Payment Application Disputes in Construction Contracts
Problem: In Lidl Great Britain Limited v Closed Circuit Cooling Limited t/a 3CL the Court had to consider whether reference a contractual requirement to submit a valid VAT invoice could determine the final date for payment.
Outcome: The Judge decided in this case that the obligation to make the final payment date dependent on receipt of a valid VAT invoice did not comply with the requirements of Section 110(1)(b) of the ‘Construction Act’, and there was an implied term that it would be paid within 17 days of the payment application.
When does payment obligation apply in Construction contracts?
Lidl, a well-known national retailer and 3CL, a contractor in the business of industrial refrigeration and air-conditioning, entered into a framework agreement which enabled the parties to enter into individual works orders, each of which constituted a separate contract. This framework agreement entitled 3CL to make interim payments following the achievement of defined milestones.
The relevant payment application in this case is the 19th such payment application (“AFP19”), in which 3CL sought payment of £781,986.22.
There were three major disputes between the parties:
- Lidl’s claimed that 3CL’s payment application was invalid due of its failure to comply with (a) the identification of the milestones achieved and amounts claimed against each; (b) failure to provide supporting photographs and insurance evidence; and (c) inadequate method of service
- In response to the payment application, Lidl valued the works at nil and maintained that it was a valid payment notice, while 3CL contends that it was not and that it was in reality an invalid pay less notice served without a prior payment notice
- The third major dispute concerns the compliance of the payment terms with the requirements of the Housing Grants, Construction, and Regeneration Act 1996 (as amended) (‘Act’), the contract made the final date for payment conditional upon 3CL’s delivery of a compliant VAT invoice.
The Adjudicator’s Decision
The adjudicator, Mr. Robert J. Davis rejected all of Lidl’s submissions as to the invalidity of AFP19 and as to the validity of PAY-7 and, thus, rejected Lidl’s defence that no sum was payable because the final date for payment had not arrived. He ordered Lidl to pay the sum applied for in AFP19 in full together with interest.
Can final date for payment be conditional upon the issuance of a VAT invoice?
In this case, the contract stated that the final date for payment was either (i) 21 days after the due date or (ii) the date of receipt of a VAT invoice. It was therefore Lidl’s argument that the final date for payment was conditional on a valid VAT invoice, whereas 3CL argued that this provision was contrary to the Act.
The Judge decided in this case that the obligation to make the final payment date dependent on receipt of a valid VAT invoice did not comply with the requirements of Section 110(1)(b) of the Act regarding dates for payment in construction contracts which provides that:
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.
In the circumstances, the Court held that the Scheme for Construction Contracts Regulations 1998 was implied, which would override the contractual mechanism for determining the final date for payment when a contraction contract does not comply with the Act. This provides that if the parties have failed to provide for the final date for payment of sums due in the construction contract pursuant to the Act, the Scheme provides that the final date is 17 days after the payment due date.
The Judgment
In the Judge’s view:
“the only discretion … is for the parties to agree the period between the due date for payment and the final date for payment. If it was open to a paying party to include a provision which required the fulfilment of some further condition between the due date for payment and the final date for payment, that would have the effect of driving a coach and horses through the wording and clear intention of this part of the Act”.
Comments from Expert Construction Dispute Lawyers
Parties entering into construction contracts should carefully review their construction contracts and carefully review any payment provisions, particularly given the current economic climate in the construction industry. Although it is common and indeed acceptable for an invoice to be part of the payment process, any provisions that specifically interlink the final date for payment to the provision of an invoice may be subject to challenge.
It is important to seek specialist legal advice to ensure that all essential pre-requisites have been met. If you wish to discuss your construction claim with our construction dispute lawyers, please do not hesitate to call us or complete our booking form below to schedule a Free Consultation or alternatively call us on 0207 459 4037.
