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Adjudication: Late Payments Act no route to recovering costs

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.

Osborne Clarke David Kirkpatrick

3 thoughts on “Adjudication: Late Payments Act no route to recovering costs

  1. It seems the debate over the recovery costs in adjudication rumbles on….

    The article highlights that where a contract provides a substantial remedy a claim for the recovery of reasonable costs not met by the fixed sum will fail. The article also identifies that a standard un-amended JCT provides a substantial remedy for Late Payment.

    What the article does not consider are instances when the JCT provision is amended to a rate which is lower than tribunals’ contractual rate of 5% above the base rate, perhaps to 2% which is common in the majority of sub-contracts adopted by Main Contractors. Other instances were contracts lack a substantial remedy for Late Payment include verbal contracts and cases where the terms of the contract are not properly defined at the outset. It would seem that the right to recover reasonable costs could be implied into more contracts than people currently believe.

    There is another argument which I have seen parties successfully use as an attempt to prevent the recovery of costs in adjudication which is that recovery is prevented under Section 108A of the Housing, Grants, Construction and Regeneration Act 1996 (as amended);
    “(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 a construction contract.
    (2) The contractual provision referred to in subsection (1) is ineffective unless
    – 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
    – it is made in writing after the giving of notice of intention to refer the dispute to adjudication.”
    However, it is clear that the wording of subsection (2) simply requires a contract to confer power on the adjudicator allocate his fees and expenses as between the parties, OR… (emphasis added) and that on this basis a contract which lacks a substantial remedy for the purposes of the Late Payment Act, which has the default provisions of the Late Payment Act implied, it would appear that the requirements of Section 108A are not at odds with terms implied by Late Payment Act as they do not prevent the adjudicator from allocating his fees and expenses as between the parties.

    In the event that Section 108A does somehow prevent the recovery of costs under Section 5A (2A) of the Late Payment Act, then clear guidance has been provided by the European Parliament in Recital 19 of the European Directive 2011/7/EU on combating late payment in commercial transactions stating that compensation for the recovery of costs should be determined without prejudice to national provisions.

    Other arguments I have seen put forward by opposing parties were that for some particular reason that interim payments were not a qualifying a debt however Edwards-Stuart J provides clarification in the case of Yuanda at para. 80 and concludes that “An interim payment under a construction contract is made a “qualifying debt” by section 11 of the Act”.

    In a construction contract is it not reasonable for a supplier to refer a matter to adjudication? Is it fair that the cost of late payment should no longer be borne by the supplier but by the late paying purchaser? Whilst I accept it may not be fair that costs may only be recovered in one direction under the Late Payment Act, a purchaser always has the option of paying monies and if it truly believes that monies are not due then the suppliers claim would fail and there would be no liability for costs, alternatively the purchaser could have ensured the terms of the contract included a remedy for late payment. If a supplier’s claim is successful why should it be prevented from recovering costs which are not covered by the fixed sum? More specifically why should adjudication be excluded?

    From my personal experience, I have found that where a contract fails to provide a substantial remedy for the purpose of the Late Payment Act and a dispute has subsequently been referred to Adjudication, a claim for the recovery of costs has succeeded in c.50% of cases. In these instances it has been possible to put an argument forward in less than 1000 words and has provided significant relief to our clients in these instances. That’s value added for our clients!

    Finally, with the increasing costs and complexity of adjudication, hopefully it will not be too long before the matter is clarified by the courts, however as this matter would not form the substantive part of the dispute it is difficult to see how this matter would be put before the courts. I suspect one day a brave solicitor may request a declaration from the courts on the matter alongside an adjudication for clarification on a point of law, if this point was successful then I suspect we will end up with an argument over what is a reasonable cost?

    Advice for purchasers;
    – Ensure that your contracts provide a substantial remedy for the purposes of the Late Payment Act. In a construction context it would seem that 5% above base rate is acceptable, however if you intend to pay on time, why not make it 10% above the base rate, as this provision would never be used.
    – If you presented with a claim for the recovery of reasonable cost, you could consider paying your supplier if the monies are due!
    – If you do not believe that monies are due, then you should engage in sensible discussions with the supplier to avoid any further action.

    Advice for suppliers;
    – Ensure that your contracts provide a substantial remedy for any Late Payment.
    – Question why a supplier would want to offer a low rate of interest in the event of late payment? Do they intend to pay late?
    – Don’t be afraid to negotiate terms for late payment.
    – In the event that a contract fails to provide for a substantial remedy for late payment, advance a claim for the recovery of your reasonable costs – what have you got to lose?
    – Ensure that keep records of your costs associated with chasing the debt and ensure that the costs are reasonable.

    Richard Barnes BSc(Hons) MSc FRICS FCIArb

  2. The matter has now come before the TCC, albeit in adjudication enforcement proceedings.

    In Lulu Construction Ltd v Mulalley & Co Ltd [2016] EWHC 1852 (TCC), Mr Jonathan Acton-Davis QC (sitting as a deputy High Court judge) enforced an adjudicator’s decision, finding that he had jurisdiction to award the unpaid party its “debt recovery costs” of £47,666, claimed under the Late Payment Act 1998 (see Legal update, Adjudicator’s decision enforced as costs under Late Payment Act 1998 were ancillary to dispute (TCC)).

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