Adjudication doesn’t come cheap. In recent years, the cost of adjudicating has become one of the most common criticisms of the whole process. As we are often reminded, it was always meant to be about cashflow, to introduce a process that was interim-binding and that would allow the parties to keep working together while, at the same time, ensuring the contractor (or sub-contractor) got paid and the project got built.
Dyson J recognised this back in 1999 in Macob v Morrison when, in the first adjudication enforcement case, he said it was a “speedy mechanism for settling disputes in construction contracts on a provisional interim basis”.
Over the years, the process has moved forward, with parties more tactically astute and their arguments and submissions more sophisticated. However, cashflow remains the central theme. As Ramsey J commented in True Fix v Apollo, cashflow is the “essence of adjudication” and “it is imperative that cashflow is maintained as a priority in the construction industry”.
Parties still out-of-pocket
Yet even if one party succeeds in an adjudication and the cash flows again, it is likely to leave both parties out-of-pocket because of the costs that are involved.
Everyone will be familiar with the fact that the Construction Act 1996 is silent on who should be liable for the costs of an adjudication, so the starting point is that each party bears its own costs. The Scheme for Construction Contracts 1998 is also silent on the point, although it does make the parties jointly and severally liable for the adjudicator’s reasonable fees and expenses (paragraph 25), even if the adjudicator apportions liability for his fees between the parties (which paragraph 25 gives him the power to do).
However, this doesn’t deal with the parties’ own costs and it is rare for the parties to give the adjudicator jurisdiction to deal with those costs.
Tolent clauses are, hopefully, a thing of the past. They were inherently unfair because they provided that the referring party would be liable for all the costs of an adjudication, regardless of which party was the “winner”. Even if there is still potential for a debate about the effectiveness of section 108A of the Construction Act 1996 (which aimed to get rid of Tolent clauses), regard should also be had to Edward-Stuart J’s judgment in Yuanda (UK) Co Ltd v WW Gear. He decided that a Tolent-type clause in the parties’ contract conflicted with the right in section 108 of the Construction Act 1996 to refer a dispute “at any time”. As such, the clause was ineffective and the contract’s adjudication provisions were replaced by Part I of the Scheme for Construction Contracts 1998.
What happens when the cash doesn’t flow?
If the adjudicator’s decision is not complied with and enforcement proceedings follow, a party cannot recover its adjudication costs in the enforcement proceedings. This follows from HHJ Wilcox’s judgment in Total M&E Services v ABB Building Technologies, where he rejected Total’s damages claim for its adjudication costs, saying:
“I agree with [ABB] that since the Act does not provide for the recovery of costs the claim is misconceived. Furthermore, this claim is put as a claim for damages for breach of contract arising out of ABB’s failure to pay. Because the Statutory Scheme envisages both parties may go to Adjudication and incur costs which they cannot, under the Act recover from the other side, it follows that such costs cannot therefore arise as damages for breach.
To permit such claim would be to subvert the statutory scheme under the Act.”
In adjudication enforcement proceedings, this judgment has stood the test of time (it was heard in February 2002).
Finally determining the dispute in court
We started talking about an interim-binding decision. Sometimes those interim-binding decisions end up before the court, with a judge being asked to make a final decision on the matters in dispute. If that happens, are the costs of the adjudication recoverable? Can they be a head of damages in their own right?
Some may argue that adjudication costs cannot be recoverable, even in subsequent litigation, because of HHJ Wilcox’s judgment in Total M&E Services v ABB Building Technologies. However, whether this is a correct interpretation or not, parties rarely claim their adjudication costs in subsequent litigation. That might be about to change, following Akenhead J’s judgment in National Museums and Galleries on Merseyside v AEW and PIHL Galliford Try.
National Museums and Galleries on Merseyside v AEW and PIHL Galliford Try
In this case, the museum was awarded over £1.1 million in damages against the architect, AEW, and the contractor, PIHL Galliford Try JV (a joint venture between PIHL UK Ltd and Galliford Try Construction Ltd) for design and construction defects in the Museum of Liverpool. The judgment is a fact-specific and detailed analysis of what went wrong at the museum relating to the steps and seats claim. Tucked away in paragraphs 124 to 130 is the court’s analysis of the museum’s claim for the costs of an earlier adjudication between the museum and the contractor.
The adjudication, which the contractor started in 2010, concerned the contractor’s liability for design responsibility relating to the steps and seats claim. The adjudicator agreed with the contractor and decided the issues in its favour, granting the declaratory relief it sought. As the architect, not the contractor, was liable for design, the museum was ordered to pay the adjudicator’s fee (which it did).
In the museum’s claim against the architect, it claimed the adjudicator’s fee (£19,830), its own legal expenses (£95,831) and expert fees (£6,630) from the adjudication.
The issue for the court revolved around reasonable forseeability and causation linking the architect’s breaches of contract and the adjudication. Put simply, the argument was that if the architect had carefully designed or co-ordinated the design of the steps and seats, there would have been no dispute between the museum and the contractor:
- On the question of foreseeabilty, as adjudication is well-established in the construction industry, it was reasonably forseeable that the contractor may refer a dispute, which could include a dispute over the scope of its design liability.
- Causation was potentially more problematic. The architect argued that as the museum knew that it could not recover its costs in the adjudication (even if it was successful), and fought the adjudication knowing this (and that it could not recover those costs from the contractor in subsequent proceedings), there was no reason why it should recover its costs now, “this being a backdoor method of cost recovery”.
The court decided the costs were recoverable:
“If AEW had done its job properly in the first place, it is inconceivable that there would have been any adjudication in relation to the design responsibility of the Contractor because the issue simply would not have arisen… Adjudication is a fact of life now in construction contracts… It was within the bounds of reasonable foreseeability that there could be adjudication in circumstances such as arose here. There was a sufficient causative link between the defaults of AEW and this adjudication.”
The court said that the causative link could only have been broken if the museum had acted unreasonably or its solicitors had negligently advised it that it had an arguable defence in the adjudication. Neither of those propositions had been before the court. The court assessed the recoverable damages at £19,830 for the adjudicator’s fee, £53,000 for legal expenses and £5,160 for expert fees.
What does this mean?
While certain heads of claim have rarely been advanced to date, this case may herald a change in approach, both from the parties and the court. Parties will now be able to look to Akenhead J’s words and see whether causation can be established on the facts of their dispute. It is likely, if that happens, that a body of case law will develop around what acting unreasonably means in the context of bringing or defending an adjudication. Fertile ground indeed!
Fewer issues are likely to surround the question of whether it was reasonably foreseeable to refer a dispute to adjudication. Given how Akenhead J phrased that particular aspect of his judgment, it is hard to imagine a situation where it was not “reasonably foreseeable” for a construction dispute to be referred to adjudication.
Only time will tell whether the scope of this judgment is limited to multi-party disputes and negligence claims, or it is much wider.