We are often asked by clients whether they can recover their costs of an adjudication (legal fees, expert fees etc.) if they are successful. Similarly, we often act for clients faced with claims made by other parties for such costs. This is a reflection of the general rule which applies to litigation in the courts in England and Wales - that the unsuccessful party pays the successful party's reasonable and recoverable costs.

Purpose of adjudication

Adjudication was introduced to protect cashflow in the construction industry and to provide a faster mechanism than court proceedings for resolving disputes that might otherwise affect cashflow. It is widely accepted that what adjudication has become today (parties represented by lawyers, and substantive submissions across several lever arch files often including witness statements, expert reports) was not what was originally intended. This is, however, a reflection of the fact that disputes dealt with in adjudication will rarely be subjected to later court proceedings.

Costs of adjudication – the general position

Under the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act), an adjudicator has no jurisdiction to decide that one party to the adjudication should pay some or all of the costs of another party unless the parties expressly agree to confer that jurisdiction.

The sole exception – adjudication costs recoverable by agreement

In Northern Developments (Cumbria) Limited v. J & J Nichol [2000] EWHC 176 (TCC), it was held that while adjudicators have no jurisdiction to decide who is liable for the costs of the adjudication, parties could provide the adjudicator with that jurisdiction by agreement. In this case, the judge found that both parties had agreed that the adjudicator should deal with the question of costs. As a result, the adjudicator had jurisdiction to award costs.

The Construction Act was amended by the Local Democracy, Economic Development Act 2009, which (amongst other things) inserted a new provision into the Construction Act at section 108A to address the circumstances in Northern Developments. Effectively, section 108A provides that parties can insert a provision into a construction contract dealing with the costs of the adjudication. However, to be effective, this provision must be included, in writing, in the construction contract and permit the adjudicator to allocate his fees and expenses between the parties. (Note that the majority of standard construction contracts provide that each party will bear their own costs of an adjudication.)

Alternatively, under section 108A, the parties can agree to the allocation of costs in a separate agreement in writing made after a party has served its notice of adjudication (in other words, after a party has commenced an adjudication under the construction contract).

Many of the bodies that nominate adjudicators and provide rules for adjudication, such as the ICE, TeCSA, TECBAR and CEDR, do not permit the recovery of costs unless the parties otherwise agree.

The possible loophole

A possible loophole arose as a consequence of National Museums and Galleries on Merseyside v. AEW Architects and Designers Ltd [2013] EWHC 2403 (TCC). This case was decided in 2013, after the introduction of section 108A, and therefore represents an exception to the general rule outlined above.

In National Museums, a successful attempt was made to recover legal and expert costs incurred in defending an adjudication from a third party whose breach of contract was said to have brought about the need for adjudication.

In essence, the Museum sought to recover these costs from AEW Architects, alleging that the costs were reasonably foreseeable as a result of the architect's negligence. Had the architect not been negligent, the adjudication would not have been necessary and the costs would not have been incurred. Mr Justice Akenhead agreed and found that adjudication had become “a fact of life” in the construction industry and accordingly such costs were reasonably foreseeable, had been caused by the architect's negligence and were recoverable as a separate head of damages.

It is, however, debateable how much weight can be placed on National Museums. In a more recent judgment in Husband and Brown Ltd v. Mitch Developments Ltd [2015] EWHC 2900 (TCC), the court confirmed that “to allow the Claimant to recover its costs of Adjudication would subvert the statutory scheme [under the Construction Act] which does not allow for such costs.” On this basis, the decision in National Museums is very much confined to its facts.

The latest argument – costs recoverable as a consequence of Late Payment of Commercial Debts (Interest) Act 1996

Recently, there has been a rush of parties attempting to recover costs under the Late Payment of Commercial Debts (Interest) Act 1996 (the Late Payment Act). In short, amendments to the Late Payment Act made in 2013 allow parties a right to recover their “reasonable costs" incurred in the act of recovering a debt caught by the Late Payment Act.

Parties were offered encouragement in attempts to recover adjudication costs under the Late Payment Act following a case from last year - Lulu Construction Ltd v. Mulalley & Co Ltd [2016] EWHC 1852 (TCC). The consequence of this case was that legal costs associated with an adjudication could be recovered in certain situations where the Late Payment Act was engaged and the legal costs incurred were debt recovery costs incidental to the dispute.

This finding appeared to be contrary to the position set out above under the Construction Act and existing case law. However, this contradiction has now been clarified in a recent judgment from Mrs Justice O'Farrell (which, at the time of writing, has not been formally reported) in Enviroflow Management Ltd v. Redhill Works (Nottingham) Ltd [2017] (unreported,16 August 2017).

As the judgment was not reported, we do not know the exact circumstances or arguments before the court. However, we understand that it was held that while a party may have an implied right under the Late Payment Act to recover debt recovery costs, this implied term is caught by the express provisions of section108A of the Construction Act. In other words, to be enforceable, any agreement as to the costs of an adjudication must be in writing and made after the notice of adjudication is given.

The current position – can I recover the costs of adjudication if I am successful?

In short, it seems to have been settled (for the time being at least) that a party cannot recover its legal and expert costs of adjudication from the losing party unless section 108A of the Construction Act is complied with. In other words, if costs are to be recoverable, the parties must have given the adjudicator jurisdiction to deal with costs either in writing in the construction contract or by agreement made after the notice of adjudication is served.