Fighting it out on adjudication costs

26 November 2016

Two Acts of Parliament appear to offer contradictory positions on who pays an adjudicator's costs. Jonathan Parker attempts to find out if there can be an overall winner.

Jonathan Parker

This column considers the often confusing and much-debated position for recovering costs in adjudication. Thankfully, it is all perfectly clear and easy to grasp because Section 108A of the Housing Grants and Construction Regeneration Act says unequivocally that parties cannot include provisions in their contract for the allocation of the other side’s costs in adjudication. And, coming from the lofty echelons of an Act of Parliament, nobody is going to question the effects of that provision… right?

Well, that is until we run into another Act of Parliament that arguably provides the contrary. The legislation fighting out of the blue corner in this instance is the Late Payment of Commercial Debts (Interest) Act 1998. Let’s just call them the Construction Act and the Commercial Debts Act for now.

What are the two Acts fighting about? 

Section 5A of the Commercial Debts Act conveys a right to the costs of recovering a debt, which could extend to a party’s costs in adjudication. The Commercial Debts Act came into force in 2013, and although there has been some consideration over the potential clash between these Acts before, this debate has raised its head most recently following the judgment in Lulu Construction Ltd v Mulalley & Co Ltd.

Here the High Court enforced an adjudicator’s decision which included an award under the Commercial Debts Act of almost £48,000 for what it described as “debt recovery costs”.

In the red corner there is section 108A of the Construction Act. This limits the recovery of costs subject to two exceptions. The first exception is that a contract can state that the adjudicator decides who pays their fees and expenses – that is the easy part. What is being fought over between the two Acts is a party’s costs for instructing lawyers to represent them in an adjudication.

"There have been good fights put up from both camps - the truth is that the victor can only land the knockout blow with the courts or legislative intervention."

The second exception is for agreements between the parties to allocate costs after the adjudication has begun. In all my years of working in construction law, I have only seen this once.

So what is the legal position on the awarding of costs following the Lulu judgment? The short answer is nobody can be certain at this stage, and it will remain uncertain until we have a High Court judgement on precisely this question. But doesn’t the Lulu judgment answer the question as to recovery of a party’s costs?

I hear you ask Unfortunately it does not. Lulu was merely concerned with the enforcement of an adjudicator’s decision, and as we have seen before, enforcement can only be defeated on narrow grounds, such as the adjudicator being biased or lacking jurisdiction.

The courts will enforce an adjudicator’s decision even if they think it is wrong, and as bizarre as that may sound, I believe it is how things should be. Adjudication is supposed to provide quick access to a temporarily binding decision and if those decisions can be as quickly unpicked it would undermine the value of the process. And the parties will still have access to court or arbitration to have the decision reheard.

So we are left with the two positions slugging it out and a very real conflict between the two Acts. The Construction Act prohibits clauses in a contract that allocate payment of costs; whereas the Commercial Debts Act implies terms in contracts for the payment of interest and compensation arising out of late payment. 

The Commercial Debts Act also provides that “If the reasonable costs of the supplier in recovering the fixed debt are not met by the fixed sum (of £100), the supplier shall also be entitled to a sum equivalent to the difference between the fixed sum and those costs”.

The argument goes that it is reasonable to engage a lawyer in seeking to recover monies due through adjudication, especially if you are not familiar with the adjudication process, and so the above provision imposes a right to recover your costs.

Lawyer Rachel Gwilliam has written a superb Society of Construction Law paper on this topic and argues that there is no conflict between the two Acts because the Commercial Debts Act doesn’t award costs, but instead awards compensation, if the fixed amount of up to £100 is insufficient. If it is compensation that is being awarded, it cannot then be barred by the Construction Act provision that is concerned with costs.

Some see that as a fair and balanced position, since without it a paying party suffers little consequences for failing to pay, whereas the payee, whose cash flow has suffered, can end up out of pocket for costs of simply trying to get what was owed to them. 

My view? I have sympathy for costs being awarded because I have always seen adjudication as being there to help the little firm get paid and reduce subbie bashing, and that works better if they are not left with a costs size hole in their bank balance for the privilege of obtaining their money.

There have been good fights put up from both camps on this issue, but the truth is that the victor can only land the knockout blow with the courts or legislative intervention. Until then we’ll be wandering in to adjudications unsure about whether costs will be awarded or not. This is extremely significant when you look at the unexpected award of £48,000 of costs in the Lulu case.

Jonathan Parker is director of Quigg Golden Solicitors

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