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Recovering adjudication costs: does Lulu Construction Ltd v Mulalley & Co Ltd [2016] EWHC 1852 (TCC) mean that the costs of an adjudication are recoverable?

Traditionally, the costs of an adjudication are not recoverable from the paying party (subject to the agreement of the parties, which itself has arguably been limited by section 108A of the Housing Grants, Construction and Regeneration Act 1996).

Executive summary:

Following the March 2013 amendments to the Late Payment of Commercial Debts (Interest) Act 1998, where there is an inadequate interest rate on debts, it is now at least arguable that such costs can be claimed from the losing party. An adjudication decision awarding such costs was successfully enforced in Lulu Construction Ltd v Mulalley & Co last year. Practitioners should consider the rate of interest for debts arising under a construction contract, both when negotiating and drafting them, and in respect of adjudications. This is, however, unlikely to be the last word on the subject.

The question of the recoverability of the legal costs of an adjudication (as opposed to the costs of enforcing an adjudicator’s decision) is very important for parties to a construction dispute. Such costs can quickly accumulate, especially if the dispute is substantial or complicated. The traditional position has been that the costs of an adjudication (beyond the adjudicator’s fees) are not recoverable from the other party, a view which has been endorsed by the TCC on a number of occasions.

There has lately been a debate as to whether recent amendments to the Late Payment of Commercial Debts (Interest) Act 1998 have changed that position, allowing parties to recover their costs. The recent case of Lulu Construction Ltd v Mulalley & Co Ltd [2016] EWHC 1852 (TCC) gave this argument some weight. The decision was not conclusive, however; we are still waiting for more decisive guidance on this important point.

The traditional position

Section 108 of the Housing Grants, Construction and Regeneration Act 1996 says nothing about an adjudicator’s power to make orders as to the payment of either side’s costs at the conclusion of the adjudication. The statutory Scheme for Construction Contracts contains provisions about the payment of the adjudicator’s fees but does not contain an express power to make inter partes costs orders.

From an early stage, it was accepted that, without more, an adjudicator had no power to makes costs orders. HHJ Bowsher QC held in Northern Developments (Cumbria) Ltd v J&J Nichol [2000] BLR 158 that, generally, an adjudicator has no jurisdiction to decide that one party’s costs of the adjudication should be paid by the other party. He did note, however, that: ‘Provided they do not detract from the requirements of the Act and the Scheme, the parties are free to add their own terms and there is no reason why they should not expressly agree that the Adjudicator should have power to order one party to an adjudication to pay the costs of the other party.’

This enlargement of the jurisdiction of the adjudicator could be on an ad hoc basis. Coulson on Construction Adjudication (3rd edition; 2015) at 10.07-10.08 notes that in both Northern Developments and John Cothliff Ltd v Allen Build (North West) Ltd [1999] CILL 1530, where both sides had sought their costs, the adjudicator was bestowed by the parties with such a power. The author warns of ‘the dangers of one party expressly seeking their costs in the adjudication: if they do so, there is at least the risk that this will begin a process that will ultimately allow the adjudicator to decide, in an appropriate case (say, where all the claims have failed) to award costs against the referring party or (where all or most of the claims have been successful) to award costs against the responding party’.

In at least England and Wales, a clause in a construction contract requiring the claiming party in any adjudication to bear all of the costs and expenses incurred by both parties (called a Tolent clause, after the decision in Bridgeway Construction Ltd v Tolent Construction Ltd [2000] CILL 1662) is generally seen as contrary to the 1996 Act and unenforceable: see Leander Construction Ltd v Mulalley and Company Ltd [2011] EWHC 3449 (TCC); [2012] BLR 152.

Unfortunately, the water was muddied by Parliament with the insertion of section 108A into the 1996 Act, which came into force for contracts entered into on or after 1 November 2011:

108A Adjudication costs: effectiveness of provision

  1. This section applies in relation to any contractual provision made between the parties to a construction contract which concerns the allocation as between those parties of costs relating to the adjudication of a dispute arising under the construction contract.
  2. The contractual provision referred to in subsection (1) is ineffective 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.

Although the wording of this section is not clear, it appears to prohibit an agreement enlarging the jurisdiction of the adjudicator to include costs unless:

  1. That provision is simply conferring a power on the adjudicator to allocate his or her own fees and expenses as between the parties (s108A(2)(a)); or
  2. The parties have agreed to enlarge the scope of the jurisdiction after the service of the notice of intention to refer the dispute to adjudication (s108A(2)(b)).1

The Late Payment of Commercial Debts (Interest) Act 1998

The 1998 Act applies to commercial contracts: under section 2, it applies (with some limited exceptions that do not fit a normal construction contract) to a contract for the supply of goods or services where the purchaser and the supplier are each acting in the course of a business. It provides for enhanced interest on commercial debts plus a fixed sum for compensation arising out of the late payment, on a sliding scale of up to £100.

In March 2013, however, the Act was amended to implement Directive 2011/7/EU to include a new section 5A(2A), which boosted the fixed compensation scheme:

(2A) 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.

