The debate around adjudication costs has been brought to an end, where in a recent case, the sub-contractor's claim for adjudication costs was unsuccessful.

Background

The Late Payment of Commercial Debts (Interest) Act 1998 does not just provide for statutory interests on qualifying debts. It also provides for compensation for late payment. Under Section 5A(2a) of the Act, if the claimant's reasonable costs of recovering the debt are not met by the fixed compensation under the Act, the debtor is required to pay the balance of those reasonable costs.

That Act can apply, for instance, where a construction contract does not include interest provisions. In those cases, referring parties have been seeking payment of their own adjudication costs where they are successful in recovering a qualifying debt. Practice among adjudicators has been varied, as many considered this approach conflicts with the Construction Act (Housing Grants, Construction and Regeneration Act 1996). In particular, section 108A of Construction Act, which states that agreements to allocate parties' own costs of adjudication (as opposed to the adjudicator's costs) are ineffective unless made in writing after notice of adjudication is given.

Recent case

The recent case of Enviroflow Management Limited v Redhill Works (Nottingham) Limited concerned a sub-contractor's claim for payment for internet installation works.

The sub-contractor began an adjudication claiming payment, not just for the works, but also for its reasonable costs of recovering the debt in reliance on Late Payment of Commercial Debts (Interest) Act. It succeeded and the adjudicator awarded over £80,000 on the claim plus costs of nearly £15,000.

Unfortunately for the sub-contractor, the losing party did not simply pay up, and so it went to court to enforce the adjudicator's decision. The decision was challenged on a number of grounds, the relevant one for present purposes being that the adjudicator did not have jurisdiction to award the sub-contractor referring party its costs.

The Judge in the Technology and Construction Court agreed that the adjudicator did not have jurisdiction to make the costs award. Her reasoning was that the Late Payment of Commercial Debts (Interest) Act implied a term into the construction contract, whereas the Construction Act requires that in order to be effective, the term must be in writing.

Implications

In practice, this should mean an end to referring parties claiming their costs in adjudication.

The circumstances in which parties' own costs can be recovered are set out in Section 108A of the Construction Act. As explained above, these are limited to cases where contractual provisions are made in writing after the notice of intention to refer the dispute to adjudication. You might think this would never happen, but it has been known to occur inadvertently.

In the case of Northern Developments (Cumbria) v J&J Nichol, both the referring party and the responding party requested (in writing) that the adjudicator award the costs of the adjudication. This was held by the court to give rise to an implied agreement giving the adjudicator jurisdiction to award costs. Although a decision under the old wording of the Construction Act, the relevant wording is similar, so there is reason to believe that the case remains good law.

What does this mean for you?

Unless you are willing to risk costs being awarded against you if you lose, make sure you do not claim your own costs in adjudication.