In this series we have already looked at Lulu v Mulalley and Wes Futures v Allen Wilson, following which we predicted that, while parties to adjudication would attempt to use the Late Payment Act to recover their costs of adjudication (citing Lulu v Mulalley as authority to recover adjudication costs as 'debt recovery costs'), the TCC would 'stay the course' on rejecting recoverability of adjudication costs as soon as it got the chance to deal with this developing line of argument. Our reasoning for this conclusion was that:
"The [Late Payment Act] is the generally applicable position in relation to commercial contracts (in the widest form). The [Construction Act] is a more specific statute that restricts this general position in relation to adjudication - not contradictory, but supplementary."
A recent unreported decision of Mrs Justice O'Farrell does just this.
O'Farrell not "Satisfied"
The decision of O'Farrell J in Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd (2017) (Ex Tempore) is of interest for the comments made by O'Farrell J in severing the award by the adjudicator of debt recovery costs - this was the first time (of which we are aware) that the court had been addressed on the interaction of the Late Payment Act and Construction Act.
As predicted in our commentary on Lulu v Mulalley, there has been an influx of parties to adjudication seeking to recover their costs of adjudication as 'debt recovery costs' under section 5A of the Late Payment of Commercial Debts (Interest) Act 1998 ("Late Payment Act"), and such an award had been made in Enviroflow v Redhill following a typical dispute over payment being referred to adjudication - the adjudicator awarded £81,000 plus interest and £14,900 in debt recovery costs.
Redhill refused to comply with the adjudicator's decision, and, in the subsequent enforcement proceedings, argued that the adjudicator had not had jurisdiction to award Enviroflow debt recovery costs, in accordance with section 108A of the Housing Grants, Construction and Regeneration Act 1996 ("Construction Act"), which requires that an agreement permitting this must be made in writing after the adjudication has commenced.
O'Farrell J held that:
"Accordingly, by reason of the 1998 Act, [Enviroflow] was entitled to seek its reasonable costs by reason of an implied term. However, such an implied term was caught by s.108A of the 1996 Act and was ineffective unless an agreement had been made in writing."
O'Farrell J held that the adjudicator therefore lacked jurisdiction to make a costs award, and severed the debt recovery costs from the remainder of the adjudicator’s decision.
The Construction Act narrowing the broad position under the Late Payment Act and preventing the recoverability of adjudication costs must be the correct interpretation of the interaction between the Late Payment Act and Construction Act given the clarity of the wording in section 108A of the Construction Act, and this aligns with our earlier conclusion - not contradictory but supplementary.
With any hint of 'approval' of using the Late Payment Act to recover the costs of adjudication in Lulu therefore having been well and truly banished by the decision of O'Farrell J in Enviroflow, we expect the recent trend of incorporating this line of argument to now gradually die out of adjudication; although, given the potential upside, it may well be 'thrown in' for some time to come.
It is unsurprising that the court continues to support the general position on recovering adjudication costs given the clear wording of the Construction Act, and as taken in Tolent, Wes Futures, and now Enviroflow.
However, we wonder whether O'Farrell J may, while so firmly closing this door, have in fact opened another in the further recent decision in Jacobs UK Ltd v Skanska Construction UK Ltd, where O'Farrell held that Jacobs was entitled to recover its wasted costs of a withdrawn (and subsequently re-started) adjudication.
O'Farrell J's reasoning was of course sound - the parties had entered into an "ad hoc agreement under which the procedure and timetable to resolve the referred dispute in the first adjudication were agreed and fixed. That went beyond mere agreement as to the timetable to be directed by the adjudicator in respect of an existing contractual or statutory adjudication and imposed new enforceable obligations on the parties." O'Farrell J therefore held that, in breaching this agreement, Skanska became liable for the associated wasted costs.
However, while this is sound from a general contract law point of view, and is very fact specific, O'Farrell J has hereby permitted the recovery of costs of adjudication (albeit wasted costs) despite no written agreement permitting this; exactly what she refused to do in Enviroflow - could this be the first inroad towards more general recoverability of adjudication costs?