There is considerable lack of clarity around the recovery of adjudication costs which has been exacerbated by a recent case. We look at how and why cases are now subject to such uncertainty.
Despite some slightly unclear drafting, the statutory adjudication regime prescribed by the Construction Act does not appear to allow a successful party to recover its costs in any adjudication.
Conversely, section 5A of the Late Payment of Commercial Debts (Interest) Act 1998 allows a party to recover its reasonable debt recovery costs as compensation arising out of late payment. In the recent case of Lulu Construction v Mulalley, the successful party relied on this provision to recover its adjudication costs.
Mulalley referred a dispute to adjudication concerning the value of the sum due to its sub-contractor, Lulu which was seeking a final account of circa £1m. Therefore, unusually, the referring party was the paying party, albeit hoping for a decision which would reduce significantly the sum claimed. In its rejoinder, Lulu claimed it was entitled to its debt recovery costs pursuant to the 1998 Act. The adjudicator agreed, awarding £47,666.27 in respect of such costs, the vast majority of which comprised Lulu’s legal costs.
In the subsequent enforcement proceedings, Mulalley argued that the adjudicator did not have jurisdiction to award any debt recovery costs because it was not part of the dispute referred to him. The TCC upheld the adjudicator’s award on the basis that such costs were clearly connected with and ancillary to the referred dispute.
Some commentators have hailed this decision as a green light for a party to recover its adjudication costs by relying upon the Late Payment Act. This is wrong. The decision does not address at all whether the adjudicator was correct to award the debt recovery costs; rather it only deals with whether the adjudicator had jurisdiction to determine this point (which he did as such costs were clearly connected with and ancillary to the referred dispute). The courts will not refuse to enforce an adjudicator’s decision simply because the adjudicator incorrectly applied the law.
The other key point is that the 1998 Act only applies to contracts which do not contain a substantial remedy for late payment. If a contract imposes an adequate rate of interest on late payments, it will not apply. The majority of written contracts (particularly standard form building contracts) will contain such a provision provided that the rate of interest is not set too low. So if you set an interest rate at, say, 1% you are inviting trouble.
A further uncertainty is whether or not, simply because an adjudicator increases a sum that has been previously certified, that of itself brings the 1998 Act (which only relates to debts) into play.
Until the courts properly address this issue we expect arguments about costs will be unfortunately remain a feature of adjudications.