For those working in the construction section, the English High Court has given a reminder of the importance of complying with the mandatory payment system (for payment applications, payment notices and pay less notices) under the Housing Grants, Construction and Regeneration Act 1996 (the “Act”).
The Lidl case
In a recent case in the High Court[1], the Judge had to decide a number of issues, including whether the payment process was compliant with the Act.
Lidl appealed against the ruling by an adjudicator that 3CL were entitled to a payment of just over £780,000 under a payment application, which Lidl had alleged was invalid. (Lidl had paid under previous applications for payment).
The contract between Lidl and 3CL provided that a valid payment application must identify the milestones for which payment was sought, include photographic evidence and evidence of the renewals of relevant insurance.
The contract also provided that for an application for payment to be considered as “received” by Lidl, so that the “due date” could be calculated, it had to comply with clause 1.3.1 of the contract. This provided that notices and requests had to be in writing and delivered by hand or posted or sent by courier, with a copy transmitted by email, to a nominated address. For “other communications”, email alone could be used.
Lidl maintained that the payment application was of no effect under the contract and had not been validly “received”, with the consequence that neither the “due date” nor the “final date for payment” had occurred.
Lidl also claimed that the payment application did not comply with the requirements regarding milestones etc.
In response to the payment application, Lidl issued a document (PAY-7) valuing the works at “nil”. Lidl claimed this was a valid “payment notice”.
There was also a dispute as to whether the payment terms in the contract complied with the requirements of the Act. Lidl argued that the contract terms made the final date for payment conditional on 3CL delivering a compliant VAT invoice, which 3CL had failed to do.
On the issue of whether Lidl had issued a payment notice, the Judge decided that the notice went beyond what the contract stated, because it also amounted to a “pay less notice” and by referring to a “nil” payment was claiming liquidated damages from 3CL. Lidl had therefore failed to serve a valid “payment notice.”
Under the Act, Lidl were required to serve a “payment notice” and a separate “pay less notice”.
The Judge went on to consider if failure to comply the various requirements set by Lidl in the contract rendered the payment application invalid. Taking into account the fact that, in relation to previous payment applications, Lidl had not insisted on compliance with the requirements, it was decided that these requirements were not a condition precedent to Lidl’s payment obligations.
The judge then turned to the question of whether the payment application was a “notice, request” or “another communication” between the parties. He was critical of the fact that the contract did not state when notices etc would take effect. Although the judge decided that the payment application was a “request”, he did not think compliance with clause 1.3.1 was a condition precedent to the validity of the payment application, so it could be served by email. He noted that, if Lidl had intended that a payment application would only be valid if served in compliance with clause 1.3.1, they should have expressly referred to it in the text. The Judge was no doubt also influenced by the fact that, in relation to earlier payment applications which Lidl had paid, Lidl had not queried service by email.
On the issue of compliance with the Act, 3CL claimed that the contract failed to provide an adequate mechanism for determining when payment become due under the contract, contrary to the Act.
The court had to consider if the provisions of the contract determining the “final date for payment” complied with the Act and whether it was a condition precedent to the validity of the payment application that 3CL has submitted a VAT invoice, as required by Lidl’s payment schedule.
If the contract did not provide for a final date for payment by reference to a specified period between the due date and the final date for payment, it would not comply with the Act. This would mean that the Scheme for Construction Contracts would apply and so the final date for payment would be 17 days from the due date. The consequence would be that the deadline for serving a valid “pay less” notice would have been missed. On this point the Judge found in favour of 3CL.
The second issue was whether it was a condition precedent to the validity of the payment application that a VAT invoice compliant with the payment schedule had to be submitted. The contract required 3CL to submit the payment application with the VAT invoice, which 3CL failed to do. However, 3CL’s covering letter and the invoice itself referred to the payment application. The Judge decided that attaching the payment application to the invoice was not a condition precedent to Lidl’s obligation to pay on receipt of 3CL’s invoice.
A consequence of this decision is likely to be that employers will re-visit the terms of appointments, to make sure they comply with the requirements of the Act. What is clear from the case is that a contract which requires the submission of a VAT invoice to determine the final date for payment will not be compliant with the Act.
[1] Lidl GB Ltd -v- Closed Circuit Cooling Ltd (t/a 3CL) 2023 EWHC 2243