REUTERS | Toby Melville

Are adjudication costs recoverable or not?

A simple question perhaps, but is the answer just as simple?

Since the Construction Act 1996 came into force, the general position has been that, unless the parties agreed (either contractually or specifically in relation to an adjudication), that the adjudicator had jurisdiction to determine whether one party would pay the other party’s costs (legal and/or expert) of an adjudication, the parties would bear their own costs.

Parliament then helpfully intervened by enacting the snappily titled Local Democracy, Economic Development and Construction Act 2009 (LDEDCA 2009).

Costs and the LDEDCA 2009

In relation to adjudication costs, section 108A provides that:

“(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 –

(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.”

The stated legislative intention was that, save for a particular type of pre-dispute agreement regarding costs (namely a clause in the parties’ construction contract enabling an adjudicator to allocate his own costs as part of his decision), the effect of the “broad and simple prohibition” in section 108A was to outlaw any other contractual provision concerning the allocation of the costs of an adjudication.

However, one reading of section 108A might be that a costs allocation clause is effective provided that it:

  • is made in writing;
  • is contained in the construction contract; and
  • confers power on the adjudicator to allocate his fees and expenses.

If this reading is correct, it renders permissible clauses that had previously been prohibited as infringing the statutory right to refer a dispute at any time, such as Tolent-type clauses (see Yuanda v WW Gear).

The precise scope and extent of the section 108A prohibition is likely to be the subject of litigation at some point. However, in the absence of any authority, it remains arguable that a clause may empower an adjudicator to determine party-party costs. It may also be possible to prescribe some degree of pre-allocation in the event of a claim not succeeding entirely provided that the clause:

  • complies with section 108A;
  • applies equally to both parties; and
  • does not detract from a party’s right to adjudicate.

If such arguments fail and section 108A prohibits all such clauses, any part of an adjudicator’s decision dealing with party-party costs will be unenforceable (though probably severable from the substantive decision).

What about the Late Payment of Commercial Debts (Interest) Act 1998?

Added to that conundrum is a tension between section 108A and Regulations that came into force in early 2013, which amended the Late Payment of Commercial Debts (Interest) Act 1998 by adding the following to the compensation already provided for by section 5A(2A) of the Late Payment Act 1998:

“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.”

The Regulations implement the Late Payment Directive 2011 (2011/7/EU), which states that recoverable expenses should include the costs of instructing a lawyer. Therefore, in so far as these Regulations apply in adjudication claims, they may present a route for recovering legal costs. At the outset, any such right is entirely one-sided; it applies only to claims going up the contractual chain rather than down.

The guidance to the Directive also states 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.”

This may mean that the Regulations were not intended to oust the court’s jurisdiction to determine costs, but what about adjudication?

How – if at all – do the competing regimes fit together?

It is possible to contract out of the Late Payment Act 1998 provisions (which operate by implying terms), provided that UCTA “reasonableness” principles are met. If the parties agree to expressly contract out of section 5A(2A) without upsetting the UCTA principles, “compensation” for late payment would not include an uplift to cover that party’s reasonable costs. The parties would be left with whatever their contract provided in respect of the costs of adjudication, which would then be subject to section 108A.

However, if the proper interpretation and effect of section 108A is that provisions that pre-allocate party-party costs are prohibited, it is arguable that such a clause could not be relied upon to effectively allow parties to contract out of section 5A(2A). If section 108A extends to provisions that permit the adjudicator to allocate costs, then any attempt to contract out will be of doubtful efficacy.

How is the clash between the Act and the Regulations to be resolved?

Bennion on Statutory Interpretation considers that “delegated legislation cannot override any Act”. If the Late Payment Act 1998 (as amended) is applicable to adjudication claims, it appears to be inconsistent with section 108A’s prohibition on cost allocation clauses and is, potentially, ultra vires (or at least inapplicable to the extent of the inconsistency).

If the Regulations are “ultra vires”, what if an adjudicator decides that the referring party can recover its costs under them. Is that a jurisdictional issue or just an example of an adjudicator reaching the wrong conclusion on the law?

It is reasonably arguable that an adjudicator’s reliance upon ultra vires (or inapplicable) delegated legislation to award costs when legislation prohibits such clauses is a jurisdictional issue (rather than an error of law) that does not render the decision (or, if severable, that part of it) unenforceable.

What is clear is that the answer is by no means certain. Parties spend significant sums on adjudication. Their ability to recover their costs will often determine whether they opt for adjudication. Many claims consultants are now advertising their services on the basis that costs (that is, their fees) are recoverable by referring parties. In this environment, it should not be too long before a court is troubled with these issues.

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