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Adjudication costs and the Late Payment of Commercial Debts (Interest) Act 1998 (Part 1)

Very occasionally a case pops up on BAILII from a number of months ago meaning that, if you’re not careful, you’ll miss it. That is what happened a few weeks ago when Lulu Construction Ltd v Mulalley & Co Ltd (which was decided in March) suddenly appeared.

This case is interesting because it concerns an issue that has been vexing some in the adjudication world:

Is it possible for a referring party to recover its costs under the Late Payment of Commercial Debts (Interest) Act 1998, as amended by the Late Payment of Commercial Debts Regulations 2013?

The judgment appeared not long after Rachel Gwilliam of Blake Morgan presented her excellent paper on this subject to the Society of Construction Law in London, so I thought I would give you my two penneth worth on the subject.

Section 108A of the Construction Act 1996

We need to start with the Construction Act 1996 and specifically section 108A, which was introduced under the amendments that came into force in 2011. To refresh you:

“108A Adjudication costs: effectiveness of provision

(1) This section applies in relation to any contractual provision made between the parties to a construction contract which concerns the allocation as between those parties of costs relating to the adjudication of a dispute arising under the construction contract.

(2) The contractual provision referred to in subsection (1) is ineffective unless-

(a) it is made in writing, is contained in the construction contract and confers power on the adjudicator to allocate his fees and expenses as between the parties, or
(b) it is made in writing after the giving of notice of intention to refer the dispute to adjudication.”

You may recall that before this section was introduced there was some debate about its scope, with people generally falling into one of two interpretation camps:

  • The narrow interpretation camp, which considered that section 108A would banish Tolent clauses, but permit clauses allowing adjudicators to allocate their fees and expenses.
  • The wide interpretation camp, which argued that section 108A allows Tolent (and more onerous) clauses to survive, provided that the adjudicator can allocate his fees and expenses.

Indeed, I wrote a couple of blogs on this issue, as did Chris Hallam. I said at the time that I was in the narrow camp and, while I acknowledge that Coulson J hinted in the third edition of his book that the wide camp may arguably be correct, until this is decided in court my tent remains pitched in the narrow camp.

The narrow interpretation means that parties cannot agree in their contracts that an adjudicator will have the power to award costs, and can only agree this after service of the notice of adjudication. In my experience of acting as adjudicator, this rarely happens.

Section 5A(2A) of the Late Payment Act 1998

For the sake of the word count, I will refer to the Late Payment of Commercial Debts (Interest) Act 1998, as amended by the Late Payment of Commercial Debts Regulations 2013, as the Late Payment Act 1998.

The 2013 amendments to the Late Payment Act 1998 gave referring parties wishing to recover their adjudication costs a ray of hope. As you all know, the Late Payment Act 1998 implies a term into commercial contracts for the supply of goods and services for the payment of simple interest, together with compensation for late payment. Under section 5A the compensation comprises a fixed sum but, given the amounts involved, I think describing it as “compensation” is a little far-fetched (a maximum of £100 for debts over £10,000).

However, since 2013 the party recovering the debt has been able to claim further sums by way of compensation by virtue of section 5A(2A):

“If the reasonable costs of the supplier in recovering the debt are not met by the fixed sum, the supplier shall also be entitled to a sum equivalent to the difference between the fixed sum and those costs.”

So the potential conflict between the narrow interpretation of section 108A of the Construction Act 1998 and section 5A(2A) of the Late Payment Act 1998 is evident.

Lulu v Mulalley

In this case, Mr Jonathan Acton-Davis QC (sitting as a deputy High Court judge) enforced an adjudicator’s decision, finding that the adjudicator had jurisdiction to award the unpaid party its “debt recovery costs” of £47,666, claimed under the Late Payment Act 1998. In Lulu, the “debt recovery costs” were held to be connected with and ancillary to the referred dispute, and considered to be a part of it. It did not matter that the costs were not referred to in the notice of adjudication, but were included for the first time in a rejoinder. This was because, unusually, the adjudication had been started by the paying party (Mulalley), as it wanted to resolve the issue of the value of the sums claimed under the parties’ sub-contract.

