It was generally understood that parties to an adjudication could not recover their costs of participating in that adjudication. But as I discussed in an earlier blog, last year the decision in Lulu Construction Ltd vs Mullaley & Co Ltd [2016] seemed to open to the door to recovery under the Late Payment of Commercial Debts (Interest) Act.

In Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd (unreported, TCC, 16 August 2017), O’Farrell J considered the point again and appears to have closed the door to the recovery of adjudication costs. However, as this judgment was unreported, the position is not entirely clear, and indeed more recent case law seems to support the judgment in Lulu. So, what is the position?

Inconsistency between the Construction Act and the Late Payment Act

The issue arose as a result of the apparent inconsistency between the Housing Grants, Construction and Regeneration Act, as amended (“the Construction Act”) and the Late Payment of Commercial Debts (Interest) Act, as amended (“the Late Payment Act”):

  • Section 108A of the Construction Act states that adjudicators cannot determine that one party is responsible for the others party’s costs, unless the parties agree to this after the adjudication has begun.
  • Section 5A of the Late Payment Act implies a term into a contract for the supply of goods and services, that a successful party is entitled to 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.

In Lulu Construction vs Mulalley & Co, the referring party, an employer, asked for a declaration as to the value of the final account. Its submissions did not refer to the costs incurred in the adjudication or who should bear them. The responding party, a contractor, set out its case as to the value of the final account and pursuant to the Late Payment Act claimed its “debt recovery costs”, that is the costs it incurred in participating in the adjudication.

The adjudicator decided that the employer should pay the contractor’s costs incurred in participating in the adjudication. On enforcement, the judge did not look at whether or not the adjudicator was correct to award the contractor its costs. Instead he considered whether the adjudicator had jurisdiction to make an award of costs pursuant to the late payment legislation. Mr Jonathan Acton-Davis QC, sitting as a deputy judge of the TCC, found that the adjudicator had jurisdiction to award costs on this basis. Therefore he granted the contractor summary judgment in the amount of the adjudicator’s decision.

Since then, it has become common practice for contractors and subcontractors to claim their costs under the Late Payment Act.

However, in Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd, Mrs Justice O’Farrell considered the question again. The building contract was an oral contract. As in Lulu, the parties had not agreed that the adjudicator could award costs, but the winning party had claimed them as debt recovery costs under the Late Payment Act.

At a summary judgment hearing to enforce the decision, Mrs Justice O’Farrell held that the adjudicator did not have jurisdiction to make an award of costs, and severed that part of the decision, seemingly bringing an end to the practice of recovery of adjudication costs under the Late Payment Act.

As far as we can tell from the coverage of the case, she said that section 5A of the Late Payment Act provided for an implied term but that this was ousted by section 108A of the Construction Act, which required all agreements as to costs to be in writing. Therefore, since there was no agreement to this effect in writing, the adjudicator had no jurisdiction to award costs in this case.

However, this does not appear to be the end of the matter, as in another unreported judgment (Actavo v Doosan Babcock) O’Farrell J appears to have followed the decision in Lulu, and enforced an adjudicator’s decision which awarded costs under the Late Payment Act. It is really difficult to tell what the distinguishing facts are without reading the full judgments, but it appears that the distinguishing feature in Enviroflow might have been that it was an oral contract.

The law as it stands is in need of clarification. It seems clear that adjudicators should not be awarding costs under the Late Payment Act, but if they do, their decision will (probably) be enforced (unless you have an oral contract). It looks as though the door to recovery of costs in an adjudication isn't entirely closed yet.