There continues to be a steady stream of adjudication enforcement cases going through the courts, which tend to suggest that adjudication remains a popular form of dispute resolution. James Mullen looks at some of the most important developments from the last few months, starting with the question about whether a party can recover the costs incurred during the adjudication process.

Adjudication Costs

It is well established that a party’s ability to recover its adjudication costs is limited. However that has not stopped parties from trying to assert that they are entitled to payment of their costs. A decision from Mrs Justice O'Farrell has provided important guidance and clarity on this issue.

It is generally accepted amongst legal practitioners that the wording of section 108A of the Housing Grants, Construction and Regeneration Act 1996, as amended (“Construction Act”), prevents parties from agreeing that an adjudicator can allocate party costs unless there is a written agreement made after the start of the adjudication.

Such agreements rarely happen in practice meaning that in the vast majority of cases, each party bears its own adjudication costs. However, whilst adjudication is intended to be a quick and inexpensive dispute resolution process, the costs can be significant. As a result, parties have come up with various arguments to try to recoup their adjudication costs.

For a while during the past year, it was thought that a party may be able to recover its adjudication costs as a debt under the Late Payment of Commercial Debts (Interest) Act 1998 (“Late Payment Act”).

Support for this line of thought was reinforced by the case of Lulu Construction Ltd v Mulalley & Co Ltd.1 Here, Mulalley (who were effectively the paying party) commenced adjudication proceedings to resolve the value of Lulu’s claim under the parties’ subcontract. In its rejoinder, Lulu included for the first time a claim of £48k for “debt recovery costs” claimed under the Late Payment Act.

The adjudicator awarded Lulu its debt recovery costs. Mulalley argued that the head of claim was not within the scope of the referral and was not something which could be run as what might be called a defence. The Judge disagreed, finding that the costs were clearly connected with and ancillary to the referred dispute and must properly be considered part of it. Therefore the adjudicator had jurisdiction to decide that element of the dispute.

However, the TCC has recently firmly shut the door on this potential route of recovery in Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd. Although the case is unreported it appears that the adjudicator had awarded Enviroflow £81k plus interest and also its reasonable costs of recovering the debt in the amount of £14,900 plus VAT under the Late Payment Act.

On enforcement, it seems that Mrs Justice O'Farrell referred to:

(i) section 5A of the Late Payment Act which implies a term into a contract that a successful party is entitled to its reasonable costs of recovering a debt; and (ii) section 108A of the Construction Act which says that the costs of an adjudication can only be awarded where such a provision has been made in writing.

Therefore, whilst Enviroflow was entitled to seek its reasonable costs by the implied term under section 5A of the Late Payment Act, such an implied term was caught by section 108A of the Construction Act and is therefore ineffective unless agreed in writing. It was common ground that there was no written agreement and so the adjudicator did not have jurisdiction to award Enviroflow its debt recovery costs.

Parties have also attempted to recover adjudication costs as part of the costs of subsequent legal proceedings opening up the results of the adjudication (i.e. not enforcement proceedings). In WES Futures Ltd v Allen Wilson Construction Ltd,2 Mr Justice Coulson had to consider whether a Part 36 offer included adjudication costs. Here, there had been a number of disputes between the parties, including adjudications. In February 2016, WES made a Part 36 offer which said that if:

“this offer is accepted at a point which is more than 21 days from the date of this offer, you will be liable for all our client’s legal costs incurred in this case”.

Unexpectedly, Allen Wilson accepted the offer. Both parties agreed that there was a binding compromise but a dispute arose as to whether the agreement included WES’s costs of two previous adjudications. The Judge found that WES’s offer was a valid Part 36 offer. Applying CPR 36.13(1), he was clear that adjudication costs were not “costs of the proceedings” and so were not recoverable. The Judge also considered the position if the offer had not been a valid Part 36 offer and concluded that there was no difference because in his view “all [Futures’] legal costs incurred in this case” related to the imminent court proceedings. The offer made no reference to costs in adjudication proceedings.

Mr Justice Coulson also referred to two wider principles that supported his view:

(i) pursuant to the Construction Act, costs incurred in adjudications are not recoverable so if a successful party cannot recover its costs in the adjudication itself, it cannot recover them in enforcement proceedings either; and (ii) recoverable pre-action costs do not normally include the costs of separate, stand-alone ADR proceedings such as adjudication.

These cases reinforce the well established principle that a party’s ability to recover its adjudication costs is limited.

Guidance on enforcement

Having lost an adjudication, it is common for the losing party to look for ways to resist enforcement of the adjudicator’s decision. However, it is important to remember that the grounds to resist enforcement are restricted. If the adjudicator has decided the issue that was referred to him and he has broadly acted in accordance with the rules of natural justice, the court will enforce the decision,3 even if the adjudicator has made an error.4

It seems that the TCC has become concerned with the number of disgruntled parties looking to resist enforcement by commencing Part 8 proceedings5 seeking declarations as to errors made by the adjudicator and/or attempting to rerun large parts of the adjudication at the enforcement hearing.

In Hutton Construction Ltd v Wilson Properties (London) Ltd6 Mr Justice Coulson took the opportunity to give some helpful guidance on the appropriate use of the Part 8 procedure in adjudication enforcement. In his judgment, he noted that there had been a number of cases where a defendant had sought the final determination of disputes by way of court declarations. However, all these examples involved a large degree of consent between the parties.

