This time last year there was much focus on the amusingly titled case of Lulu Construction v Mulalley & Co Ltd [2016] EWHC 1852, an enforcement decision where Lulu, which won an adjudication, persuaded an adjudicator to also award payment of its legal costs by Mullaley, and the TCC enforced that part of the award. Many commentators criticised that decision because section 108A of the Housing Grants, Construction and Regeneration Act 1996 (as amended) (‘the Construction Act’) does not permit the recovery of legal costs in adjudication without written agreement. Two recent decisions have reinforced the view that recovery of costs in adjudication is not appropriate unless explicitly agreed.

Before looking at those cases, it is worth remembering that recovery of costs in the Lulu adjudication was enabled by the provisions permitting the reasonable costs of debt recovery at section 5A of the Late Payment of Commercial Debts (Interest) Act 1998 (‘the Late Payment Act’). The adjudicator applied those provisions and the TCC felt that since he had answered the question that was put to him, it would enforce his decision (even if his findings were legally dubious). I wrote in some detail about that case a year ago (‘Lack of interest pays off’), and said that the costs recovery situation is perverse because it means that, thanks to the Late Payment Act, those who have not entered into a written contract are in a better position than those who have, such as a JCT Contract which provides for 5% interest on late payments (a ‘substantial remedy’ under the Late Payment Act). A contractual ‘substantial remedy’ dis-applies the Late Payment Act, including the right to recover reasonable legal costs.

The classic statement on the prohibition of recovery of costs in adjudication came from HHJ Wilcox in Total M&E Services Limited v ABB Building Technologies Limited [2002] EWHC 248, in which he said “…since the Act does not provide for the recovery of costs the claim is misconceived. Furthermore, this claim is put as a claim for damages for breach of contract arising out of ABB’s failure to pay. Because the Statutory Scheme envisages both parties may go to Adjudication and incur costs which they cannot, under the Act recover from the other side, it follows that such costs cannot therefore arise as damages for breach….To permit such claim would be to subvert the statutory scheme under the Act.”

So the Construction Act has always required each party to bear their own costs of an adjudication unless they agree otherwise. The traditional position was reinforced later last year by the judgment of Mr Justice Coulson in Wes Futures Ltd v Allen Wilson Construction Ltd [2016] EWC 2863 (TCC). There, WES had made a valid Pre-action ‘Part 36 Offer’ (i.e. a qualifying offer under Part 36 of the Civil Procedure Rules) on 11 February 2016 to accept £65,000.00 plus VAT in full and final settlement of its claim against Allen Wilson, plus costs (‘the Offer’). In open correspondence the same day, imminent court proceedings were threatened. However, WES instead referred the dispute to adjudication and obtained a favourable adjudicator’s award in the sum of £86,469.21 plus VAT and interest, well in excess of the Offer. Allen Wilson refused to pay the award but instead accepted the Offer, which to be a valid Part 36 Offer had to remain open for acceptance until such time as it was withdrawn.

The TCC had to decide whether the costs incurred in the adjudication formed part of “the costs of the proceedings” for the purpose of CPR 36.13(1). If they did, then WES could recover them. However, Coulson J held that “That means the cost of the court proceedings, threatened in February but not actually commenced until later. It is, I think, agreed that the costs of the adjudications are not costs of the proceedings. So if this was a Part 36 offer, it would exclude the costs of both the earlier and the later adjudications, which would not be recoverable.”

He later elaborated at paragraphs 15 – 19 of his judgment, citing two principal reasons for holding that the costs envisaged by the Offer were not those incurred in the adjudication: “The first is that, in an ordinary case, a party seeking to recover a sum awarded by an adjudicator is not entitled to (and cannot seek) the legal costs it incurred in the adjudication itself. That is because, pursuant to the Housing Grants (Construction and Regeneration) Act 1996, as amended, 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 “Secondly, “costs of proceedings” … will not normally include the costs of separate, stand-alone ADR proceedings such as adjudication….”

Coulson J drew support for this ‘stand-alone Alternative Dispute Resolution proceedings’ analysis from two cases, Lobster Group Ltd v Heidelberg Graphic Equipment Ltd [2008] EWHC 413 (TCC) and Roundstone Nurseries Ltd v Stephenson Holdings Ltd [2009] EWHC 1431 (TCC). In both cases it was held that the costs of a pre-action mediation could not subsequently be recovered as costs of the court proceedings because the parties had agreed that they would each bear their own costs of that mediation. By analogy to adjudication, he said “That is effectively achieving by an agreement to mediate what the 1996 Act requires for adjudication, and the result is the same: the costs are the subject of a different regime and are not recoverable….. Accordingly, for all those reasons, I conclude that Futures are not entitled to recover from Wilson their costs of the adjudications.”

