Legal Q&A: Payments
Chris Dickson, Partner, CMS Cameron McKenna Nabarro Olswang LLP
IN the recent case of Lidl Great Britain Ltd v Closed Circuit Cooling Ltd (t/a 3CL) (2023) EWHC 2243, the Technology and Construction Court (TCC) affirmed a previous decision that payment terms which link the final date for payment with provision of an invoice are non-compliant with the Housing Grants, Construction and Regeneration Act 1996 (the construction act).
The construction act
The construction act provides certain requirements for payment clauses in construction contracts. Where a construction contract does not meet these requirements, the provisions of the scheme for construction contracts regulations (the scheme) will be implied.
Section 110 of the act requires every construction contract to contain (i) an ‘adequate mechanism’ for determining what payments become due and when; and (ii) a ‘final date for payment’ for any sum that becomes due, with the parties being free to agree the length of the period between the due date for payment and the final date for payment. If a construction contract does not contain these payment provisions, or they are found to be invalid, the relevant provisions of the scheme will be implied with the effect (as the case may be) that a payment will become due seven days after the date of valuation or the unpaid party making a claim and/or the date for payment being 17 days after the date payment becomes due.
In practice, construction contracts often do not have a defined final date for payment. Instead, the final date for payment can ‘float’ by being linked to the issuing of a VAT invoice.
Rochford Construction Ltd v Kilhan Construction Ltd (2020) EWHC 941 (TCC)
In practice, construction contracts often do not have a defined final date for payment. Instead, the final date for payment can ‘float’ by being linked to the issuing of a VAT invoice.
The Lidl case builds on a previous decision of the TCC in Rochford Construction Ltd v Kilhan Construction Ltd. In this case, a dispute arose between the parties in part concerning a provision in a subcontract which stated that payment terms were ‘30 days from invoice’.
On an obiter non-binding basis, the court held that the act did not in fact permit ‘floating’ final dates for payment, as envisaged under the subcontract terms. In its reasoning, the court highlighted the difference in the language of the section 110 requirement to provide an ‘adequate mechanism’ for determining the due date and the final date for payment being a ‘period’ between calculated from the due date.
This was supported by the fact that wording in section 109 states that parties could agree the ‘circumstances in which’ amounts would become due. There is no analogous wording in the act in relation to the final date for payment.
Lidl Great Britain Ltd v Closed Circuit Cooling Ltd (2023) EWHC 2243 (TCC)
In the Lidl case, a challenge was made to the reasoning of the court in Rochford. Lidl had entered into a framework agreement with 3CL, an industrial refrigeration and air-conditioning contractor. The agreement allowed both parties to enter into individual work orders, and each of these orders would be considered its own separate contract. The terms of a work order contained provisions that allowed 3CL to make applications for interim payment once certain milestones had been achieved, with the final date for payment being the later of 21 days following the due date or receipt of 3CL’s valid VAT invoice.
It remains common for final dates for payment to be linked to the provision of VAT invoicesA dispute arose between the parties in relation to various matters concerning payment under the work order. 3CL contended that the terms of the work order regarding the final date for payment (i.e. being linked to the delivery of the valid VAT invoice) did not comply with the act, citing the approach of the TCC in the Rochford case. Lidl contended that the court should follow earlier authority which upheld provisions which linked the final date for payment to issue of an invoice.
Although the court accepted that the cases referenced by Lidl did contain invoice-linked final date for payment provisions which had been upheld, the court noted that there had not been a challenge under the act in any of those cases and therefore they were of limited value as a reason not to follow Rochford. Agreeing with the decision reached in Rochford, the court again highlighted the distinction set out in section 110 between the requirements for establishment of a due date and those for a final date for payment.
Implications
It remains common for final dates for payment to be linked to the provision of VAT invoices. This is largely due to the need to link the payment provisions of the act with accounting policies and software built around invoicing. In light of the Lidl case, parties should now give much closer consideration to the specific wording of the act when drafting payment mechanisms in their contracts, particularly in relation to the provision of invoices. This ought to ensure that the mechanisms are compliant with the act and avoid the possibility of the scheme being implied.
Chris Dickson, Partner, CMS Cameron McKenna Nabarro Olswang LLP