Payment and invoices – what to do?

Last year there were two cases known as Lidl v. Closed Circuit Cooling (t/a 3CL) which attracted a lot of attention. One of the issues raised in one of them was as to the validity of 3CL’s application for payment, and the validity of a payment notice served by Lidl, which in turn raised the question of whether a final date for payment could be linked to the issuing of an invoice.

As part of the Framework Agreement entered between Lidl and 3DL, the parties were able to enter individual work orders, each of which constituted a separate contract. In respect of one of those, 3CL submitted an application for payment in the sum of £781,986.22 (‘AFP19’). Lidl submitted that this was an invalid application for payment as it failed to comply with various requirements of the contract, one being that it did not identify the milestone for which the payment was sought. Lidl subsequently issued a payment notice valuing the works at nil (‘Pay-7’).

In April 2023 3CL referred a dispute to adjudication on the basis that Pay-7 was not a valid payment notice, but instead it was an invalid pay less notice served without a prior payment notice. As part of their submissions, Lidl’s argued that the final date for payment was conditional on receiving a valid VAT invoice from 3CL and this issued was raised against before the court.

Linking the final date for payment to the provision of a VAT invoice is a relatively common thing to see. A typical clause might look like this: “The final date for payment shall be 28 days from its due date or the date of receipt by the Employer of an appropriate VAT invoice, whichever is the later”.

However, Lidl v. 3CL confirms this kind of provision is not acceptable: while the parties have wide discretion as to the circumstances in which a payment becomes due, the discretion is much narrower when it comes to deciding the period between the due date and the final date for payment. The court said that the discretion there was limited only to the period in question, and did not allow the introduction of new triggers or hurdles, such as the issue of an invoice.

The court’s decision does make practical sense. The provision of a valid invoice could vary from month to month which in turn would make it difficult in practice to adhere with different payment terms dependant on when an invoice is raised (for example knowing when a pay less notice could be issued). Even when the final date for payment is linked to a fixed period, we see many disputes arise, so the uncertainty with comes with the issue of a VAT invoice would complicate matters relating to payment even further.

Where contracts still link the final date for payment to the issue of an invoice, it is clear in light of Lidl v. 3CL that this will be non-compliant. As such, the relevant provisions of the Scheme for Construction Contracts 1998 as amended (the ‘Scheme’) will supplement the non-compliant payment term (and any other defective payment terms in the contract). The Scheme provides that the final date for payment will be 17 days from the date that payment becomes due, which could mean that a payment must be made (and a pay less notice served) much earlier than one party expects.

This is when chaos often ensues: when one party to a contract is working to defective contractual terms, and the other party is adhering to those under the Scheme. It is important that all parties to a construction contract have a clear understanding of the payment terms, whether they are following compliant terms under the contract, or defaulting to those under the Scheme, so they can issue relevant notices on time. Making sure provisions are drafted from the outset that are compliant with the Construction Act is therefore vitally important.

This article originally featured in the March 2024 edition of our Aggregate newsletter: to read the complete edition, click here.