Adjudication costs…or lack of!

It is an established principle that parties to adjudication, under the ‘Housing Grants, Construction and Regeneration Act 1996’ (‘HGCRA’), should bear their own costs. In order to clarify the position, in light of the legislation being silent as to same, the Act was amended by the Local Democracy, Economic Development and Construction Act in 2011. Section 108A was introduced; the effect of which was to render any agreement allocating responsibility for the costs of an adjudication unenforceable unless:

(a) “It is made in writing, is contained in the construction contract and confers power on the adjudicator to allocate his fees and expenses as between the parties, or

(b) It is made in writing after the giving of notice of intention to refer the dispute to adjudication”. 

It is, therefore, clear that there is no automatic right to recover the costs of an adjudication, and that they can only be recovered in very limited circumstances.

The case of Lulu Construction v Mulalley & Co Ltd [2016] EWHC 1852 (TCC) appears to have caused some controversy regarding the recoverability of such costs. In this case, there was no agreement in the construction contract/notice of adjudication regarding the allocation of fees between the parties. However, the adjudicator decided that the losing party should pay the winning party’s costs of the adjudication. This decision was enforced by the Court despite the correctness of the decision not being reviewed; this is to be expected given the strict approach by the TCC to enforcement. It was decided that the “debt recovery costs” were connected with and ancillary to the referred dispute, and, therefore, were considered to be a part of it. It was held that it did not matter that the costs were not referred to in the notice of adjudication, but were included for the first time in a rejoinder. This was due to the fact that, unusually, the adjudication had been initially referred by the paying party (Mulalley). This case brings to the fore the uncertainty surrounding the recoverability of such costs under the Late Payment of Commercial Debts (Interest) Act 1998 (‘LPCDIA’). The ‘LPCDIA’ was amended in 2013 when a new section 5A (2A) was introduced. This states that: “if the reasonable costs of the supplier in recovering the debt are not met by the fixed sum, the supplier shall also be entitled to a sum equivalent to the difference between the fixed sum and those costs”. This appears to conflict with section 108A of the ‘HGCRA’ in that it may present a route for recovering legal costs in adjudication claims. It is likely that parties will cite LuLu as authority that the costs of an adjudication can be claimed as ‘debt recovery costs’ pursuant to Section 5A (2A) of the’ LPCDIA’. However, it must be borne in mind that, the apparent conflict between the Acts, was not argued before the Judge in this case. The TCC was only asked to decide whether the adjudicator had jurisdiction to reach a decision.

It is likely that this case will increase the number of claims for debt recovery. However, many unpaid construction parties will have to wait a while longer for a definitive Court decision on whether the ‘LPCDIA’ is applicable to adjudication claims. I imagine, when the Court is faced with the argument that costs should be recoverable, effectively ‘through the back door’, that it may be held to be contrary to Parliament’s intentions under the ‘HGCRA’.

Clarity awaited…

In a more recent decision from the TCC, Wes Futures Ltd v Allen Wilson Construction Ltd [2016] EWHC 2863 (TCC), the recoverability of adjudication costs was again addressed. Although not directly related to the recoverability of adjudication costs as a ‘debt recovery’, the case concerned the recoverability of adjudication costs as part of a settlement under Part 36. The receiving party sought to claim the costs of adjudication as “costs of this case”. The case came before the Court wherein the established principle that adjudication costs are not recoverable under the ‘HCGRA’ was reiterated. Coulson J (the Judge in charge of the TCC) stated that: “a party seeking to recover a sum awarded by an adjudicator is not entitled to…the legal costs it incurred in the adjudication itself. That is because, pursuant to the HCGRA, as amended, costs incurred in adjudications are not recoverable. So if a successful party cannot recover its costs in the adjudication itself, it cannot recover them in enforcement proceedings either”. In addition, Coulson J highlighted that “costs of this case” was not wider than “costs of the proceedings”. Adjudication costs are not costs of the proceedings and, therefore, could not be included within the offer.

Although this case does not clarify the position in respect of the recoverability of adjudication costs under the ‘LPCDIA’, it does go towards demonstrating the Court’s unwillingness to award adjudication costs outside of the exceptions listed in Section 108A.

Further clarification awaited…

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