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Recovery of costs in adjudication: Enviroflow v Redhill

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It was generally understood that you could not recover your costs incurred in participating in an adjudication.  But as I discussed in an earlier blog, last year the decision in Lulu Construction Ltd vs Mulalley & Co Ltd seemed to open to the door to recovery under the Late Payment of Commercial Debts (Interest) Act.

In Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd  (unreported, TCC, 16 August 2017), the court considered the point again and confirmed that the Late Payment of Commercial Debts (Interest) Act does not confer on an adjudicator a right to award costs. 

Inconsistency between the Construction Act and the Late Payment Act

The issue arose as a result of the apparent inconsistency between the Housing Grants, Construction and Regeneration Act, as amended (“the Construction Act”) and the Late Payment of Commercial Debts (Interest) Act, as amended (“the Late Payment Act”): 

  • Section 108A of the Construction Act states that adjudicators cannot determine that one party is responsible for the others party’s costs, unless the parties agree to this after the adjudication has begun. 
  • Section 5A of the Late Payment Act implies a term into a contract for the supply of goods and services, that a successful party is entitled to the payment of simple interest, together with compensation for late payment. Since 2013, where the contract does not 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 is not enough to cover its reasonable costs, any sums reasonably incurred in recovering the debt.

In Lulu Construction vs Mulalley & Co, the referring party, an employer, asked for a declaration as to the value of the final account. Its submissions did not refer to the costs incurred in the adjudication or who should bear them. The responding party, a contractor, set out its case as to the value of the final account and pursuant to the Late Payment Act claimed its “debt recovery costs”, that is the costs it incurred in participating in the adjudication.

The adjudicator decided that the employer should pay the contractor’s costs incurred in participating in the adjudication. On enforcement, the judge did not look at whether or not the adjudicator was correct to award the contractor its costs. Instead he considered whether the adjudicator had jurisdiction to make an award of costs pursuant to the late payment legislation. Mr Jonathan Acton-Davis QC, sitting as a deputy judge of the TCC, found that the adjudicator had jurisdiction to award costs on this basis. Therefore he granted the contractor summary judgment in the amount of the adjudicator’s decision.

Since then, it has become common practice for contractors and subcontractors to claim their costs under the Late Payment Act.

However, in the recent unreported case of Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd, Mrs Justice O’Farrell considered the question again.  As in Lulu Construction, in Environflow  the parties had not agreed that the adjudicator could award costs, but the winning party had claimed them as debt recovery costs under the Late Payment Act.  At the enforcement hearing, Mrs Justice O’Farrell held that the adjudicator did not have jurisdiction to make an award of costs. The implied term provided for in section 5A of the Act was ousted by section 108A of the Construction Act. Therefore, the remedy under section 5A of the Act was held to be ineffective.

It will be interesting to see whether this puts an end to the practice.

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