Adjudication‘s key selling point is that it is relatively quick and low-cost compared to other forms of dispute resolution, such as High Court litigation. However, the costs are not inconsiderable, and with adjudicators rarely given the power to award parties their own costs, successful parties in adjudication rarely recover those costs.
This year we have acted for many responding parties in adjudications involving claims for payment where the referring party has also sought to recover its costs of the adjudication proceedings through another route. These claims for costs have been based on section 5A of the Late Payment of Commercial Debts (Interest) Act 1998 (the Late Payment Act), as amended by the Late Payment of Commercial Debts Regulations 2013 (which have been in force since 2013).
Every claim failed for the reasons set out below.
Entitlement under the Late Payments Act
Section 5A of the Late Payment Act (as amended) reads:
“5A Compensation arising out of late payment.
(1) Once statutory interest begins to run in relation to a qualifying debt, the supplier shall be entitled to a fixed sum (in addition to the statutory interest on the debt).
(2) That sum shall be– [£40 – £100 depending on the amount of the debt],
(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”.
Referring parties bringing such claims typically argue that they are entitled to their costs of the adjudication over and above the relevant fixed sum as “reasonable costs… in recovering the debt”.
However, under section 5A of the Late Payment Act, it is only “[o]nce statutory interest begins to run” that there is a prima facie entitlement to a fixed sum or the reasonable costs of recovering the debt. In many cases, statutory interest will not start to run at all.
Section 8(2) states:
“8(2) Where the parties agree to a contractual remedy for late payment of the debt that is a substantial remedy, statutory interest is not carried by the debt (unless otherwise agreed).”
If the parties have agreed a contractual remedy for late payment of the debt that is a substantial remedy, “statutory interest is not carried” (that is, it does not begin to run). In those circumstances, therefore, the debtor is not entitled to the fixed sum, let alone the difference between the fixed sum and the “reasonable” costs of recovering the debt.
What is a substantial remedy?
A typical example of the court’s reasoning, upholding a JCT standard form contractual rate of 5% above base in connection with section 8 of the Late Payment Act, was given in Walter Lilly & Company Ltd v Giles Patrick Cyril Mackay and another. In that case, the contract was made in 2004 and the contractual interest rate was 5% over the Bank of England Base Rate. Akenhead J said:
“This contract rate is to be compared with the statutory rate under the statute which is Base Rate plus 8%; so the statutory rate is 3% better than the contract rate. I have no doubt that the contract rate provides a “substantial remedy” within the meaning of Section 8 of the statute. Any “substantial remedy” must be one which at least judged at the date of the contract would provide adequate compensation for late payment. Section 8 is obviously considering at least the possibility that the “substantial remedy” will be less than the statutory interest remedy. Whilst the statutory “remedy” is Base Rate plus 8% and that is a “better” remedy for the Contractor than the contractual remedy for late payment that does not mean that the contractual remedy is not “substantial”. The commercial reality is that commercial lending is, depending on the creditworthiness of and security offered by the Contractor, likely to be in the area of Base Rate plus 1 to 3%. Therefore, on that basis not only is the Contractor likely to be compensated for late payment but also there is an incentive provided on the Employer to pay on time.”
Further, in Yuanda (UK) Co Ltd v WW Gear Construction Ltd, Edwards-Stuart J considered the Late Payments Act and related provisions and held:
“In the light of these criteria, it is of interest that the rate provided in the standard printed form of JCT Trade Contract was 5% over base, which might suggest that this was thought by those responsible for drafting the contract to be a fair rate of interest for late payment in the context of the construction industry. Given this, when taken together with the other considerations that I have already mentioned, I can see no reason why 5% over base should not be regarded as a substantial remedy within the meaning of the Act, even though it is 3% less than the statutory rate”.
In each of the cases we have acted on this year, the relevant contract provisions provided for interest at a rate of 5% over base (which is not unusual). In each case, the adjudicator considered this to be a substantial remedy. Hence, those claims for costs failed.
Where does this leave claimants?
As the cases discussed above and our recent experience has shown, the law on this area is clear. Where parties have agreed to a contractual remedy of 5% over base for late payment of the debt:
- That will be considered to be a “substantial remedy”.
- Statutory interest is not “carried by the debt”, and does not “begin to run” under section 5A (1) of the Late Payments Act.
- The claimant is not entitled to either the fixed sum or the difference between the fixed sum and the “reasonable” costs of adjudicating to recover the debt.
However, all may not necessarily be lost for claimants. On commencement of an adjudication (but not before), the parties are able to agree that the adjudicator has the power to award parties their costs. In National Museums and Galleries on Merseyside v AEW and PIHL Galliford Try, Akenhead J also suggested that parties may be able to claim their costs of adjudication as a head of damages in any subsequent litigation (although, this point was distinguished and doubted in Husband and Brown Ltd v Mitch Developments Ltd).
Nevertheless, in the vast majority of cases, the low likelihood of a successful party recovering its costs will remain a key drawback of adjudication for parties considering their options for resolving a dispute.