Adjudication Enforcement and Contract Considerations - 3CL -v- Lidl

It is widely known and accepted that the payment provisions of the Housing Grants, Construction and Regeneration Act 1996 (Act) aim to improve cash flow within the construction industry, with a particular focus on increased visibility and certainty in relation to payments under a construction contract.

In the recent case of Closed Circuit Cooling Limited t/a 3CL (3CL) v Lidl Great Britain Limited (Lidl) [2023] EWHC 2243 the Technology & Construction Court (‘TCC’) provided some clarification and guidance to parties on a number of issues that have been the subject of dispute in recent years.

Of particular importance was the court’s interpretation of Section 110(1)(b) of the Act when determining whether the payment provisions of a construction contract were statutory compliant.

Chris Keating, senior associate at Hill Dickinson, acted for 3CL in this matter, and outlines below some key aspects of the judgment.

Background facts

3CL and Lidl entered into a framework agreement and a work order which together formed the basis of the contract (Contract). Under the Contract, 3CL was required to carry out works for Lidl which included the design, installation and maintenance of air conditioning and refrigeration.

In April 2023, 3CL initiated adjudication proceedings following a dispute over its entitlement to an interim payment (AFP19) relating to works carried out under the Contract.

While Lidl had sought to oppose 3CL’s entitlement to payment for a multitude of reasons, the adjudicator rejected the defences and found in favour of 3CL.

Lidl opted not to pay the sums ordered, and instead issued a Part 8 Claim in the TCC. It sought a declaration from the court that the adjudicator’s decision should not be enforced on the basis that he had breached the rules of natural justice and/or that his decision was wrong.

Subsequently, 3CL issued its own Part 7 claim, together with a summary judgment application seeking enforcement.

Executive summary

The claims proceeded to a joint hearing before His Honour Judge Stephen Davies at the TCC in Manchester. Charlie Thompson was instructed by Hill Dickinson on behalf of 3CL.

Following a reserved judgment, HHJ Davies ultimately determined that Lidl was not entitled to any of the Part 8 declarations which it had sought, and that 3CL was entitled to payment of its Part 7 claim in the sum of £1,014,556.27.

While many of the issues decided by the court turned on the specific facts of the case, some aspects of the judgment are of wider importance to the construction industry generally.

Final date for payment

It is not uncommon for a construction contract to make provision for the final date for payment being tied to an event such as the issuing of a VAT invoice.

The Contract between Lidl and 3CL contained such provision, with the final date for payment being stated to occur 21 days following the later of either the due date, or upon:

‘receipt of the Contractor’s valid VAT Invoice in the sum due by the Employer from the Contractor attaching a copy of the relevant Payment Notice, or in the event of a default Payment Notice in accordance with the Conditions, the Application for Payment submitted by the Contractor.’

One of the declarations sought by Lidl in its Part 8 claim was that, in the absence of such a VAT invoice, the final date for payment of AFP19 had not yet arrived and therefore no sum was payable to 3CL.

A fundamental question that the TCC had to address therefore was whether the payment mechanism upon which Lidl sought its declaration complied with the Act.

3CL argued that it did not and that consequently the provisions of the Scheme for Construction Contracts (England and Wales) Regulations 1998/649 (Scheme) ought to be implied into the Contract in place of the payment terms upon which Lidl relied.

The Act

Section 110(1) of the Act requires that:

“Every construction contract shall -

a. provide an adequate mechanism for determining what payments become due under the contract, and when, and

b. shall provide a final date for payment in relation to any sum which becomes due.

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”

Upon consideration of the wording of the Section 110 the court concluded that it was the intent of the Act to provide parties with the freedom to include conditions or events which determine the date on which payments become due in a contract.

However, in contrast, the Act provides parties with a ‘much narrower and more circumscribed discretion as regards the final date for payment - only as to the length of the period between the due date and the final date’.

In reaching his decision, HHJ Davies noted that it was not for the courts to allow parties to agree terms relating to the final date of payment which go beyond parliament’s intended narrow limit, even where the potential for abuse might be minimal.

The practical implication of the judgment is that any such clauses in existing contracts are potentially unlawful and instead the provisions of the Scheme are likely to be implied, setting the final date for payment at 17 days from the due date.

This could obviously impact the validity or otherwise of a payment notice or a payless notice from a timing perspective. As such, steps should be taken to revisit and amend such contractual provisions where necessary.

