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

Is a contractual 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 (e.g. by reference to service of a VAT invoice) compliant with s.110(1)(b) of the Construction Act? The High Court has provided clarity around this point in a recent decision.

Background

Lidl, a national retailer, engaged 3CL, an industrial refrigeration and air-conditioning contractor, pursuant to a framework agreement that enabled the parties to enter individual works orders. Under payment application 19 (‘AFP19’) issued pursuant to one such works order, 3CL sought payment of £781,986.22.

Lidl did not pay AFP19, and a dispute subsequently arose concerning 3CL’s entitlement to the same. Amongst Lidl’s assertions was that the contract made the final date for payment conditional upon 3CL delivering a compliant VAT invoice which Lidl said 3CL did not. In its defence, 3CL argued that terms of the contract as regards the final date for payment did not comply with the Construction Act.

In April 2023, 3CL referred the payment dispute to adjudication. Finding in 3CL’s favour, the Adjudicator ordered Lidl to pay the sum applied for in AFP19, together with interest.

Lidl continued not to pay and instead issued a Part 8 claim seeking the determination of various issues arising out of the Adjudicator’s decision by way of declaratory relief. In response, 3CL issued a Part 7 claim and summary judgment application to enforce the decision.

Decision

HHJ Davies’ judgment provides commentary on a number of matters, including the correct procedure to adopt in cases involving a Part 7 summary judgment application to enforce an adjudicator’s decision and a competing Part 8 application seeking a determination that the decision was wrong and should not be enforced.

However, perhaps the most extensive analysis in the judgment is that of whether the final date for payment provisions of the contract complied with s.110(1)(b) of the Construction Act, which states:

110 Dates for payment.

• Every construction contract shall—

• provide an adequate mechanism for determining what payments become due under the contract, and when, and

• 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.

In support of its position, 3CL relied upon the decision in Rochford Construction Limited v Kilhan Construction Limited. In Rochford, Cockerill J accepted (albeit obiter) that, properly construed, while s.110 allows a due date to be fixed by reference to (for example) an invoice or a notice, the final date for payment must be pegged to the due date, and be a set period of time, not an event or a mechanism.

Here, the contract provided that the final date for payment was 21 days following the due date or receipt of the Contractor’s valid VAT invoice (attaching certain document(s)), whichever was the later. Therefore, the final date for payment could depend on the date of 3CL’s invoice (i.e. not calculated solely by reference to the due date).

Whilst Lidl referred to earlier authorities, including that of Volkerlaser Limited v Nottingham City Council, which it submitted were of contrary effect, the Judge dismissed these, concluding that in none of the cases to which he had been referred was: (a) the s.110(1)(b) point argued; (b) the s.110(1)(b) point expressly identified by the judges concerned as requiring consideration; nor (c) any reason given as to why a provision fixing the final date for payment other than solely by reference to the date of the due date did not contravene s.110(1)(b).

Instead, the Judge was satisfied that the decision in Rochford was correct, noting:

“…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…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.”

Therefore, to require some further condition between the due date and the final date for payment (e.g. the service of a VAT invoice) would be akin to ‘driving a coach and horses’ through the clear intention of this part of the Construction Act, which allowed discretion only as to the length of the period between the due date and the final date for payment.

Accordingly, HHJ Davies concluded that the final date for payment provisions of the contract did not comply with s.110(1)(b) of the Construction Act.

Comment

In our experience, final date for payment provisions which fall foul of the judgment in Lidl are not uncommon. Parties to contracts containing such terms should now be aware that they may not stand up to judicial scrutiny. For some, this could have particularly wide-ranging consequences, as in many contracts the deadline for the issue of a pay less notice, for example, is tied to the final date for payment which now can only be determined on the length of the period specified between the due date and final date for payment.

From a drafting perspective, those holding the pen should however keep in mind that this decision does not impact the parties’ ability to peg the due date to some event or mechanism. It is only relevant in the context of the final date for payment.

The decision does not address the actual final date for payment that will apply where a contract is found to have terms which do not comply with s.110(b) of the Construction Act. In such circumstances, it appears from the judgment that the provisions of the Scheme for Construction Contracts may be incorporated ‘piecemeal’ to the extent necessary for the contract to comply with the Construction Act. However, the potential that (as an alternative), the offending provision might instead be ‘part-severed’ does not appear to have been considered directly. Future judicial guidance on this issue would be welcome.

In respect of disputes arising from non-payment of certified or notified sums and arising from a failure to issue pay less notices on time, paying parties now need to be aware that they cannot defend their actions by reference to any condition such as submission of an invoice.

As above, the key dates and actions for the payment process must be governed by the applicable due date, the date for issuing relevant payment notices and pay less notices and the final date for payment.