The Housing Grants, Construction and Regeneration Act 1996 has been in force for over 25 years. A part of me keeps on wondering whether parties to construction disputes – and their lawyers – have thought of all of the possible arguments that might be raised in relation to what it actually means. And then, along comes a decision like that of HHJ Stephen Davies in Lidl Great Britain Ltd v Closed Circuit Cooling Ltd (t/a 3CL) [2023] EWHC 2243 (TCC) to remind me that I shouldn’t waste my time wondering.
The case centred on a number of arguments about the validity of an application (issued by 3CL) and pay less notice (issued by Lidl) in relation to refrigeration and air-conditioning work done by 3CL pursuant to a works order issued by Lidl to 3CL under a framework agreement between the parties. 3CL broadly succeeded under adjudication proceedings brought in relation to the various issues (entitling it to a payment of just over £780,000) and both parties made applications (which had to be resolved by the judge). 3CL won on each point.
Making the final date for payment conditional on a VAT invoice
A number of the points raised rest on the particular facts of the case and the wording of the framework agreement. However, one issue is of far wider importance. The framework agreement made the final date for payment conditional on 3CL issuing a VAT invoice. Lidl argued that it did not do so and, as such, the final date for payment was never triggered. 3CL argued that this requirement breached the terms of the 1996 Act and was unenforceable.
This can be a significant issue for construction clients. They will want to receive a valid VAT invoice (so they can account for VAT) before being required to pay money to their contractor or consultant. If they don’t, they run the risk of being legally required to pay a VAT-inclusive amount without, from a tax perspective, the means of doing that properly.
The judge also had to consider contradictory lines of authority. 3CL relied on the decision of Cockerill J in Rochford Construction Ltd v Kilhan Construction Ltd [2020] EWHC 941 (TCC), where it was held that a final date for payment had to be fixed by a time period and not by reference to the issue of an invoice or a notice. Lidl relied on a number of earlier decisions, including VHE Construction plc v RBSTB Trust Co Ltd [2000] BLR 187, Alstom Signalling Ltd v Jarvis Facilities Ltd [2004] EWHC 1285 (TCC), Manor Asset Ltd v Demolition Services Ltd [2016] EWHC 222 (TCC) and Volkerlaser Ltd v Nottingham City Council [2016] EWHC 1501 (TCC), in which final dates fixed by reference to the issue of an invoice appear to have been considered, and not struck down, by various judges.
Section 110
Judge Davies, agreeing with Cockerill J, found the answer in the wording of section 110 of the 1996 Act. The section requires construction contracts caught by the Act to specify two separate payment dates – a due date and a final date. So far as due dates are concerned, the statutory requirement for a due date is for the contract to “provide an adequate mechanism for determining what payments become due under the contract, and when”. As for the final date, the requirement in section 110(1)(b) is to “provide for a final date for payment in relation to any sum which becomes due”. However, the clause then states 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”.
It is this final sentence that Judge Davies (and Cockerill J) felt was key. The Act only allows parties to a construction contract to agree a time period between the due and final dates, making the final date conditional on the submission of a VAT invoice unenforceable.
The judge also had little difficulty distinguishing the line of authorities on which Lidl relied. None of the cases involved any argument over the correct interpretation of section 110(1)(b) and the section was not referred to in any of the judgments. Quite simply, the point was not discussed.
What about linking the due date to issue of a VAT invoice?
In Rochford, Cockerill J suggested that the Act does allow for a due date to “be fixed by reference to, say, an invoice or notice”, creating the possibility that construction clients wanting to ensure they receive a proper VAT invoice could make the due date conditional on that happening. Section 110 (at paragraphs (1A) and (1D)) contains provisions limiting what can be considered when the parties are creating an adequate mechanism. You cannot link the mechanism to (i) the performance of obligations under another contract, (ii) a decision as to whether other obligations under another contract have been performed or (iii) the failure of the employer to issue an effective payment notice under section 110A of the Act.
None of those prohibit linking the due date to the issue of a VAT invoice. The challenge for construction clients (and their lawyers) will be to ensure that the mechanism they draft in relation to the due date will meet the Act’s requirement of being “adequate”. I think we can expect more litigation on that.
Stuart Pemble is a partner at Mills & Reeve
