Adjudication costs: No harm in asking

It’s not every day that a long held assumption in construction law is overturned, but that is precisely what happened in Lulu Construction Ltd vs Mulalley & Co Ltd [2016] in the Technology and Construction Court (TCC).

It has long been accepted that you cannot claim costs incurred in participating in an adjudication, whatever the outcome. The court held that because both the Construction Act and the Construction Industry Scheme expressly allow the adjudicator to apportion his fees, but neither expressly mention legal costs, parliament could not have intended legal costs to be recoverable (Northern Developments (Cumbria) Ltd vs J & J Nichol [2000]).

Some construction contracts included clauses stating that the adjudicator had the power to award legal costs to one party. However, in Bridgeway Construction Ltd vs Tolent Construction Ltd [2000] the court held that a clause that permitted the adjudicator to award costs to one party (in that case the responding party) were contrary to the intention of parliament.

When the act was amended by the Local Democracy, Economic Development and Construction Act in 2011, the effect of new s108A was to bring an end to agreements that the adjudicator could award one party legal costs, unless that agreement was reached after the adjudication starts.

However, it is hard for parties to agree anything once an adjudication has started, and this mechanism is rarely used. Sometimes the referring party requests an order for costs in its referral notice, and the responding party also asks for its costs. In this situation, the parties are deemed to have conferred jurisdiction on the adjudicator to award costs.

In Lulu Construction vs Mullalley & Co, there was no such agreement but, nevertheless, the adjudicator decided that the losing party should pay the winning party’s costs of the adjudication. What is more, the court enforced the decision, and the contractor got its costs.

Why? Well, the referring party, an employer, asked for a declaration as to the value of the final account. Its submissions were silent as to costs. The responding party, a contractor, set out its case as to the value of the final account and claimed its “debt recovery costs”, that is the costs it incurred in participating in the adjudication. This claim was made pursuant to the Late Payment of Commercial Debts (Interest) Act 1998, as amended by the Late Payment of Commercial Debts Regulations 2013.

The law remains unclear as to whether the adjudicator was correct to make an order as to costs

This late payment legislation implies a term into commercial contracts for the supply of goods and services for the payment of simple interest, together with compensation for late payment. Since 2013, where the contract does not provide an adequate remedy for late payment, a party recovering a debt has been able to claim a fixed fee (£100 for debts over £10,000) or, if the fixed fee is not enough to cover its reasonable costs, any sums reasonably incurred in recovering the debt. As you can see, there is a potential conflict between the apparent prohibition on recovering costs under the Construction Act and these provisions of the late payment legislation.

In Lulu Construction vs Mullalley & Co the adjudicator came down on the side of the late payment legislation and ordered the referring party to pay the responding party its costs of adjudication under that legislation.

In an application for summary judgment, the judge did not look at whether or not the adjudicator was correct to award the contractor its costs. After all, following Bouygues (UK) Ltd vs Dahl-Jensen (UK) Ltd [2000], the court need not look into whether the adjudicator made the correct decision. Instead he considered whether the adjudicator had jurisdiction to make an award of costs pursuant to the late payment legislation.

In a succinct judgment, Mr Jonathan Acton-Davis QC, sitting as a deputy judge of the TCC, found that the adjudicator did have jurisdiction. Therefore he granted the contractor summary judgment of the amount of the award. While it’s not the first time a party has recovered its adjudication costs (see The Board of Trustees of National Museums and Galleries on Merseyside vs AEW Architects and Designers Ltd [2013]), it is the first case I am aware of in which a party has successfully recovered its adjudication costs under the late payment legislation.

The law remains unclear as to whether the adjudicator was correct to make an order as to costs. Parliament does seem to have intended to stop adjudicators awarding costs without both parties’ consent.

On the other hand, the late payment legislation came into effect after the act was amended, and applies to the late payment of commercial debts arising out of the sale of goods or the provision of a service, and does not expressly exclude construction operations. Consequently, the position is arguable until there is a higher court judgment on the point.

What is clear is that while the position is in flux, in certain circumstances you may succeed in persuading an adjudicator to award your costs, so it would be foolish not to ask for them. After all, if you don’t ask, you don’t get.

Catherine Gelder is a construction partner at Berwin Leighton Paisner