Lidl Great Britain Ltd vs Closed Circuit Cooling Ltd (t/a 3CL) [2023] EWHC 2243 TCC

Construction solicitor, Lawrence Pearce, and trainee construction solicitor, Alicia Hilton, take a look at recent case law surrounding payment notices in the construction industry.

Background

Lidl contracted with refrigeration and air-conditioning contractor, Closed Circuit Cooling Ltd t/a 3CL, under a framework agreement so that both parties could enter into various individual work orders, and each of these would constitute a separate contract.

The contract contained provisions for interim applications and stated that 3CL must when submitting a payment application:

• Identify the milestones achieved and the amounts claimed against each of them
• Provide supporting evidence
• Serve via the correct method of service

3CL issued application for payment (AFP19) for the sum of £781,986.22 and in response, Lidl issued its own payment notice (PAY-7) which valued the works at nil. The payment notice contained a deduction for liquidated damages and as such refused to pay the sum applied for.

3CL referred the dispute to adjudication in April 2023 seeking a decision on 3CL’s entitlement to payment of AFP19 on the basis that PAY-7 was not a payment notice but an invalid pay less notice. The adjudicator decided in 3CL’s favour and ordered Lidl to pay the whole of AFP19 with interest.

However, Lidl did not pay 3CL and instead issued a Part 8 claim seeking declaratory relief. 3CL responded by issuing a Part 7 claim and a summary judgement application seeking enforcement of the adjudicator’s decision.

The Court’s Decision

Judge Stephen Davies heard both Part 7 and Part 8 claims together in the TCC and considered two issues:

• Issue 1
  Whether AFP19 was a valid application for payment or if in fact it failed to comply with the terms of the contract in relation to the method of service and its contents as argued by Lidl.

• Issue 2
  Whether Lidl’s payment notice (PAY-7) was valid in response to AFP19, or an invalid pay less notice as argued by 3CL.

In response to the first issue, the court found that the requirements of the contract were not a condition precedent to 3CL receiving payment of AFP19 and therefore, AFP19 was valid. If Lidl were to rely on their argument, the wording would have needed to clearly state that payment of interim applications was conditional on 3CL meeting the requirements as set out in the contract.

In response to the second issue, the court held that PAY-7 was not a valid payment application. PAY-7 described itself as a pay less notice and went further than what was set out in the contract insofar as it contained deductions for liquidated damages, when contractually deductions would constitute a pay-less notice.

What is also extremely interesting is that the Davies J commented (albeit in obiter) on whether the final date for payment could be fixed to 3CL issuing a compliant VAT invoice. It was held that the contract between Lidl and 3CL had in fact contravened section 110 Construction Act by linking the final date for payment to a VAT invoice. It is important to remember that a due date can be fixed to an event, for example a notice or an invoice but the final date for payment must be a set period of time following the due date and cannot be fixed to an event or mechanism.

Takeaway points

• Payment mechanisms in construction contracts are often governed by condition precedent clauses, however they must be clearly drafted to take effect. It is important to recognise if your contract contains them and whether they are effective.
• In order to comply with the Construction Act, a construction contract is required to have a clear due date and the final date for payment must be linked to the due date, and not to an event such as a VAT invoice.
• Construction contracts will often link the final date for payment to the submission of a compliant VAT invoice. However, this case is a stark reminder that if you are a party to a contract which links the final date for payment it may be unlawful, which could affect when you get paid.

If you are unsure of what your contract says, Holmes & Hills’ Construction Division have extensive experience in carrying out contractual reviews and in-house training. We would be more than happy to host a training session at our Commercial Hub in Colchester, attend your offices in person or remotely to offer training on a variety of topics. Please do not hesitate to contact us as our team of construction lawyers would be happy to assist you.