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Contractor recovers adjudication costs under Late Payment Legislation

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Summary: It has long been held that an adjudicator does not have the power to award a party it’s legal costs which were incurred in an adjudication. Yet, in Lulu Construction Ltd v Mullalley [2016] TCC, the court upheld an adjudicator’s decision awarding these costs. Catherine Gelder considers the limited circumstances in which these costs can be recovered. Read more…

It’s not the first time that a party has recovered its adjudication costs: the courts awarded adjudication costs as damages in a subsequent court action in The Board of Trustees of National Museums and Galleries on Merseyside v AEW Architects and Designers Ltd [2013]). However, as far as I am aware this is the first time a party has successfully recovered its adjudication costs under the late payment legislation.

The Construction Act position

In Northern Developments (Cumbria) Ltd v JJ Nichol [2000], it was held that an adjudicator could not award a party’s legal costs incurred in participating in an adjudication. In that case, the court decided that because both the Construction Act and the Scheme expressly allow the adjudicator to apportion his fees, but neither expressly mention legal costs, parliament couldn’t have intended legal costs to be recoverable.

Some construction contracts included clauses stating that the adjudicator had the power to award legal costs to one party. However, in Bridgeway v Tolent [2000] the court held that a clause that permitted the adjudicator to award costs to one party were contrary to the intention of Parliament, as making the referring party pay the other side’s costs could be a barrier to parties adjudicating at any time, and therefore could prevent cashflow in the industry.

When the Act was amended by the LDEDC in 2011, the effect of new s108A was to bring an end to so-called Tolent clauses, unless the parties reach agreement as to costs after the adjudication starts.  Since parties find it very difficult to agree anything once an adjudication has started, this mechanism is rarely used.

Rarely, both parties request an order for costs, and then the parties are deemed to have conferred jurisdiction on the adjudicator to award costs.

The Late Payment Legislation

In the dispute that is the subject of Lulu Construction Ltd v Mullalley, there was no such agreement, but the adjudicator decided that the losing party should pay the winning party’s costs of the adjudication. What’s more, the court enforced the decision, and the contractor got its costs.

What happened? The referring party, an employer, asked for a declaration as to the value of the final account. It did not ask for its costs in its submissions.  The responding party, a contractor, set out its case as to the value of the final account and claimed its “debt recovery costs”, i.e. the costs it incurred in participating in the adjudication. This claim was made pursuant to the Late Payment of Commercial Debts (Interest) Act 1998, as amended by the Late Payment of Commercial Debts Regulations 2013 (“the Late Payment Legislation”).

This Late Payment Legislation implies a term into commercial contracts for the supply of goods and services for the payment of simple interest, together with compensation for late payment. Since 2013, where the contract fails to provide an adequate remedy for late payment, a party recovering a debt has been able to claim a fixed fee (£100 for debts over £10,000), or, if the fixed fee isn’t enough to cover its reasonable costs, any sums reasonably incurred in recovering the debt. 

Conflict between the Late Payment Legislation and the Construction Act

Note that the Late Payment Legislation is only relevant where a party is recovering a debt, and the contract doesn’t provide an adequate remedy for late payment.  But where it is relevant,  there is a potential conflict between the apparent prohibition on recovering costs under the Construction Act and these provisions. 

Parliament does seem to have intended to stop adjudicators awarding costs without both parties’ agreement.  On the other hand, the Late Payment Legislation came into effect after the Act was amended, applies to the late payment of commercial debts arising out of the sale of goods or the provision of a service, and doesn’t expressly exclude construction operations.  Consequently, whether or not it applies to the costs of an adjudication is arguable until there is a Court of Appeal judgment on the point.

In Lulu Construction v Mullalley the adjudicator came down on the side of the Late Payment Lislation and ordered the Referring Party to pay the Responding Party its costs of adjudication under that legislation. 

Lulu Construction made an application for summary judgment, so the judge was not considering whether or not the adjudicator was correct to award the contractor its costs.  The only reason for refusing to enforce the adjudicator’s decision would be if the adjudicator had exceeded his jurisdiction to make an award of costs pursuant to the Late Payment Legislation.  In a succinct judgment, Acton-Davis J found that the adjudicator had not exceeded his jurisdiction.  He granted the contractor summary judgment of the full amount of the award, and made no decision as to whether the adjudicator was correct to make an order as to costs. 

Final thoughts

While the position is in flux, where a contractor is adjudicating to recover the late payment of a debt, and the contract doesn’t provide an adequate remedy for late payment, it may succeed in persuading an adjudicator to award its costs of adjudicating.  It is likely therefore that we will see an increase in parties to adjudications asking for their costs. For those drafting contracts, it is a good idea to reconsider whether your contracts include an adequate remedy for late payment.

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