It is generally accepted that the intention behind the Housing Grants, Construction and Regeneration Act 1996 (HGCRA) was that parties to adjudication should bear their own costs, but the legislation was silent on this point. The Local Democracy, Economic Development and Construction Act 2009 clarified the position by introducing section 108A, which renders any agreement allocating responsibility for the costs of an adjudication unenforceable unless it is; i) a written clause within the construction contract that confers power on the adjudicator to allocate his fees and expenses, or ii) an agreement in writing following the giving of the notice of adjudication. Section 108A HGCRA is therefore clear that there is no automatic right to recover the costs of an adjudication, and that they can only be recovered in very limited circumstances.

However, recently we have seen flickering embers of a new trend on a much discussed topic; the uncertainty surrounding recoverability of adjudication costs under the Late Payment of Commercial Debts (Interest) Act 1998 (LPCDIA), and the apparent conflict with the HGCRA. The recently reported TCC decision in Lulu Construction Limited v Mulalley & Co Ltd [2016] EWHC 1852 (TCC) might therefore just be the kindling required to ignite this trend over the next six to twelve months.

Background

In contrast to the express provision of section 108A HGCRA, the Late Payment of Commercial Debts Regulations 2013 introduced a new section 5A(2A) into the LPCDIA, which enables a creditor to any type of commercial contract to claim "a sum equivalent to" its reasonable costs of recovering the debt (debt recovery costs). The debt must be a part or whole of the contract price and be a debt to which statutory interest applies, and the creditor's costs must not be reasonably satisfied by the fixed sum initially granted. However, provided this criteria is satisfied, the right to debt recovery costs is automatic.

Despite the apparent conflict, we have seen the emergence of parties to adjudication seeking debt recovery costs under section 5A(2A) LPCDIA, with some success. The most common argument seen to date is that section 5A(2A) LPCDIA does not allow the recovery of a party's adjudication costs, but allows the recovery of "a sum equivalent to" that 'loss'. While plausible, this is a highly technical distinction. There are of course other schools of thought as well. The case of Lulu Construction Limited v Mulalley & Co Ltd therefore seemed to be prime opportunity to get the court's view on this apparent conflict.

Lulu Construction Limited v Mulalley & Co Ltd

The adjudication in Lulu was unusual in that it was the paying party (Mulalley) that referred the dispute to adjudication. The debt recovery costs were therefore sought by the responding party (Lulu) within its Rejoinder. Mulalley submitted a jurisdictional challenge on the basis that the debt recovery costs did not form part of the referred dispute within the Notice, and that, if claimed by Lulu, these should have been claimed in the Response in any case.

The adjudicator decided that he had jurisdiction and awarded Lulu £240,324.77, including a sum for debt recovery costs. Mulalley refused to pay the debt recovery costs, and Lulu commenced enforcement proceedings and applied for summary judgment.

In the TCC, Deputy Judge Acton-Davies QC found that the claim for the costs of running the adjudication were so closely connected to the referred dispute that they should properly be considered part of it - notwithstanding that this was contained in the Rejoinder as opposed to the Response. The Judge relied on a decision in a previous case, Allied P&L Ltd v Paradigm Housing Group Ltd [2009] EWHC 2890, where the court found that a dispute could extend to claims for discretionary costs and interest, which were "connected with and ancillary to the referred dispute". Deputy Judge Acton-Davies QC held that the adjudicator had jurisdiction and his decision ought not to be impeached; there was therefore no need to decide or provide any comment on the correctness of the award by the adjudicator of debt recovery costs.

So what?

The decision to enforce the adjudicator's award without reviewing the correctness of the decision is of course expected, given the strict approach to enforcement by the TCC. However, parties to adjudication may misconstrue this as a "rubber stamp" approval of the award of debt recovery costs.

From a practical perspective, we expect parties to cite Lulu as 'authority' that debt recovery costs can be claimed, and adjudicators may well be persuaded by this. In addition, Lulu makes clear that, provided debt recovery costs fall within the adjudicator's jurisdiction, the court should not interfere with the decision. This will therefore leave the 'losing' (paying) party with little recourse.

Debt recovery costs appear to be here to stay (at least for the time being), despite never actually having been ratified by court, and could be a valuable weapon in construction disputes. We therefore expect Lulu, rightly or wrongly, to increase the number of claims for debt recovery costs in adjudication.

Where next?

The apparent conflict between section 108A HGCRA and section 5A(2A) LPCDIA, was not argued before the Judge in Lulu (the challenge focussed on the debt recovery costs not being claimed within the Notice and only being raised within the Rejoinder), and therefore the judge did not comment upon it.

One might argue the position is quite clear; the LPCDIA is the generally applicable position in relation to commercial contracts (in the widest form). The HGCRA is a more specific statute that restricts this general position in relation to adjudication - not contradictory, but supplementary.

There are also practical issues with the recoverability of debt recovery costs, which might support that section 108A HGCRA should prevail. The LPCDIA would create a two-tiered adjudication system, where LPCDIA provides an automatic right to debt recovery costs for some parties, but section 108A HGCRA restricts the recovery of adjudication costs for others (unless there is an agreement between the parties). A two-tiered system like this could cause issues where, for example, a building contract is restricted by section 108A HGCRA, but the supply chain contracts can fall under section 5A(2A) LPCDIA; leaving the main contractor out of pocket. This would de-stabilise a scheme that’s whole purpose is to create a level playing field throughout the construction supply chain.

In addition, there will likely be inconsistency between adjudicators' decisions on the applicability of the LPCDIA. Not only will this give rise to unfairness (even for a "quick and cheap" interim binding solution), but it may encourage further adjudicator shopping; an already increasing problem that has received heavy criticism from the TCC.

The decision in Lulu is not conclusive either way and the door remains very much open on whether or not there is a conflict. For now, it appears as though Lulu could have a significant practical impact and become the next big trend in adjudication.

It will be interesting to see whether the TCC will get an opportunity to address the apparent conflict between section 108A HGCRA and section 5A(2A) LPCDIA soon and, if so, whether they choose to take it.

*This article was originally published as guest editor in Construction Law on 5 December 2016.