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The Rise and Fall of Cost Recovery in Adjudication

Since the introduction of statutory adjudication in the Housing Grants, Construction and Regeneration Act 1996, parties have been trying to find ways of recovering the costs incurred in referring or defending a dispute in adjudication. An early decision in John Cothliff Limited v Allen Build (Northwest) Limited1  suggested that the adjudicator did have the jurisdiction to award costs. However, HHJ Bowsher QC in Northern Developments (Cumbria) Ltd v J&J Nichol 2 considered this not to be the case; concluding that if Parliament intended this power, then it would have said so when drafting the legislation.

Next came the inclusion of clauses within a construction contract which, following Bridgeway Construction Limited v Tolent Construction Limited 3 became known as “Tolent Clauses”. Such clauses were worded to the effect that the referring party would bear all costs incurred by both parties.

Tolent clauses were commonplace until the decision in Yuanda (UK) Co Limited V WW Gear Construction. The position in Yuanda was that such clauses were ineffective.

Meanwhile, the introduction of the new section 108A to the Housing Grants, Construction and Regeneration Act 1996 by the Local Democracy, Economic Development and Construction Act 2009, which came into force for all construction contracts entered into after 1 October 2011, states that any clause which seeks to allocate the costs of adjudication would be ineffective unless either:

(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 there was some ambiguity as to the interpretation of the new Section 108A (to the extent that it could be argued that it actually facilitated the use of Tolent clauses), it is clear that both this and the position in Yuanda was intended to limit the scope for recovery of costs in adjudication.

However, a glimmer of hope was then offered by amendments in 2013 to the Late Payment of Commercial Debts (Interest) Act 1998.  Prior to the 2013 amendment, parties were entitled to recover a fixed sum of up to £100 in addition to statutory interest on a qualifying debt. However, the Late Payment of Commercial Debts Regulations 2013 broadened the scope of section 5A to include the following:

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.”

The Late Payment Directive 2011 (2011/7/EU), which the 2013 regulations were implementing, provided guidance on what would be deemed to be “reasonable costs”:

i. “This could include expenses incurred, inter alia, in instructing a lawyer or employing a debt collection agency.” (Article 6.3.)

ii. “Such costs should include, in particular, those incurred by creditors in instructing a lawyer or employing a debt collection agency.” (Recital 20.)

Suddenly, the proponents of cost recovery in adjudication found another route to argue their entitlement to recover costs in certain disputes. However, there was a problem.

A party seeking to recover a qualifying debt (for the purposes of the Late Payment of Commercial Debts (Interest) Act) would appear to be entitled to also recover its costs as a part of the statutory interest provisions.

However, what if the adjudicator considered that there wasn’t a debt? In this scenario, the defending party who would have likely expended a similar amount of costs in defending the adjudication would not have any mechanism by which to recover its costs, despite being successful in defending the dispute.  This made the ability to rely on the provisions of this Act a little one sided.

Nevertheless, in Lulu Construction Limited v Mulalley & Co Limited 4, the courts considered that debt recovery costs were connected with and ancillary to the dispute and as such, the adjudicator had the jurisdiction to award the referring party its reasonable costs.

Enviroflow

The latest case in this saga is Enviroflow Management Limited v Redhill Works (Nottingham) Limited 5. A dispute arose between the parties which was referred to adjudication. The adjudicator decided that the Referring party was entitled to its reasonable cost incurred in adjudication and directed that Redhill pay £14,900. Redhill disagreed and brought the matter before the Technology and Construction Court (TCC).

Mrs Justice Farrell found that although section 5A of the Late Payment of Commercial Debts (Interest) Act implied the “reasonable costs” term into the contract, that implied term did not satisfy the requirements of section 108A of the Construction Act. This still requires that for a term to be effective, it must be in writing and stated within the Contract, or that it was agreed by the parties after the service of the Notice of Adjudication. In this case, the provisions of the 1998 Act were not considered to satisfy the requirements of section 108A.

Therefore, contrary to the view following Lulu, the Adjudicator did not have the jurisdiction to award costs to the Referring Party and the decision in respect of party costs was not enforced.

Conclusion

Once again, the TCC has reinforced the position stated that in Northern Developments v J&J Nichol. The Housing Grants, Construction and Regeneration Act does not confer the jurisdiction to award costs and therefore, should parties wish to grant the adjudicator the jurisdiction to award costs, they must do so using section 108A of the Housing Grants, Construction and Regeneration Act 1996.

It seems the route of using the Late Payments Act is closed for now, unless of course the matter is taken to the Court of Appeal. However, there remain opportunities for parties to make provision for costs to be recovered should they wish to do so.

Tudor Rose has been actively involved with cases relevant to this issue as the legal context surrounding recovery of costs has evolved.  Should you wish to find out more about this, please do get in touch with us.

1[1999] CILL 1530
2[2000] EWHC 176 (TCC)
3[2010] EWHC 720 (TCC)
4 [2016] EWHC 1852 (TCC)
5 (2017) Unreported, 16 August 2017

Whilst Tudor Rose has made every effort to ensure that the information contained within this article is correct at the date of publication, this article has been prepared as guidance only and does not constitute legal advice.