Obstacles to recovering adjudication costs mean it might not be the best choice for complex disputes, write Akin Akinbode and Tracey Summerell.
Parties cannot recover legal costs incurred in adjudication without written agreement – after service of the adjudication notice – that the adjudicator has costs jurisdiction. That’s the general position, despite varying interpretations of section 108A of the Construction Act and recent court decisions that suggest alternative means to recover costs.
This basic principle makes adjudication potentially expensive for those embroiled in complex, high-value disputes. Such disputes are often referred to adjudication, contrary to what most envisaged when the process was introduced 20 years ago. They require intensive preparation to meet uncomfortably short deadlines, and do not come cheap.
Little wonder then that parties new to adjudication are horrified to learn they are unlikely to recover these costs, even if an adjudication decision in their favour is later upheld in court. It is therefore crucial that claimants consider which dispute resolution procedure is the most appropriate as soon as the dispute arises: for complex cases, that might not be adjudication.
Remember that the aim of adjudication was to keep cash flowing and projects on track. Limited to single disputes, it was designed to deal swiftly with discrete issues to avoid them blowing up into disruptive, damaging disputes.
The Construction Act was silent about adjudication costs: parties were to bear their own to keep the costs down. That intentional omission hasn’t stopped parties looking for ways to claim their costs, though. While the courts decided early on that adjudication costs claims subverted the act, they later held parties could agree to give an adjudicator jurisdiction over costs liability.
Parties started to include “Tolent clauses” in their contracts dictating who would pay adjudication costs and expenses regardless of the outcome. Such clauses discouraged parties from exercising their right to adjudicate and were outlawed in 2011 by section 108A, which allowed parties to give the adjudicator jurisdiction over legal costs by written agreement made after service of the adjudication notice (but note section 108A’s interpretation is likely to be subject to further judicial attention in future).
Despite section 108A, legal and expert costs were successfully claimed in National Museums and Galleries on Merseyside v. AEW Architects and Designers Ltd as a separate head of damages in subsequent litigation. However, most agree that National Museum’s very particular facts could well make it a one-off decision.
Some have tried to recover adjudication costs under the Late Payment of Commercial Debts (Interest) Act 1998 (the LPA) claiming they are reasonable costs incurred in recovering a qualifying debt under the LPA.
The LPA gives parties some hope of costs recovery but its scope is limited: the LPA is triggered only if the contract contains no substantial remedy for late payment (which most standard forms do). It also applies only to qualifying debts, not damages. An LPA claim did succeed in Lulu Construction Ltd vs Mulalley & Co Ltd, where the costs were held to be debt recovery costs incidental to the dispute, but Lulu seemed at odds with the Construction Act. Clarification came in Enviroflow Management Ltd vs Redhill Works (Nottingham) Ltd: the implied right under the LPA to recover adjudication costs as debt recovery costs breached section 108A: in effect, the Construction Act takes precedence over the LPA. (Note, however, that Robert Akenhead does not think LPA claims should be written off just yet.)
Faced with a complex dispute, it can be tempting to plan ingenious ways to claim irrecoverable costs. But such claims miss the point. Just because there is a right to adjudicate does not make it the best option. In fact, our standard advice for complex claims is to avoid adjudication: available funds can be better used in a facilitated negotiation, a mediation or even by starting the pre-action protocol procedure. These (and other procedures not available in adjudication, such as disclosure) might help you better understand the other party’s position and break the deadlock. Alternatively, they might reduce the issues in dispute ready for more focused adjudication proceedings.
If still lured by a quick adjudication decision, scrutinise the cost estimate. Weigh this up against adjudication’s statistically high success rate. Does the benefit of a quick decision (despite the risk of rough justice) and interim binding findings outweigh the irrecoverable costs? If the answer is still yes, take a strategic approach. Isolate the key issue central to the dispute. Its resolution could well lead to a negotiated settlement that more than justifies the cost outlay on the (hopefully) more manageable adjudication.
After serving the adjudication notice, you could still try to agree with the other party to give the adjudicator costs jurisdiction under section 108A: but don’t count on it.
A word to respondents. Usually you’ll know an adjudication is in the offing. Be brave; ask the question: “Is adjudication really the most sensible route?” If the other party is still determined, try to negotiate the issue for resolution before they serve the adjudication notice. Fortune favours the brave – and you might save a fortune in costs.