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Case Commentary: Lidl Great Britain Limited v Closed Circuit Cooling Limited t/a 3CL

Steven Docherty

Published bySteven Docherty

28th September 2023

Case Commentary: Lidl Great Britain Limited v Closed Circuit Cooling Limited t/a 3CL

The case of Lidl Great Britain Limited v Closed Circuit Cooling Limited t/a 3CL looked at a couple of important points in relation to construction contracts, and specifically the payment mechanisms. First, it considered the enforceability of contract clauses which fix the final date for payment of a certified amount by reference to something other than a period of time following the due date for payment (such as by reference to the date of an invoice); and second, it looked at the viability of hybrid Payment and Pay Less Notices. The decision came out on 11 September 2023 from the Technology and Construction Court.

On the first issue, the Court in Lidl decided definitively that such clauses do not comply with the Housing Grants, Construction and Regeneration Act 1996.

The decision confirmed the judge’s observations in a 2020 case (Rochford Construction Limited v Kilhan Construction Limited) and re-emphasises the importance of parties ensuring that their contractual payment mechanisms comply with the requirements of the 1996 Act. If they don’t, the Scheme for Construction Contracts will step in to provide a different (but compliant) payment mechanism, which may not be what one or other of the parties would wish.

In the Lidl case, the contract provided that the final date for payment would be “either 21 days following the due date or receipt of the Contractor’s valid VAT invoice, whichever is the later”.

The contractor’s position in the case was that this clause failed to comply with Section 110(1)(b) of the 1996 Act, which only permits parties to agree a time period between the due date and the final date for payment and does not permit parties to fix the final date for payment by reference to the occurrence of an event (such as the issuing of an invoice). Lidl’s argument was that the 1996 Act imposed no such constraints and that the clause in their contract complied with the 1996 Act.

Section 110(1)(b) of the 1996 Act, provides (in respect of final dates) that “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 contrast, Section 109(2) of the 1996 Act provides (in respect of due dates) that, “The parties are free to agree the amounts of the payments and the intervals at which, or circumstances in which, they become due” (emphasis added).

In looking at these provisions, the court considered the judgment in Rochford in which the judge commented that “properly construed, Section 110 required a final date for payment provision to fix a time period, albeit that that might itself depend on an event to fix the due date….[which] suggests that while a due date can be fixed by reference to, say, an invoice or a notice, the final date has to be pegged to the due date, and be a set period of time, and not an event or a mechanism”.

Having looked at other, earlier cases, the court in Lidl concluded that the judge’s observations in Rochford were correct, and that the 1996 Act gives parties latitude to agree the length of the time period between the due date for payment and the final date for payment, but no more. On the facts of the case, the payment mechanism under the contract allowed for the final date for payment to be “entirely dependent on the date of 3CL’s invoice”, which the court said did not comply with the requirements of Section 110(1)(b). The consequence was that the Scheme for Construction Contracts was implied to the required extent, overriding the agreed mechanism for determining the final date for payment.

The takeaway from the first issue in the Lidl case is that a contractual payment mechanism which interposes the occurrence of a further event between the due date for payment and the final date for payment as the basis for calculating the final date for payment will be unenforceable, and the Scheme will be implied into such a contract to that extent. Parties to construction contracts should therefore re-consider their existing styles and contracts, bearing in mind that the decision also has implications for the timing of Pay Less Notices.

On the second issue, the Court asked the question about whether a notice which describes itself as a Pay Less Notice but which is, in content and substance, a hybrid Payment Notice and Pay Less Notice, could be treated as a valid Payment Notice. The decision was that it could not.

The judge looked at Coulson’s textbook on Construction Adjudication (4th edition, para.3.28(5)), where it was written that “The original provisions [in the 1996 Act], which entitled a payer to serve a notice, operating as both a payment notice and a withholding notice, have been deleted [from the legislation] in their entirety. Thus the payer must serve both the payer’s notice and a payless notice in accordance with the new s111 in the periods identified”.

In highlighting this passage, and agreeing with it in the Lidl decision, the Court made it clear that it is not competent to serve a hybrid Payment and Pay Less Notice – two separate notices, issued in terms of the timetable provided for in the contract or the 1996 Act, are required if a payer wishes to withhold payment.

The takeaway here is that payers need to ensure they comply with all aspects of the payment notification procedure and timetable, if they wish to pay less than the sum sought by the payee.

 

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