Recovery of adjudication costs under the Late Payment of Commercial Debts (Interest) Act 1998

A TCC decision last week has ruled against the increasing practice of claiming for adjudication costs under the Late Payment of Commercial Debts (Interest) Act 1998 (the “Late Payment Act”). The court has struck down an adjudicator’s decision to award such costs under the Late Payment Act as being contrary to section 108A of the Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act”).

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 Construction Act, the position with regard to contract clauses permitting the recovery of such costs was uncertain. The matter was put beyond doubt by a new section 108A inserted by the 2011 amendments to the Act. 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.

There are three potential exceptions to this general rule:

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 costs will be sufficient to confer jurisdiction by an implied agreement.
2. In certain circumstances, the costs of prosecuting or defending an adjudication may be recoverable as a discrete head of damages for breach of contract. For a recent Law-Now on this topic please click here.
3. Where the construction contract in question contains no adequate right to claim interest for late payment, a potential route to the recovery of adjudication costs exists due to amendments made in 2013 to the Late Payment 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” a debt caught by the Late Payment Act, but it is unclear whether section 108A of the Construction Act prevents the extension of this right to adjudication costs.

There has of late been an increasing trend for claimants to seek adjudication costs under the Late Payment Act and for adjudicators to make cost awards on this basis. One case in which such an award had been made came before the TCC last year in Lulu Construction Limited v Mulalley & Co Limited. The case concerned jurisdictional issues and the court stopped short of considering whether the claim under the Late Payment Act was well founded at law. For our Law-Now on this case please click here.

In this most recent TCC decision, the court has now ruled against the lawfulness of such claims.

Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd

Redhill was the main contractor on a project for internet installation works. It sub-contracted part of the works to Enviroflow. A dispute arose as to payment and the sub-contractor commenced an adjudication seeking an order for payment as well as its reasonable costs in recovering payment under the Late Payment Act. The adjudicator accepted the claim and ordered Redhill to pay £81,000 as the principal sum due, as well as £14,900 in costs under the Late Payment Act and his own fees and expenses incurred in the adjudication.

Enviroflow challenged the decision before the TCC, both as to the principal sum and the award of costs. Whilst upholding the principal amount ordered by the adjudicator, the TCC found that the adjudicator had no jurisdiction to make a costs award under the Late Payment Act. Although section 5A of the Late Payment Act provides in certain circumstances for a party to be paid the costs of recovering a debt, section 108A of the Construction Act was found to have ousted those provisions as far as construction adjudication was concerned. That section requires, among other things, any agreement in respect of payment of costs to be in writing which, of course, it would not be if reliance was placed on the Late Payment Act.

Conclusions and implications

This decision should put an end to claims for adjudication costs under the Late Payment Act, unless and until the matter comes before the Court of Appeal. Parties wishing to recover adjudication costs will now be limited to the two narrow categories of case indicated in the introduction to this Law-Now.

References:

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

Lulu Construction Limited v Mulalley & Co Limited [2016] EWHC 1852 (TCC)

Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd (unreported, 16 August 2017)