Recovering legal and expert costs in adjudication

A recent TCC decision has considered an attempt to extend the limited circumstances in which parties may seek to recover legal and expert costs incurred in bringing or defending an adjudication. We summarise the current state of the law in relation to the recovery of such costs below.

Introduction

The general rule in relation to adjudications brought under construction contracts is that each party must bear their own legal and expert costs, whilst the adjudicator will usually be empowered to allocate his own fees and expenses between the parties. Prior to the 2011 amendments to the Housing Grants, Construction and Regeneration Act 1996 (the “Act”), the position with regard to contract clauses permitting the recovery of such costs was uncertain. The matter has now been put beyond doubt by a new section 108A. The section stipulates that any contractual provision in a construction contract dealing with the allocation of adjudication costs between the parties is ineffective unless:

• made in writing after service of a Notice of Adjudication; or
• if made in advance, is limited to conferring power on the adjudicator to allocate his fees and expenses as between the parties.

Three potential exceptions to the general rule can be identified:

1. An agreement in writing after service of the Notice of Adjudication in accordance with section 108A. In this regard, the section would not appear to change the decision reached in Northern Developments v J&J Nichol that mutual requests by opposing parties for an adjudicator to award legal costs will be sufficient to confer jurisdiction by an implied agreement.
2. Where the construction contract in question contains no adequate right to claim interest for late payment, a potential route to the recovery of legal costs exists for payment claims referred to adjudication due to recent amendments to the Late Payment of Commercial Debts Act (for our Law-Now in relation to these amendments, please click here). These amendments allow parties a right to recover the “reasonable costs in recovering the debt” and it is unclear whether s108A would prevent a party from using this provision to recover adjudication costs.
3. In certain circumstances, the legal costs of prosecuting or defending an adjudication may be recoverable as a discrete head of damages for breach of contract. We explore this particular exception in greater detail below.

The National Museums case

In National Museums and Galleries on Merseyside v AEW Architects, a successful attempt was made to recover legal and expert costs incurred in defending an adjudication from a third party whose breach of contract was said to have precipitated the adjudication. The case was decided in 2013, after the introduction of section 108A, and therefore represents an exception to the general rule outlined above.

The Museum successfully sued its architect, AEW, for (among other things) negligence in relation to certain steps and seats forming part of the newly constructed Museum of Liverpool. The steps and seats had suffered from design problems which resulted in work being suspended. The problems led to an adjudication by the Museums’ contractor to determine whether it held any design responsibility in relation to the issue. The Museum defended the adjudication, but was unsuccessful and was ordered to pay the adjudicator’s fees and expenses as well as incurring its own legal and expert defence costs.

The Museum sought to recover these costs from AEW alleging that they were a reasonably foreseeable consequence of AEW’s negligence. It claimed that AEW’s negligence had caused these costs to be incurred as, but for AEW’s breach of contract and negligence, the adjudication would not have been necessary and the costs (both legal and expert) would not have been incurred. The court agreed with the Museum and found that adjudication had become “a fact of life” in the construction industry and accordingly such costs were reasonably foreseeable and recoverable as a separate head of damages.

Husband and Brown v Mitch Developments

In this more recent case, the TCC has considered whether the rule in the National Museums case could be extended to two party scenarios. Husband and Brown (“H&B”) sought to recover their legal costs of an earlier successful adjudication commenced against Mitch Developments (“Mitch”). H&B sought to rely on the National Museums case by arguing that their adjudication had concerned a breach of contract by Mitch and that the legal costs incurred in bringing such an adjudication were reasonably foreseeable and ought therefore to be recoverable as damages for breach of contract.

The case concerned a sale and purchase of land and associated advisory fees due and the parties were also in dispute as to whether the contract between the parties was a construction contract for the purpose of the Act and in turn whether H&B’s adjudication had been validly commenced under the Act. The court concluded that the contract was not a construction contract and dismissed the claim for costs on this basis, but noted also that the National Museums line of reasoning would not have applied as, “to allow the Claimant to recover its costs of adjudication would subvert the statutory scheme which does not allow for such costs.” The court’s decision in this regard followed an earlier decision from 2002, decided in the absence of the new section 108A (Total M&E Services Ltd v ABB Building Technologies Ltd).

Conclusions and implications

This recent case suggests somewhat unsurprisingly that the court will take a robust approach to section 108A and not permit legal and expert costs of an adjudication to be recovered from the losing party to an adjudication where the criteria in section 108A are not met. It remains to be seen how far this approach will apply to a claim for “reasonable costs” under the Late Payment of Commercial Debts Act.

The case also appears to be the first time since the National Museums case in which a similar type of argument has been pursued before the court for the recovery of adjudication costs. Subject to the position under the Late Payment of Commercial Debts Act, such arguments are potentially the only remaining avenue for parties to recover their legal and expert costs of bringing or defending an adjudication.

A National Museums type argument will only apply where a third party can be said to have caused the need to bring or defend an adjudication. It is most likely to apply, therefore:

• In circumstances where a third party designer has caused delay or disruption to construction work as a result of defective or uncertain designs.
• Against sub-contractors, in circumstances where delay, disruption or other breaches of contract by a sub-contractor can be said to have caused an adjudication against its main contractor or superior sub-contractor.

The prohibition in section 108A of the Act extends only to the allocation of costs for adjudications between the parties to a construction contract, not adjudications between one of them and a third party. There would accordingly appear to be nothing to prevent parties from reflecting and/or extending the National Museums position in their contract through the use of indemnities and hold harmless provisions such as those found in the JCT suite of sub-contracts (see for example clause 2.5.2 of the SBC Sub-contract).

References:

Northern Developments (Cumbria) Ltd v J&J Nichol [2000] EWHC 176 (TCC)

Total M&E Services Ltd v ABB Building Technologies Ltd [2002] EWHC 248 (TCC)

National Museums and Galleries on Merseyside (Trustees of) v AEW Architects and Designers Ltd [2013] EWHC 2403 (TCC)

Husband and Brown Ltd v Mitch Developments Ltd [2015] EWHC 2900 (TCC)