Section 5A only applies to debts which are ‘qualifying debts’ for the purpose of statutory interest under the 1998 Act. Section 8(2) provides:

(2) Where the parties agree a contractual remedy for late payment of the debt that is a substantial remedy, statutory interest is not carried by the debt (unless they agree otherwise). [words highlighted by author]

The argument that has been made is that where a qualifying debt (i.e. not damages) is created under a construction contract, under section 5A(2A) the claiming party can also claim, by way of damages, a sum equivalent to their costs of the adjudication (less the nominal fixed costs).

Note, however, Coulson J’s extra judicial comments in Coulson (2015) at 10.17-10.19. The interpretation advanced here is based on Rachel Gwilliam, Recovering Adjudication Costs under the Late Payment of Commercial Debts (Interest) Act (SCL paper, July 2016), pp1-2, which was in turn based on the government’s own confirmation given to Parliament in October 2009.

What is a ‘substantial remedy’?

Section 9 of the 1998 Act defines what a substantial remedy is in imprecise language:

9 Meaning of “substantial remedy”

  1. A remedy for the late payment of the debt shall be regarded as a substantial remedy unless—
    1. the remedy is insufficient either for the purpose of compensating the supplier for late payment or for deterring late payment; and
    2. it would not be fair or reasonable to allow the remedy to be relied on to oust or (as the case may be) to vary the right to statutory interest that would otherwise apply in relation to the debt.
  2. In determining whether a remedy is not a substantial remedy, regard shall be had to all the relevant circumstances at the time the terms in question are agreed.
  3. In determining whether subsection (1)(b) applies, regard shall be had (without prejudice to the generality of subsection (2)) to the following matters—
    1. the benefits of commercial certainty;
    2. the strength of the bargaining positions of the parties relative to each other;
    3. whether the term was imposed by one party to the detriment of the other (whether by the use of standard terms or otherwise); and
    4. whether the supplier received an inducement to agree to the term.

The TCC has, in the past, considered what is a ‘substantial remedy’. In Yuanda (UK) Co Ltd v WW Gear Construction Ltd [2010] EWHC 720 (TCC), [2010] BLR 435 the standard JCT rate of interest of 5% over the Bank of England’s base rate was regarded as a ‘substantial remedy’ but 0.5% over base was not. In Walter Lilly & Co v Mackay [2012] EWHC 1773 (TCC), [2012] BLR 504, likewise, 5% over base was regarded as ‘substantial’.

As a consequence, on the basis of the authorities decided before the March 2013 amendment (and with that caveat emphasised), the section 5A(2) argument is unlikely to assist: if, however, a party (as in Yuanda) attempted to drive a hard deal on the rate of interest for late payments, the possibility of such an argument is opened up.

What did Lulu Construction Ltd v Mulalley & Co Ltd decide?

The short answer to this question, is: not much beyond the facts of the particular case. The judgment itself is very short. Jonathan Acton-Davis QC, sitting as a Deputy Judge of the TCC, rejected a challenge to ‘debt recovery costs’ of £47,666.27. The paying party’s argument was that such costs, payable under section 5A of the 1998 Act, were not part of the dispute referred to the adjudicator, having been pleaded for the first time in the Rejoinder. The learned Deputy Judge referred to Akenhead J’s decision in in Allied P& L Limited and Paradigm Housing Group Limited [2009] EWHC 2890 (TCC), where at [30] he held that the ambit of the reference to arbitration or adjudication may unavoidably be widened by the nature of the defence or defences put forward by the defending party.

This ten paragraphs-long decision should not, therefore, be taken to be the final word on this point. Instead, it appears to have turned on the question of jurisdiction. The question as to whether the adjudicator was right in law, of course, is something that is very difficult to raise on enforcement (see Bouygues v Dahl-Jensen [2000] EWCA Civ 507 [2000] BLR 522).

Some commentators are already pointing to Coulson J’s comments on the recoverability of adjudication costs in the subsequent case of Wes Futures Ltd v Allen Wilson Construction Ltd [2016] EWHC 2863 (TCC), which although delivered in the context of the recoverability of pre-action costs under Part 36, appear to set down a rather more rigid rule in general leaning against the recoverability of adjudication costs:

[16] In my view there are also two wider principles which also militate against Futures' interpretation of the letter, even if we assume that it was not a Pt 36 offer. The first is that, in an ordinary case, a party seeking to recover a sum awarded by an adjudicator is not entitled to (and cannot seek) the legal costs it incurred in the adjudication itself. That is because, pursuant to the Housing Grants (Construction and Regeneration) Act 1996, 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.

Conclusion

We do not have the final word on this debate yet. The door has been opened, however, to section 5A(2A) arguments where the rate of interest for debts in a construction contract does not provide a ‘substantial remedy’. Parties seeking payment should carefully consider whether Lulu and the 1998 Act is a useful argument to deploy.

David Sawtell / 20th Apr 2017


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