Anyone within the construction industry will know that it pays to ensure that your contracts comply with the payment provisions specified within the Construction Contracts (Northern Ireland) Order 1997 (the “Order”) (or the similarly worded English law equivalent Housing Grants, Construction and Regeneration Act 1996 (the “Act”)).
However, it is an often glossed over fact that parties frequently make the final date for payment under construction contracts conditional on the presentation of a VAT invoice. Whilst this is a pragmatic approach to take in the day to day running of a business, whether it is in fact compliant with the Order has been a question of judicial uncertainty until the recent case of Lidl Great Britain Limited v Closed Circuit Cooling Limited t/a 3CL [2023] EWHC 2243 (TCC).
Background
Lidl is a well-known retailer and 3CL is an industrial refrigeration and air-conditioning contractor appointed by Lidl under a framework agreement which enabled the parties to enter into individual works orders, each of which would constitute a separate contract incorporating both the terms of the framework agreement and the Order. One of the relevant terms specified that the Final Date for Payment would be:
“21 days following:
- a) the Due Date; or
- b) receipt of the Contractor’s valid VAT invoice in the sum due by the Employer from the Contractor attaching a copy of the relevant Payment Notice or in the event of a default Payment Notice in accordance with the Conditions the Application for Payment submitted by the Contractor;
whichever is the later.”
3CL raised an interim payment application that Lidl refused to pay. This was partly because Lidl maintained that 3CL did not present a VAT invoice with its application for payment, meaning the final date for payment never arose and no sums became payable under the contract. 3CL referred the payment dispute to adjudication and was successful. Lidl then applied to challenge the Adjudicator’s decision and 3CL to enforce it.
The decision
One of the arguments before the Court was whether a contract term which provides for a final date for payment other than by reference to a specified period between the due date and the final date for payment is compliant with the Act.
The requirements under both the Order and the Act on this are identical:
“(1) Every construction contract shall—
(a) provide an adequate mechanism for determining what payments become due under the contract, and when; and
(b) shall provide 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.
(1A) The requirement in subsection (1)(a) to provide an adequate mechanism for determining what payments become due under the contract, or when, is not satisfied where a construction contract makes payment conditional on—
(a) the performance of obligations under another contract; or
(b) a decision by any person as to whether obligations under another contract have been performed.
The issue identified by the Court was that the final date for payment to 3CL under this contract was 21 days from either the Due Date or the presentation of a valid VAT invoice, whichever was the later. In other words, the final date for payment may be entirely dependent on the date of 3CL’s invoice, which is not therefore set solely by reference to the due date.
The Act (and the equivalent provisions of the Order) gives parties a clear freedom to determine the period of time between when a payment becomes due and when it must be paid, but this is the only discretion given to the parties. Parliament clearly intended to guard against the paying party abusing the payment process by making payment conditional upon some hard-to-achieve obligation. Davies J noted in his judgment that:
“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 the clear intention of this part of the Act, which is to allow the parties a wide discretion as regards to when payments become due under a contract constrained only by the requirement that it be an adequate mechanism and the specific anti-abuse provisions of s.110(1A) and(1D), but in contrast a much narrower and more circumscribed discretion as regards the final date for payment – only as to the length of the period between the due date and the final date.” [at paragraph 122]
Whilst acknowledging that requiring the provision of a VAT invoice is, “not obviously and inherently objectionable”, Davies J went on to point out that:
“I can see that the potential for abuse is not present to anything like the same extent where… the only additional requirement is for the contractor to serve a VAT invoice as well. However, if the way in which Parliament has decided to address this problem is to introduce a blanket prohibition on party autonomy as regards the ascertainment of the final date for payment save as to the length of the period, it is not for the courts to allow parties to agree terms which go beyond that narrow limit simply because they do not appear to have the same potential for abuse.” [at paragraph 123].
The Court therefore agreed with 3CL that by linking the final date for payment with the presentation of a VAT invoice, that provision of the contract was not compliant with the Act.
The implications
Following Lidl v 3CL, the consequence of a contract making the final date for payment conditional on receipt of a VAT invoice (or any other event) is that that particular contract clause will be considered unenforceable, and the Scheme for Construction Contracts (the “Scheme”) will apply by default. Under the Scheme, the final date for payment “shall be 17 days from the date that payment becomes due“.
This may well shorten the timeframe in which a paying party must make payment (potentially impacting cashflow as a result). It may also have a knock-on effect on the dates by which the paying party must serve a Payment Notice or a Pay Less Notice. It is therefore worth ensuring that any contract entered into is compliant with the payment provisions of the Act/Order, considering the recent clarification in Lidl v 3CL.
On a practical level, contracts often make the final date for payment conditional upon presentation of a VAT invoice because it ties in with the paying party’s account system. Some thought may therefore be needed as to how accounting systems can tie in with the necessary contractual position.
While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.