By spelling out that adjudications are stand-alone ADR proceedings, albeit based on statute, Coulson J was effectively backing Wilcox J’s analysis of the Construction Act in Total M&E, and if the costs of adjudication are immune from CPR Part 36, does that mean they’re immune from the Late Payment Act too?

That dichotomy between section 108A of the Construction Act and section 5A of the Late Payment Act was addressed by the TCC on 16 August 2017. In Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd, Mrs Justice O’Farrell DBE dealt with their respective statuses. No judgment text is available yet.

A dispute arose about payment for some IT installation works, and Enviroflow referred the matter to adjudication. The adjudicator found for Enviroflow and awarded it £81,000 plus interest, and its reasonable costs of recovering the debt, VAT and the adjudicator’s fees. Redhill refused to pay so Enviroflow sought to enforce the adjudicator’s decision; it appears from the summary we have seen that O’Farrell J had no hesitation in doing that where the substantive claim was concerned..

Enviroflow’s costs incurred in the adjudication were a different matter though. Section.5A of the Late Payment Act provided for an implied term in a contract, that a successful party was entitled to its costs of recovering a debt. However, section 108A of the Construction Act provided that where a construction contract had been referred to adjudication, the costs of an adjudication could only be awarded where the parties had expressly agreed that, and in writing. It was held that the implied term under s.5A was caught by s.108A of the Construction Act and was ineffective unless an agreement had been made in writing. Both parties accepted that no agreement had been made in writing. The adjudicator therefore had had no jurisdiction to make a costs award. O’Farrell J declined to allow Enviroflow to recover its costs incurred in the adjudication.

We will have to wait for the judgment to get the full reasons, but it appears that s.108A of the Construction Act trumps s.5A of the Late Payment Act, despite both being statutes. Arguably this is correct because, after all, s108A is a specific safeguard concerned with adjudication costs in particular; it also provides that where there is an agreement on costs, the adjudicator must have complete discretion (for reasons explained below). Section 5A however is concerned with debt recovery costs in general, but not every adjudication concerns a debt; many concern losses which, if they were litigated, would be classified as damages e.g. loss and expense claims arising from prolongation of a contract.

In the light of WES and Enviroflow, it is now difficult to see how adjudicators can continue to award legal costs to victorious parties unless there is an agreement which is compliant with s.108A of the Construction Act. The enthusiasm for Lulu was understandable, but it overlooked the fact that the judgment only served to confirm that judges rarely decline to enforce adjudicator’s decisions, not that the adjudicator was right to apply s.5A of the Late Payment Act. Enviroflow in particular now shows that on the costs recovery issue, TCC judges are now likely to sever a costs award from the substantive award where the parties have not adhered to s.108A of the Construction Act.

Recovery of the costs incurred in a adjudication may be recoverable as damages against negligent third parties though; see National Museums and Galleries on Merseyside (Trustees of) v AEW Architects and Designers Ltd and another [2013] EWHC 2403 (TCC) for example.

What does this mean for you or your business?

These cases reinforce my view that intervention by Parliament will be necessary before there will be an automatic right for every winner to recover their reasonable adjudication costs from the loser. It would not be prudent to forego the risk-protection a contract can confer just to come within the Late Payment Act with some forlorn hope of recovering costs in a future adjudication. That was true before Lulu – an oddity – and thanks to WES and Enviroflow it is even truer now. Until Parliament makes it possible for the successful party to recover costs incurred in adjudication as of right, it will be hard for smaller contractors to recover modest sums, except in the most straightforward of cases where they are confident in representing themselves.

What do you need to be doing now?

If you are keen to recover your legal costs in the event of adjudication, then if you agree this in your contracts, it will be enforceable. However, it must give the adjudicator full discretion to determine who is to reimburse whom, unlike the Tolent clauses of old which always made the referring party liable for costs regardless of who won the adjudication. Alternatively, the parties can confer the jurisdiction on the adjudicator to award legal costs, at any time after service of the Notice of intention to refer a dispute. However, there is no compulsion to agree this, so that rarely happens in practice.