Beware of Lidl ruling's ramifications for payment terms

We are nearly 12 months on from the judgment in Lidl Great Britain Ltd v Closed Circuit Cooling Ltd [2023] EWHC 2243 (TCC) which caught the attention of many in the construction industry.

While issuing a VAT invoice may have been regarded as just another administrative task, it was in this case found to have invalidated the payment mechanism.

Since then, the JCT has introduced its 2024 suite of contracts, so now is a good time to revisit the judgment and consider how it may affect the contracts you are entering into.

This enabled both parties to enter into various individual work orders with one another, each of which would constitute a separate contract but under the same terms as the framework agreement.

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 milestone
• provide supporting evidence
• serve an application for payment using the correct method of service.

The contractor issued application for payment AFP19 for the sum of £781,986.22. However, Lidl issued its own payment notice PAY-7 in response, which valued the works at nil.

The notice contained a deduction for liquidated damages for delay, and deducted a number of items where the works were either incomplete or defective, and as such Lidl refused to pay the sum 3CL applied for.

The dispute was referred to adjudication by 3CL in April 2023 for a decision on its 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 claim under Part 8 of the Civil Procedure Rules, seeking declaratory relief that the extension of time and defects adjudication was unenforceable.

The contractor responded by issuing a Part 7 claim and a summary judgment application seeking enforcement of the adjudicator's decision.

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
2. whether Lidl's 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 contract requirements were not a condition precedent to 3CL receiving payment of AFP19 and, therefore, the application was valid.

If Lidl were to rely on its argument that it was invalid, the wording would have needed to state clearly that payment of interim applications was conditional on 3CL meeting the requirements set out in the contract.

In response to the second issue, the court held that PAY-7 was not a valid payment notice, 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 these would in themselves constitute a pay-less notice.

He held that the contract between Lidl and 3CL had in fact contravened Section 110 of the Housing Grants, Construction and Regeneration Act 1996 by linking the final date for payment to an event, such as a VAT invoice.

It is important to remember that a due date can be fixed to an event such as a notice or invoice, but the final date for payment must be a set period of time following the due date and cannot itself be fixed to an event or mechanism.

Judge Davies said that the legislation set a 'blanket prohibition on party autonomy as regards the ascertainment of the final date for payment save as to the length of the period', suggesting that the legislation only allows parties to determine the length of time between the due date and final date for payment with a complete 'prohibition' on linking this to an additional event (such as the serving of a VAT invoice).

While JCT made many amendments in its 2024 suite of contracts – such as its use of gender-neutral terminology and service of notices by email to keep up with an ever-more technical world – the contracts did not alter the fairly standard provisions on payment.

Even if parties did want to link the final date for payment to an event such as the issue of a VAT invoice, it would contravene Section 110 of the 1996 Act, as His Honour Judge Davies mentioned.

With that in mind, until such time as the Act comes under review, linking the final date for payment to an event or mechanism is a no go.

It is extremely unlikely ever to be put into legislation as it does not give certainty to the payment mechanism that is so critical to the industry.

If you are using the JCT suite, therefore, be sure that amendments are not made to fix the final date for payment to a separate mechanism or event.

Condition precedent clauses require certain conditions to be met, failing which, you may lose your entitlement.

By way of an example, that the payment application is sent to a certain email address, failing which it would be deemed invalid for that month's interim payment.

It is important to recognise whether your contract contains them, and whether they are effective.

In order to comply with the 1996 Act, a construction contract is required to have a clear due date to which the final date for payment must be linked, rather than an event such as a VAT invoice.

Construction contracts will often link the final date for payment to an event such as the submission of a compliant VAT invoice.

However, this case is a stark reminder that if you are a party to a contract that links the final date for payment to an event it may be unlawful, which could affect when you get paid.

Finally, do not assume that the JCT 2024 contracts have been changed to protect you in this regard: always have your contract reviewed if you are unsure.