Where there is no consensual process, a defendant seeking to resist enforcement on the basis of its Part 8 claim must demonstrate that:

(i) the issue is short and self-contained and that it arose in the adjudication proceedings; (ii) the issue does not require oral evidence, or any other elaboration beyond that which is capable of; and (iii) the issue is one which, on a summary judgment application, it would be unconscionable for the court to ignore. He also said that any Part 8 application must be issued promptly and set out the declarations sought. Mr Justice Coulson said many of the Part 8 applications currently being made by disgruntled defendants (and which are not the subject of the consensual process) are an abuse of the court process and warned that any defendant who unsuccessfully raises this sort of challenge on enforcement will almost certainly have to pay the claimant's costs of the entire action on an indemnity basis.7

Waiving the right to challenge an adjudicator’s decision by making a slip rule request without reserving your position

Whilst the grounds to resist enforcement of an adjudicator’s decision are limited, a defendant may lose its right to raise an argument on enforcement altogether if it fails to reserve its position on the adjudicator’s decision at the appropriate time. A good example of this is the case of Dawnus Construction Holdings Ltd v Marsh Life Ltd.8

Here, Marsh commenced adjudication seeking a value of the account following termination. The adjudicator decided in favour of Dawnus and awarded just under £1.5m. Both parties wrote to the adjudicator raising a number of slips: Dawnus raised some mathematical errors but Marsh raised more substantive issues, alleging a breach of natural justice on the grounds that the adjudicator had failed to consider the arguments raised by Marsh during the adjudication.9

Crucially, when Marsh wrote to the adjudicator it did so without a general reservation of rights. The adjudicator amended the quantum but rejected the more substantial points raised by Marsh.

At enforcement, Marsh maintained its breach of natural justice argument. However, first the Judge had to decide whether Marsh had lost the right to raise such an argument at all, having invited the adjudicator to correct errors under the slip rule without a general reservation of rights.

The Judge decided that Marsh had waived its right to challenge the adjudicator’s decision, noting that the doctrine of election prevents a party from “approbating and reprobating” or “blowing hot and cold” in relation to an adjudicator's award. Marsh could have, but did not, expressly reserve its right to pursue a claim of breach of natural justice when inviting the adjudicator to make corrections under the slip rule. Absent such reservation, by inviting the adjudicator to exercise his powers under the slip rule, Marsh had waived or elected to abandon its right to challenge enforcement of the decision since it had elected to treat the decision as valid.

Whilst in this case Marsh was the referring party, it is good practice for a responding party at the outset of any adjudication to reserve its position generally on the adjudicator’s jurisdiction to determine the dispute referred. In addition, when a specific ground for challenge arises (e.g. a potential breach of natural justice) it is important for that challenge to be raised promptly and for a party to reserve its position in relation to that challenge, otherwise there is a risk that a party will be found to have waived its right to raise it at a later date.

Payment and pay less notices

“Smash and grab” adjudications have become a common occurrence over recent years. Central to these disputes is whether a valid payment or pay less notice has been served. In Surrey and Sussex Healthcare NHS Trust v Logan Construction (South East) Ltd,10 the TCC gave guidance on what constitutes a valid payment and pay less notice.

The Trust had engaged Logan to refurbish various parts of a hospital. The works were certified as practically complete and the Certificate of Making Good was issued. The Final Certificate was due on 21 September 2016 and a final account meeting between the Contractor Administrator (“CA”) and Logan’s Quantity Surveyor (“QS”) was arranged for that day. Just before midnight on 20 September 2016, Logan’s QS sent an email with various attachments including one called ‘Interim Payment Notice’ claiming a balance due of approximately £1m.

No agreement was reached at the final account meeting and later that day, the CA issued the Final Certificate certifying a balance of approximately £14k as due to Logan. In his covering email, the CA acknowledged Logan’s interim payment notice but suggested that it was “out of date and void” and that “in any event, the details stated in the Final Certificate are the same as would have been stated in any final Interim Certificate which may have been issued”.

Logan commenced adjudication proceedings. The adjudicator decided that Logan’s interim payment notice was valid and the Trust had not served a pay less notice, so Logan was entitled to the amount claimed.

The Trust commenced Part 8 proceedings11 seeking declarations that (i) Logan did not issue a valid interim payment notice on 20 September 2016; and (ii) the CA’s email and attachments sent on 21 September 2016 constituted a valid pay less notice, which was served on time.

The Judge found that the interim payment notice was valid because it was in substance, form and intent an interim payment notice and it was clear and free from ambiguity.

Of interest, however, is the Judge’s guidance on what constitutes a valid pay less notice. The Judge decided that the CA’s email and attachments were a valid pay less notice.

The issue was whether the email and attachments, when read together, were intended to constitute a pay less notice. It was wrong to focus on the specific language in the covering email and instead focus on the overall message and purpose that the email and attachments would have conveyed to the reasonable recipient.

Whilst it is an essential requirement that the sender should have the requisite intention, that intention must be derived from the manner in which it would have informed the reasonable recipient. Here, the overall message and purpose conveyed by the email was that if the CA was wrong about the contractual position, he was valuing the work on the same basis as had been set out in detail in the Final Certificate and accompanying breakdown, and that this was the only sum to which Logan was entitled whether by way of final account or by way of interim payment.

The Judge also said that it is not necessary for a pay less notice to have that title on its face or to make specific reference to the contractual clause in order to be valid. Notwithstanding this, our advice to employers is that it is always best practice to ensure that a pay less notice clearly states on its face what it is.

Conclusions

Whilst these cases all deal with different issues, taken together with the additional adjudication summaries taken from our monthly newsletter Dispatch, to be found on page 42, they provide continued evidence of the regular use of adjudication within the construction industry and the support given by the judiciary to that use