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Recovering your adjudication costs, or not

Much has been written over the years about whether a party can recover its costs of an adjudication. I wonder if a recent O’Farrell J ex tempore judgment is the last (or just the latest) word on the matter. In football speak, is it one nil to the Construction Act 1996?

If you are not sure what I’m talking about, then you’d better read on.

Costs of an adjudication

It all started with the Construction Act 1996, which is silent on the question of costs. The presumption was always that parties would be liable for their own costs. Despite this, parties wanted something else. That led us to Bridgeway Construction Ltd v Tolent Construction Ltd, which confirmed that parties could agree to a clause that required the referring party to pay the costs of the adjudication, regardless of the outcome (so-called Tolent clauses).

The perceived unfairness of Tolent was addressed when the Construction Act 1996 was amended by the LDEDC 2009, even though debate raged over the exact meaning of section 108A. Even without that Act, in Yuanda v WW GearEdwards-Stuart J had held that a Tolent clause conflicted with section 108 of the Construction Act 1996 because it fettered a party’s right to refer a dispute to adjudication “at any time”.

But still parties wanted something else.

Reaching outside of the construction world, they looked to other legislation. The Late Payment of Commercial Debts (Interest) Act 1998 (Late Payments Act 1998) seemed to offer something, an opportunity it seemed, particularly as the 2013 amendments to that Act introduced the right to be paid the reasonable costs of recovering a debt.

Consequently, it was only a matter of time before the Late Payments Act 1998 was relied on to persuade an adjudicator and, perhaps a court, that a referring party was entitled to claim its costs of an adjudication.

As far as I’m aware, we saw this in the law reports for the first time last year in Lulu Construction Ltd v Mulalley & Co Ltd, where the court enforced an adjudicator’s decision, finding that the adjudicator had jurisdiction to award the unpaid party its “debt recovery costs” of £47,000 odd. The judgment did not look at whether those costs fell within the meaning of “reasonable costs” under the Late Payment Act 1998. However, even if it had done so, it is debatable whether the court could go behind the adjudicator’s decision (applying the Bouygues v Dahl-Jensen principle that the adjudicator answered the right question, even if he got the answer wrong).

Jonathan looked in detail at Lulu v Mulalley over a couple of weeks (see part 1 and part 2). I will leave you to look at what he said at the time.

Which brings me back to the O’Farrell J judgment that I started talking about at the beginning of this post. As I said, it was an ex tempore judgment, so I’m relying on the Lawtel case analysis that I’ve been sent.

Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd (2017)

This was a payment dispute between Enviroflow Management Ltd and Redhill Works (Nottingham) Ltd (2017) over internet installation works. When that payment dispute was referred to adjudication, the adjudicator awarded Enviroflow £81,000 plus interest, as well as its “reasonable costs” of recovering the debt (some £14,900). Enforcement proceedings followed when these sums went unpaid.

In the enforcement proceedings, one of the issues was who the parties to the sub-contract were. More importantly (for this post), the other issue was whether the adjudicator had jurisdiction to award Enviroflow its costs of the adjudication.

O’Farrell J looked in detail at what happened in early 2016 and concluded that although the works had begun without a binding contract in place, Enviroflow and Redhill were the parties to the sub-contract (and not Enviroflow’s sister company, X, as Redhill had argued).

On the question of costs, O’Farrell J noted that:

  • Section 5A of the Late Payment Act 1998 provides that a successful party is entitled to its costs of recovering a debt.
  • Section 108A of the Construction Act 1996 provides that the costs of an adjudication can only be awarded where such a provision had been made in writing.

Importantly for us, it is what she seems to have said next that is key:

“Accordingly, by reason of the 1998 Act, [Enviroflow] was entitled to seek its reasonable costs by reason of an implied term. However, such an implied term was caught by s.108A of the 1996 Act and was ineffective unless an agreement had been made in writing.”

On the facts, it was common ground that no agreement had been made in writing. This meant the adjudicator lacked jurisdiction to make a costs award, so she severed the adjudicator’s decision (which is the second time this year she’s done that) and just ordered summary judgment on the £81,000 plus interest.

Last year, Jonathan ended his second blog with two important questions:

  • Is there a conflict between section 108A of the Construction Act 1996 and section 5A(2A) of the Late Payment Act 1998 and, if so, which takes primacy?
  • Will a contract have to provide for the “reasonable costs” of recovering a debt, as well as interest, in order to constitute a “substantial remedy” under the Late Payment Act 1998?

If the Lawtel description is an accurate reflection of what O’Farrell J held, then her judgment may go some way to answering the first question Jonathan posed. As I read it, she is saying that while a party may have an implied right under the Late Payment Act 1998, the express provisions of the Construction Act 1996 require any agreement to comply with section 108A (to be in writing and made after the notice of adjudication is given). If you don’t comply with the express provisions of one Act, you can’t take advantage of the implied terms of another Act. You may read something else into this language and perhaps only when we see the transcript will we know for sure.

Footnote

We are taking a short summer break. Jonathan will be back on 5 September with his thoughts on the expert evidence in ICI v MMT.

MCMS Ltd Matt Molloy

3 thoughts on “Recovering your adjudication costs, or not

  1. Mat

    It would be of great assistance if a judgment had been produced particularly on this point which arises frequently. Obviously the details of the case are not available but in principle I think the judge was wrong to reject the reasonable cost recovery provisions of the late payment regs. The Regs amended the LPCDIA 98 after S.108A came into force. An earlier parliament cannot bind a later parliament and I see the “implied term” and “express term” reasoning as a neat step to avoid considering primacy. The cost recovery provisions of the Regs do not open the flood gates as they operate one-way i.e. the supplier is able to claim the reasonable costs but not the receiver of the services/goods and only if there is no express interest provisions. Hopefully this issue will arise again and be fully dealt with.

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