Lidl Great Britain Ltd v Closed Circuit Cooling Ltd (t/a 3CL)

[2023] EWHC 2243 (TCC)

Lidl and 3CL, an industrial refrigeration and air-conditioning contractor, entered into a framework agreement which enabled the parties to enter into individual works orders, each of which was to constitute a separate contract incorporating both the terms of the framework agreement and the order. Under the contract, 3CL could make applications for interim payment following the achievement of defined milestones. Under AFP19, 3CL sought payment of £781,986.22.

Lidl said that AFP19 was an invalid payment application for a number of reasons, including that it failed to comply with the contract which required: (a) the identification of the milestones achieved, and amounts claimed against each; and (b) the provision of the required supporting photographs and insurance evidence. 3CL said that the requirements were not conditions precedent and, in any event, they had complied with them. 

 Lidl responded to AF19 by issuing “2011-PAY-7” and valuing the works at nil. 3CL said that this was, in reality, an invalid pay less notice served without a prior payment notice and that the payment terms of the contract as regards the final date for payment did not comply with the requirements of the HGCRA. Lidl said that the contract made the final date for payment conditional upon 3CL delivering a compliant VAT invoice which, Lidl says, 3CL did not do. 

An adjudicator rejected Lidl’s arguments and awarded 3CL the amount claimed in AFP19. 3CL brought Part 7 summary enforcement proceedings, and Lidl raised their contractual arguments by way of a Part 8 application for declarations. The Judge first considered whether there were any genuine defences to summary enforcement of the decision. 

The only defence raised was an alleged breach of natural justice. Lidl said that the decision was based in part on an analysis of clause 7.4.2 of the contract, in circumstances where there was no opportunity for making submissions on the point. The relevant part of the decision was made on the basis that the reasonable recipient would have understood PAY-7 to be a pay less notice because: (a) this is what it said it was; and (b) it included a deduction for liquidated damages when under the terms of the contract, including and specifically clause 7.4.2, that deduction ought to be the subject of a pay less notice and not a payment notice. In the referral, 3CL, without referring to 7.4.2, had said that one reason why the notice should be read as a payment notice was because it stated that its net value of the works took into account the deduction of liquidated damages (“LDs”)which demonstrated that it was, in content, a pay less notice. However, Lidl did not engage with this point. In considering this issue, the Judge commented that:

“It is fair to say that, in their submissions, the parties primarily indulged in detailed, repetitive and tendentious submission on the relevance of the fact that the notice was repeatedly described by Lidl’s representative as a pay less notice. The adjudicator cannot have been assisted by the tenor of these submissions which has, unfortunately, become so endemic in adjudications.” 

The Judge considered that, although 3CL did not specifically mention clause 7.4.2, given that the Referral had specifically raised the point about the notice wrongly deducting and withholding an amount for LDs, there was clearly an issue raised in the adjudication which the adjudicator was entitled to consider. To say that the adjudicator could not even refer to clause 7.4.2 in making this decision simply because it had not been the subject of express reference by either party seemed to the Judge to be taking the requirements of natural justice too far in the context of the adjudication procedure.

Looking at PAY-7, the Judge commented that it was, in substance, a combined payment notice and pay less notice, specifying 20 reasons for “withholding payment”, the majority of which were said to be where either the individual milestone had not been fully completed or where it had been completed but was non-compliant through defect or damage, and of the remainder, by far the most significant in monetary terms was the deduction of LDs, in the sum of £765k.  The adjudicator was, therefore, right to say that the deduction of LDs in PAY-7 was contrary to the express terms of the contract and to confirm that the notice was in content and substance, as well as in its express description, a pay less notice and not a payment notice. 

The Judge went on to consider whether the alleged failure by 3CL to comply with the formal requirements of the payment application was a condition precedent rendering the application invalid. The strongest point made by Lidl here was the use of the word “must.” This was “a powerful indication” that compliance with these requirements was mandatory. However, there were no words in the clause which made it clear that unless each and every one of these requirements was complied with, the payment application would not be an effective payment application and the remaining requirements of the clause would not apply. There was also no compelling reason for requiring compliance to be a condition precedent. Not only was Lidl required to inspect the works within 7 days, so that Lidl could see for itself whether the milestone had been achieved, but Lidl was only required to issue a payment notice specifying the sum it considered to be due. It was therefore entitled to have regard to any non-compliance in making its valuation.

Further, whilst it was agreed that no photographs were submitted, Lidl had not rejected any of the previous applications on the basis of a lack of photographs. In such circumstances, it was “plain” to the Judge that any challenge to the validity of AFP19 based on the absence of photographs would fail by application of estoppel by convention.

3CL then submitted that the Judge should follow the decision of Cockerill J in Rochford v Kilhan, (Dispatch Issue 243) and hold that the final date for payment provisions were not compliant with the HGCRA. HHJ Davies noted that the Judge in Rochford had said that the lack of any certainty as to when the due date fell or when the payment certificate should be issued meant that the regime agreed was so deficient that wholesale replacement with the Scheme provisions was the only option. 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. This made: “a degree of sense given that it will be important for the payer to be exactly certain how much time he or she has in which to serve a payless notice, the final date for payment being the date which is critical to that step.”

HHJ Davies accepted that these comments were obiter, and so not binding, but the Judge said they were also  “a careful and a reasoned decision on the law, which was a separate and an independent basis for finding as she did. Accordingly it cannot simply be disregarded on the basis either that it is obiter …”  

Lidl argued that the final date for payment was conditional on 3CL providing a valid VAT invoice; 3CL argued that this was contrary to the HGCRA. Here, under the Payment Schedule the final date for payment was: “either 21 days following the due date or receipt of the Contractor’s valid VAT invoice, whichever is the later.” Therefore, the final date for payment might be entirely dependent on the date of 3CL’s invoice, which was not, therefore, set solely by reference to or pegged to, the due date. HHJ Davies said that the legislation set a: “blanket prohibition on party autonomy as regards the ascertainment of the final date for payment save as to the length of the period”. In other words, under s110(1)(b) of the HGCRA, you cannot link a final date for payment to an event, rather than a particular date. 

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