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Expect case soon on right of parties to recover costs of adjudication, says expert

FOCUS: Parties are becoming increasingly likely to claim their costs when settling debt-related disputes via adjudication – but the statutes remain conflicted over whether or not this is legally possible.26 Sep 2016

A recent High Court case clearly indicates that if parties seek costs, adjudicators may award them and the courts may then enforce any such order. However, the judgment was not authority on the claiming party’s underlying entitlement, as it was concerned solely with the question of whether the adjudicator had jurisdiction to make the award in the first place.

The problem stems from two conflicting statutes on the underlying entitlement to recover the costs of adjudication. On the one hand, section 108A of the 1996 Housing Grants, Construction and Regeneration Act, although poorly drafted, would appear to outlaw all contractual clauses dealing with costs, except for the adjudicator’s own fees, unless made after the referral. On the other, new rights created in 2013 under the EU’s Late Payments Directive may allow parties pursuing debt claims to seek recovery of their legal and expert costs if there is an entitlement to statutory interest.

At a recent seminar hosted by Pinsent Masons, the law firm behind Out-Law.com, we asked an audience of 100 individuals drawn from all sectors of the construction industry whether they thought the new right under the Late Payments Act was consistent with the intentions of parliament. Some 66% said no, presumably because this was not part of the thinking when the amendments to the Construction Act were passed.

The other 33% who expressed the view that this development was consistent with parliament’s intentions may have been seeking to make sense of the new late payment rights – or they may have taken the view that subcontractors kept out of their money by main contractors should be permitted to recover their costs and that this is entirely consistent with the underlying principles of the Construction Act to improve cash flow in the industry.

Either way, practitioners await a court decision which will provide guidance on the substantive entitlement of an adjudicating party to recover costs, which should not be too long in coming. In the meantime, good practice would be to mention any such claim in pre-adjudication correspondence, removing any issues about jurisdiction. We can expect some adjudicators to be more receptive to these claims than others.

Conflicting legislation

Before the Construction Act amendments were passed in 2009, it was generally accepted that parties were free to include provisions in their contracts allocating costs or allowing adjudicators to do so. So-called ‘Tolent’ clauses, requiring subcontractors to pay the main contractor’s costs in adjudications irrespective of result, were common.

The 2009 amendments were designed to make adjudication more readily available, and most working in the construction sector thought that should be without the threat of having to pay the other party’s costs. It was thought that section 108A was passed to reinforce this by outlawing ‘Tolent’ clauses. However, the drafting of the section is not as clear as it might be and the scope of it seems wider than intended.

Meanwhile, section 5A(2A) of the 1998 Late Payment of Commercial Debts (Interest) Act (LPA), was brought into effect in 2013 in line with the EU’s Late Payments Directive. It is now possible in a debt claim to recover the “reasonable costs of recovering the debt” – which may extend to costs of a party in adjudication.

Parliament seems not to have considered this provision’s potential impact on adjudication. It appears that parties pursuing debt claims by way of adjudication proceedings may now be able to seek recovery of their legal and expert costs if there is entitlement to statutory interest; either by implication or because the contractual interest does not provide, in the words of the provision, a “substantial remedy”.

The Lulu Construction case

Adjudicators have now been facing these claims for costs under section 5A(2A) for some time, without any guidance from the courts. The decision in the Lulu Construction case, handed down in March but only recently reported, is therefore instructive: here, the High Court enforced an adjudicator’s decision which awarded some £47,000 of costs to Lulu under the LPA.

The judgment is not, however, authority on the underlying entitlement: it was concerned solely with the question of whether the adjudicator had jurisdiction to make the award. When the court found that the adjudicator did have jurisdiction, his decision had to be enforced whether right or wrong on the law.

In the words of the judge, the debt recovery costs claim was “clearly connected with and ancillary to the referred dispute”. This meant that it was within the adjudicator’s jurisdiction and had to be enforced.

Lawrence Davies is a construction disputes expert at Pinsent Masons, the law firm behind Out-Law.com.