A Lidl issue: VAT Invoices and Final Dates for Payment
In any construction contract, the payment mechanism is of fundamental importance and it is no surprise that many disputes stem from the provisions dealing with how and when payments are made.
It is also why the payment mechanism must comply with the requirements set out in the Housing, Grants, Construction and Regeneration Act 1996 (“the Act“) as amended.
An amendment or provision that we often come across in negotiating, reviewing or advising on contracts is one which ties the final date for payment to a period after the payee has provided an invoice (VAT or otherwise). Whether or not such a provision complied with the Act was uncertain after the 2020 decision in Rochford Construction Ltd v Kilhan Construction Ltd.
The TCC has now confirmed that such provisions are not compliant with the Act in the recent judgment in Lidl Great Britain Ltd v Closed Circuit Cooling Ltd (t/a 3CL)  EWHC 2243 (TCC).
The case involved a dispute between the well-known retailer Lidl and 3CL, an industrial refrigeration and air conditioning contractor. The parties had entered into a framework agreement enabling the instruction of individual works orders. Under one works order, 3CL applied for payment of £781,986.22. Lidl failed to pay and a dispute arose over 3CL’s entitlement to the sums claimed.
One of the issues in dispute was the final date for payment. The contract provided that the final date for payment would be “either 21 days following the due date or receipt of the Contractor’s valid VAT invoice, whichever is the later”.
3CL argued that this clause failed to comply with Section 110(1)(b) of the Act:
(1) Every construction contract shall—
(a) provide an adequate mechanism for determining what payments become due under the contract, and when, and
(b) 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.
3CL’s submission was that a contractual term purporting to fix a final date for payment other than by reference to a period of time following the due date is void and ineffective as it would contravene s110(1)(b). Lidl contended that the Act did not impose such a constraint, and that the clause in the contract was valid.
The TCC was not persuaded by Lidl and held that the clause in the contract was not compliant with the Act. The Court found that the wording of s110(1)(b) is deliberately more limited in scope when compared to s110(1)(a), which allows the parties to decide on the mechanism for determining when payments become due. The Court decided “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”.
The result is that s110(b)(1) prohibits parties from agreeing to a final date for payment that is contingent on the occurrence of an event (such as the issuing of an invoice). Instead, it must be pegged to the due date to ensure compliance with the Act.
In this and any other case where a construction contract does not comply with the Act, the Scheme for Construction Contracts will be implied insofar as is necessary to correct the non-compliance. Under the Scheme provisions, the final date for payment is 17 days from the due date and the contract between Lidl and 3CL would have been amended accordingly.
The incorporation of the Scheme could result in unforeseen consequences such as a failure to make payment on time or issue payment and pay less notices in accordance with the contract which, amongst other issues, may result in a smash and grab adjudication. Either way, it is in both parties interests to ensure that they agree a compliant payment mechanism and adhere to it.
If you are aware of any similar provisions in contracts that you currently use, it would be worth reviewing and updating these forms. As for any contracts already in existence, you should ensure that the effect of the Scheme is accounted for when dealing with pay less notices and making payments.