices must be given.
Can the determination of the final date for payment be conditional on the issue of a VAT invoice?
In what Davies J described as a "question of more general importance" compared with the other issues in the judgment, the court considered whether the final date for payment under a construction contract could be determined by reference to the issue of a VAT invoice. There has been some judicial uncertainty in this regard.
Section 110(1) of the Act requires that:
"Every construction contract shall—
a. provide an adequate mechanism for determining what payments become due under the contract, and when, and
b. shall provide 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"
In Lidl, the contract provided that the final date for payment was the later of 21 days after the due date or the date of receipt of a valid VAT invoice from 3CL. Lidl argued that the final date for payment was conditional on 3CL providing a valid VAT invoice; 3CL argued that this was contrary to the Act.
The Court was satisfied that the decision in Rochford Construction Limited v Kilhan Construction Limited was correct and ruled in favour of 3CL. In Rochford, the contract provided, amongst other things, that the final date for payment under the subcontract was 30 days from the date of service of an invoice. The court stated:
"The inference is that the possibility to peg final date of payment to an event rather than a fixed period was never considered acceptable under the Act"
If a contract does not comply with the Act, then the Scheme for Construction Contracts (the Scheme) imports terms into a contract (only as required to make the payment terms compliant with the Act). Under the Scheme, the final date for payment "shall be 17 days from the date that payment becomes due".
Whilst Davies J acknowledged that including a provision requiring the issue of a VAT invoice did not present the same potential for abuse, as say, setting the final date for payment based on the performance of obligations under another contract, Parliament was clear in that there was a:
"blanket prohibition on party autonomy as regards the ascertainment of the final date for payment save as to the length of the period"
Such narrow discretion in terms of the length of the period is expressly provided for in section 110(1) of the Act, as set out above. If a party was able to include some further condition between the due date and the final date for payment, other than in respect of the length of the period, it would:
"have the effect of driving a coach and horses through the wording and the clear intention of this part of the Act"
The court has provided some certainty in answer to the question of whether a final date for payment can be determined by reference to the issue of a VAT invoice, at least for now.
If you have any questions about this article, please contact Ashley Pigott or Sam Wallis.
  EWHC 2243 (TCC) at 31
 The Judge refers to Jawaby Property Investment Ltd v The Interiors Group Ltd  EWHC 557 (TCC).
  EWHC 1855 (TCC) at 37
  EWHC 2433 (TCC) at 17
  EWHC 3352 (TCC) at 28
  EWHC 557 (TCC) at 59
  EWHC 15 (TCC) at 32
  EWHC 941 (TCC)
 The Scheme for Construction Contracts (England and Wales) Regulations 1998
 See paragraph 8(2) of the Scheme