Can payments to be made under construction contracts be conditional on the production of invoices?

The answer is no, following the recent decision of Lidl Great Britain Ltd v Closed Circuit Cooling Ltd (t/a 3CL) [2023] EWHC 2243 (Technology and Construction Court)

What are the facts?

Lidl entered into a framework agreement for industrial refrigeration and air-conditioning works. 

The first order issued under the framework agreement contained a payment schedule which said that the final dates for payment would be:

“21 days following:

a) the Due Date; or

b) receipt of the Contractor's valid VAT invoice …

whichever is the later.”

One of the matters that the Technology and Construction Court (TCC) had to determine was whether the final date for payment complied with section 110 of Part II of the Housing Grants, Construction and Regeneration Act 1996 (as amended) (Construction Act). 

Lidl argued that the TCC should not follow the earlier decision in the case of Rochford Construction Ltd v Kilhan Construction Ltd [2020] EWHC 941 (TCC), where the TCC found that the Construction Act did not permit conditional or “floating” final dates for payment but required a fixed period of time between the due date and the final date for payment. 

Lidl argued that the Rochford decision was contrary to previous cases that had upheld invoice-linked final date for payment provisions. 

Judgement 

In the Lidl case, the TCC acknowledged that the cases previous to Rochford had upheld invoice-linked final date for payment provisions, but in none of those cases had a challenge been made under the Construction Act. Therefore, those cases were of limited assistance. 

The TCC referred to section 110 of the Construction Act, which provides that every construction contract shall “provide an adequate mechanism for determining what payments become due under the contract, and when” and also “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”. 

The TCC determined that the only discretion allowed to the parties to the contract is to agree on the length of the time period between the due date for payment and the final date for payment, and therefore, the final date for payment is fixed by reference to the due date and acts as a long-stop date for payment. 

Comment 

It is not uncommon for construction contracts to state that the final date for payment is linked to a VAT invoice issue. 

The consequences that flow from this could be:  

• The paying party does not pay the party claiming payment by the final date specified in the contract because a VAT invoice is not issued
• The party claiming payment rightly states that the final date is non-compliant with the Construction Act, and consequently, the relevant provisions of the Scheme for Construction Contracts 1998 (Scheme) are implied into the contract. The Scheme provides that the final date for payment is 17 days from the date the payment becomes due, the due date being seven days after the date of valuation or the unpaid contractor or consultant making a claim
• Where the 17-day period is shorter than the contractual period that the parties have agreed to in the contract, the paying party, therefore, has failed to submit a pay less notice on time
• This entitles the party claiming payment to:
  • Be paid the amount in its payment application without set-off or deduction
  • Pursue non-payment in a “smash and grab” adjudication
  • Exercise its statutory right to suspend the performance of its obligations under the construction contract 

It is critical that, before signing any construction contracts, you check whether payment is conditional on the production of an invoice ( or any other event) so that you are clear whether the final date for payment in the contract is compliant with the Construction Act or whether the final date for payment under the Scheme applies and, if appropriate, to re-draft the payment clauses. 

For legal advice on any of the issues raised in this article, contact Lucilla Waugh on 0191 211 7984 or email [email protected]