03/04/2024
Background
Lidl entered into a contract with 3CL.
Clause 7.4.3 of the contract entitled 3CL to apply for an interim payment (AFP) as certain milestones were reached. The contract contained terms which stated that for an AFP to be valid it must:
- identify the particular milestone achieved;
- include photographic evidence that the milestone had been achieved; and
- include evidence of insurance renewals.
3CL issued its AFP19 and in response, Lidl issued a document called PAY-7 valuing the works at nil and deducting liquidated damages (LDs).
Issues
- Lidl’s position was that AFP19 was invalid because it did not comply with clause 7.4.3.
- Lidl maintained that PAY-7 was a valid payment notice (PN), while 3CL maintained it was an invalid pay less notice (PLN) because Lidl had not served a prior PN.
- 3CL ‘s position was that as the final date for payment was conditional upon them delivering a compliant VAT invoice it did not comply with the requirements of Housing Grants, Construction and Regeneration Act 1996 Pt II s.110(1)(b) (“the Act”).
Adjudication
On 26 April 2023, 3CL referred the dispute over AFP19 to adjudication. The adjudicator rejected all of Lidl’s submissions as to the invalidity of AFP19 and to the validity of PAY-7. The adjudicator ordered Lidl to pay the sum applied for in AFP19. However, Lidl did not pay.
Following this, Lidl issued a part 8 claim and 3CL issued a part 7 claim.
Decision
Issue 1
The Court found that clause 7.4.3 was not a condition precedent and therefore 3CL did not have to comply with it in regard to its AFPs. The Court looked to the construction of the Contract requirements to determine their nature as condition precedent or contractual obligations. The Court confirmed that use of the word “must” in the Contract was insufficient on its own to create a condition precedent. Therefore, it was held that AEP19 was a valid notice.
Issue 2
The Court in reading the PAY-7 found that it was in substance a combined PN and PLN, as it both withheld payment and deducted LD’s. The Judge referenced Coulson’s Construction Adjudication 4th edition paragraph 3-28 at sub-paragraph (5) confirming that: “The original provisions in the Act which entitled a payer to serve a notice operating as both a payment notice and pay less notice had been deleted”.
The court agreed with the adjudicator’s assessment of PAY-7, confirming Jawaby*, in that the construction of PAY-7 was to be undertaken objectively. The question to address was how a reasonable recipient would understand the notice. It was an express term of the Contract that deductions for liquidated damages would form part of pay less notices. As PAY-7 included a deduction for liquidated damages, the court found that it was a pay less notice in content and substance, and even by its own express description. As Lidl served PAY-7 without the required prior notice, it was deemed invalid.
Issue 3
The Court found that the final date for payment provisions were not compliant with s110 of the Act as they were connected to 3CL providing a VAT invoice and s110 required it to be fixed to the due date and not fixed by reference an action e.g. a VAT invoice.
Comment
The Court’s findings provide 2 key lessons, which are as follows:
- If a party wants to make the clause relating to payment applications a condition precedent this must be clearly stated in the contract.
- The final date of payment needs to be fixed by reference to the due date, rather than connected to an event.
*Jawaby Property Investment Ltd v The Interiors Group Ltd [2016] EWHC 557 (TCC)