Suitability of Part 8 and a joint hearing

Following publication of the TCC 2022 Guide, and a number of subsequent cases, the circumstances in which Part 8 proceedings will be considered an appropriate means of determining issues flowing from an adjudication are limited, and indeed the matters in dispute must fall into the bracket of being short and self-contained (for an analysis of this, see our article on Sleaford -v- Isoplus.)

Consequently, the defending party in such proceedings will often present a preliminary argument that the claim is not suitable for Part 8. A common basis for such an argument is where there are contested facts in the case that might require analysis of the oral testimony of expert or lay witnesses.

In this case, 3CL had presented a defence of estoppel by convention. In essence, it argued that Lidl should be estopped from relying upon a number of contractual irregularities relating to 3CL’s payment application on the basis that Lidl had not chosen to do so following 18 prior applications that were issued in a similar format.

Ultimately HHJ Davies concluded that he was able to determine these estoppel arguments on consideration of the documentary evidence before him and within the confines of Part 8.

However, in doing so he did also highlight the difficulty which the courts often have in determining the suitability of Part 8 prior to hearing the parties’ submissions.

Procedurally this may cause difficulties where, as in this case, the number of issues to be determined and their relative complexity meant that several days of judicial time was required.

In circumstances where the TCC does not have availability to accommodate such a claim within a few months, the associated delay to enforcement would clearly be at odds with the underlying intent of the adjudication process for providing swift justice.

Where this scenario arises, HHJ Davies suggested that it might be more appropriate for the court to list a short summary judgment hearing on the first available date and deal with the matters of enforcement on a provisional basis.

If the court accepted any substantive defences to enforcement at the initial hearing, this would immediately remove the necessity of a subsequent longer Part 8 hearing and the significant related costs and judicial time.

Alternatively, if the enforcement application was successful, the court could decide at that same hearing whether to direct an expedited Part 8 hearing and also consider any appropriate payment orders pending judicial availability.   

While this approach may come with its own practical challenges, the commentary of HHJ Davies is certainly something that parties ought to bear in mind, particularly those faced with a Part 8 claim intended to resist payment.

Other points of interest

While the other issues for which Lidl had sought determination are largely case specific, there are some other aspects of the judgment that are useful to consider.

Conditions precedent

Lidl had argued that AFP19 was invalid on the basis that 3CL had failed to comply with a number of terms of the contract which Lidl considered to be ‘conditions precedent’. These included a requirement for a payment application to be accompanied by photographs of the related works as well as evidence of insurance.

Lidl also argued that 3CL’s VAT invoice had not been properly served on the basis that it did not attach a copy of AFP19.

The court did not accept Lidl’s submissions and determined that the wording of the various contractual terms in question was insufficiently clear and unequivocal for them to be considered conditions precedent.

The judgment is a further reminder that where parties intend for the term of a contract to be a condition precedent, this should be explicit in the drafting. The court will expect to see words such as ‘must’, ‘shall’, etc, and for the consequences of failure to comply with the term being clearly set out.

Rules of natural justice

Lidl’s preliminary position was that there was a substantive defence to enforcement of the adjudicator’s decision on the basis that he had breached the rules of natural justice when determining the issues in dispute.

It was submitted that he had arrived at his decision, in part at least, with reference to a sub-clause of the contract which the parties had not specifically directed him to in the adjudication process.

Lidl argued that if the adjudicator wished to account for the provisions of this sub-clause, he ought to have provided the parties with an opportunity to make further submissions in relation to the same.

The court determined that so long as the adjudicator was considering documentation that had been put before him, he was not confined to the submissions of the parties when arriving at a decision.

Furthermore, even if there had been a breach, it would not have been considered ‘material’ in circumstances where Lidl was unable to provide the court with an explanation as to how its further submissions may have resulted in a different outcome.

The judgment once again illustrates that there is a significant evidential burden on parties seeking to rely upon a breach of the rules of natural justice as a means of defending enforcement.

Key takeaway points

1. Any payment provisions of a construction contract which tie the final date for payment to an event, such as the issuing of a VAT invoice, are unlikely to be considered lawful. Parties ought to review such provisions where necessary.
2. When faced with a Part 8 claim intended to resist payment following an adjudication, parties should consider whether it would be appropriate to request an earlier enforcement application hearing, rather than wait a significant period for judicial availability for a joint hearing.
3. Where a contractual provision is intended to be a condition precedent, it is imperative that the wording of the clause is sufficiently clear and unequivocal.
4. The scope upon which an adjudicator can base a determination is a broad one and not confined to the specific submissions of the parties. A breach of natural justice argument is much more likely to succeed where the adjudicator’s decision is based on material or documentation that had not been provided.

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