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Is adjudication cost-effective for small value disputes?

There has been a debate in adjudication circles for some time now about how cost effective adjudication is for small value claims. After the Court of Appeal’s judgment in Walker Construction (UK) Ltd v Quayside Homes Ltd, I anticipate that the debate may gain momentum again.

We all know adjudication isn’t the dispute resolution mechanism that Parliament envisaged back in the 1990’s when the Construction Act 1996 was but a twinkle in our collective eyes. Then it was all about cash flow, about introducing a quick and dirty way of getting payment to those that needed it (and were being deprived of it), while enabling everyone to continue with the job.

Fast forward nearly 20 years (gulp) and things have moved on. Yes, adjudication is still quick and dirty most of the time, but it isn’t really just about cash flow anymore. The scope has widened to encompass almost anything that can (and often does) go wrong on a construction project. Lawyers and experts have got involved and the costs have increased. Often, once the adjudicator has made his decision, that’s the end of it. The idea was (and still is) that the parties are bound by the adjudicator’s decision until the matter is finally resolved by whatever means the parties decide is best for them. Interim binding may not be that “interim” in reality. Many parties are content to let sleeping dogs lie.

But what happens in a small value claim when the parties don’t let sleeping dogs lie? The Court of Appeal’s judgment in Walker Construction (UK) Ltd v Quayside Homes Ltd is a reminder to us all of how it may end, unhappily for one or both parties it seems.

Walker Construction (UK) Ltd v Quayside Homes Ltd 

Walker was employed by Quayside to provide drainage and road works for a residential development delightfully called Willowbank (or perhaps not so delightful, given all the rain and flooding recently). At the end of the project, Walker claimed it was owed some £23,500, made up of some outstanding payments and retention money.

As the parties’ contract did not have an adjudication clause, the Scheme for Construction Contracts 1998 applied. However, for whatever reason, rather than referring the dispute over the outstanding £23,500 to an adjudicator, in February 2008, Walker issued proceedings in the Ashford county court. It was only after a stay of those proceedings was agreed to allow the parties time to settle their dispute that Walker then started an adjudication (in August 2008).

The adjudicator awarded Walker £23,400, which Quayside promptly paid. The court proceedings were then revived, with Walker pursuing a claim for £1,773 (being the only part of the dispute the adjudicator had not dealt with due to jurisdictional issues) and Quayside counterclaiming £169,000 for defects. By the time the matter came to trial in September 2012, the counterclaim had been reduced to just under £87,000.

In the lead-up to trial, the parties had both made offers to settle but to no avail, the case did not settle. After four days in court, the judge awarded Walker its £1,773 and Quayside just under £11,000 on its counterclaim. As is often the case, the key issue for the parties then was costs. The trial judge gave Walker its costs up to the end of the adjudication and then ordered Walker to pay Quayside’s costs thereafter, some on the standard basis and some on the indemnity basis. Given the bulk of the work was done after the adjudication, it can’t have been too much of a surprise when the calculations were done to find that Quayside’s costs were huge, although I’d be surprised if Walker could have anticipated a bill for £345,800 odd on top of its legal costs for that period.

That’s a huge legal bill for a claim that started out at £23,500 and which Quayside initially paid. Even after the Court of Appeal’s adjustments to reflect errors the trial judge made in determining costs and to deal with a “substantially exaggerated” counterclaim, the costs will still dwarf the original debt and the cost of remedying the defects.

What does this teach us?

Everyone knows litigation is expensive, but I do wonder why the parties in this particular situation bothered with the courts at all. I’m sure it would have been better to deal with both the claim and counterclaim through adjudication. Those claims didn’t need to be heard in the same adjudication and, given it took Quayside so long to formulate its case, that may have been impossible anyway.

However, if Walker had not started court proceedings, it would not have run the risk of the “loser pays” costs principles that are associated with the courts. As we all know, each party bears its own costs in adjudication. I’d say that is one of the advantages of the process, especially for low-value claims. Even then, it is arguable that a claim in the region of Walker’s claim was on the borderline for making adjudication viable from a costs perspective.

I also wonder why, once the adjudicator’s decision was paid, Walker didn’t just discontinue the court proceedings and adjudicate for the balance, or ignore it entirely. After all £1,773 is such a small sum. Quayside would have run up few costs in the court proceedings (it had done little more than serve a holding defence), so the exposure for Walker at that stage would have been far less than the ultimate costs liability that it now faces.

3 thoughts on “Is adjudication cost-effective for small value disputes?

  1. It’s always depressing to hear about astronomical costs being incurred on low value claims, as Matt points out. But it’s equally a fact of life that costs are more likely to be disproportionate on such claims. One reason why parties often do consider using courts rather than adjudication is that in adjudication the winner probably won’t pay the adjudicator’s fee but will still have to cover its own costs, whereas in court the winner has a chance of getting all its (reasonable) costs back. Another reason is that courts are subsidised whereas adjudicators are not. Is it perhaps time to consider bringing adjudication into line with litigation from a costs perspective, such that unless the claim is for £5,000 or less adjudicators have the same powers as judges to award party (as well as adjudicator) costs? In addition to making adjudication more attractive for lower value claims, this would also prevent a lot of unmeritorious claims from being pursued in adjudication.

  2. This is an astonishing costs bill and a salutary reminder to those advising clients in dispute to meet and consider a compromise settlement, in the face of uncertainty as to the outcome and potential costs involved to have their “day in court”.

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