Background
Lidl v Closed Circuit Cooling was decided in September 2023. This case considered the validity of payment terms in a construction contract between national food retailer, Lidl, and Closed Circuit Cooling, trading as 3CL, an industrial refrigeration and air-conditioning contractor.
In particular, the court examined the compatibility of the final date for payment provision in the contract with the requirements of section 110(1)(b) of the Housing Grants, Construction, and Regeneration Act 1996 (HGCRA 1996).
This section provides:
“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.”
Under the contract between Lidl and 3CL, the final date for payment was either: 21 days following the due date or receipt of a valid VAT invoice from 3CL, whichever was later. Linking the final date for payment to the contractor’s issue of a VAT invoice is common in construction contracts, for practical reasons.
Lidl argued that 3CL had not issued a VAT invoice, therefore the final date for payment had not arisen. In response, 3CL argued that linking the final date for payment to a VAT invoice did not comply with HGCRA 1996, therefore Lidl could not rely on the contractual provision.
3CL submitted that the decision in Rochford Construction Limited v Killan Construction Limited [2020], which supported its approach, should be followed. Lidl disagreed, arguing that other previous court decisions should be followed, which supported its own approach.
Decision
After a thorough review of the existing authorities, the court decided in favour of 3CL on this issue.
The court held that a payment provision that links the final date for payment to the contractor’s issue of a valid VAT invoice is not compliant with HGCRA 1996. The court agreed with the decision in Rochford that whilst the due date can be fixed by reference to an event, such as the issue of a VAT invoice, the final date for payment must be a fixed time from the due date.
Key takeaways
The only autonomy parties to a construction contract have in relation to the final date for payment is the length of time between the due date and final date for payment.
Although a payment due date can be linked to an event or mechanism, the final date for payment must be a fixed time after the due date. If payment terms are not compliant with HGCRA 1996, they will be replaced by the relevant provisions in the Scheme for Construction Contracts.
The final date for payment under the Scheme is 17 days after the due date. This is a notably shorter period than is allowed in many construction contracts, so be mindful when entering into these agreements of setting achievable due and final payment dates.
If you have any questions regarding any of the above or a similar matter, please do not hesitate to contact Iain Drummond.
This article was co-authored by Shona Norbash, Trainee Solicitor in the construction, engineering, and infrastructure disputes team.