I can’t go into too much detail about this case because the judgment is sparse on details (it’s just 10 paragraphs long). However, I do want to make one thing clear. In my view this case is not authority for the proposition that a referring party can claim costs in an adjudication under the Late Payment Act 1998. The court simply found that the adjudicator had jurisdiction to award debt recovery costs as they were connected with and ancillary to the referred dispute. The judge did not consider the question of whether the adjudicator was right in law to award those costs, and arguably the judge could not have done so at an enforcement hearing. As we all know, provided an adjudicator has answered the right question, the decision will be enforced even if the adjudicator has reached the wrong conclusions as to the facts and/or law (Bouygues (UK) Ltd v Dahl-Jensen (UK) Ltd). To have looked at the question of whether the adjudicator was right in law would have required a Part 8 application.

So Lulu doesn’t provide us with the answer to our potential conflict.

Is there a conflict between sections 108A and 5A(2A)?

In her SCL paper, Rachel Gwilliam points out that section 5A(2A) derives from the EU Late Payment Directive 2011 (2011/7/EU), and that it is:

“…a fundamental principle of EU law that its rules have supremacy over national law.”

Therefore, it could be argued that, to the extent that there is any conflict, section 5A(2A) has primacy. However, Rachel makes a very valid point by reminding us that EU Directives only have vertical direct effect, and may therefore only be relied on in an action against a state or an emanation of the state (that is, a public body). As a consequence, Rachel says that commercial entities may not rely directly on rights deriving from an EU Directive against one another.

Rachel also questions whether there is actually a conflict at all on the following basis:

  • Section 108A of the Construction Act 1996 relates to:

    “…the allocation… of costs relating to the adjudication of a dispute arising under the construction contract.”

  • Section 5A(2A) of the Late Payments Act 1998 is not concerned with the allocation of costs, but rather it permits the supplier to recover a sum equivalent to the difference between the fixed sum and the reasonable costs of the supplier recovering the debt.
  • The supplier is therefore entitled to an agreed measure of damages to compensate it for losses incurred as a result of the purchaser’s contractual breach in paying the debt late.

But, whether we call it costs or compensation, does it not amount to the same thing? It is certainly likely to be valued in the same manner. Furthermore, the Late Payment Directive 2011 (2011/7/EU) expressly refers to the reasonable costs of recovery as including instructing a lawyer.

I have also heard a counter argument to the effect that section 108A takes primacy over section 5A(2A). This is based on the premise that, although a party may be entitled to its debt recovery costs under section 5A(2A), it has chosen a form of dispute resolution under which the tribunal is unable to award party costs unless the parties agree after the notice of adjudication. Therefore, party costs cannot be awarded by virtue of section 108A. But, even if that applied to the costs of the adjudication itself, what about the debt recovery costs incurred prior to the adjudication? Would they still be recoverable?

I hope that the courts get to grapple with the potential conflict sooner rather than later because, until they do, a lot of time and money will be spent arguing about this.

Next time…

In part 2 of this blog I’m going to consider how the Late of Payment Act 1998 can be ousted, and what might constitute a substantial remedy in our post-section 5A(2A) world.

MCMS Ltd Jonathan Cope

2 thoughts on “Adjudication costs and the Late Payment of Commercial Debts (Interest) Act 1998 (Part 1)

  1. Good article Jonathan. In terms of the precedence of the EU Directive, I would also note that the pre-amble to the Directive expressly provides that

    “Compensation for the recovery costs should be determined without prejudice to national provisions according to which a national court may award compensation to the creditor for any additional damage regarding the debtor’s late payment.”

    Therefore the Directive was expressly not intended to over-rule existing national rules. As such CPR rules on cost recovery (inc. Part 36) should not be affected.

    As a non-compulsory statutorily implied term (expressly stated to be subject to UCTA) and given the outright prohibition in s.108A and the historic case law on Tolent clauses and the UTCCR, in my view the implied costs recovery term will be read subject to s.108A and the historic case law.

    One way round this would be for Adjudicators / the Courts to distinguish between the costs in the dispute and other costs of recovery (i.e. pre-dispute costs). Of course, that classification might have knock-on effects for privilege too…

  2. Thanks for your comment Simon, and you make a very good point about the preamble to the Directive. I hadn’t identified that, and it is certainly another factor to consider.

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