Costs recoverability under the Construction Act

Costs recoverability under the Construction Act

Costs recoverability under the Construction Act

Are adjudication costs now recoverable under the late payment legislation? It might be safer to assume they are not, advises Michael Frisby, partner.

Since its introduction under the Housing Grants Construction & Regeneration Act 1996 ('Construction Act'), adjudication has established itself as the primary means of dispute resolution in the construction industry. It provides a fast decision, 28 days after referral (or later in certain circumstances) and the decision will be enforced by the courts subject to the adjudicator having acted within his or her jurisdiction and not fallen foul of the rules of natural justice.

The costs of adjudication broadly fall into two categories. The first category is the fees charged by the adjudicator. An adjudicator will have jurisdiction to decide which party should ultimately bear all or part of those fees. The second category is the party’s own costs of the adjudication. These might include legal fees and expert fees. Whether or not these are recoverable will depend upon whether the adjudicator has the jurisdiction to award them. This will turn on whether or not the parties have agreed that the costs should be recoverable.

Following the amendment to the Construction Act in 2011, Section 108 A of the Construction Act now provides that any contractual provision concerning the allocation of costs between the parties relating to the adjudication of a dispute will only be enforceable if: the provision is made in writing, is contained in the construction contract and confers power on the adjudicator to allocate his fees and expenses as between the parties; or is made in writing after the notice of intention to refer to adjudication has been given.

The rationale of this amendment was to stop onerous costs provisions being placed in contracts which would deter a party from adjudicating. For example provisions that required one party to pay the costs, regardless of the outcome (known as a Tolent clause, taking its name from a case where such a provision was held to be enforceable) were therefore no longer allowed.

Late Payment of Commercial Debts (Interest) Act 1998
The Late Payment of Commercial Debts (Interest) Act 1998 ('Late Payment Act') is a piece of legislation that emanates from an EU directive. Essentially it applies to most business to business contracts for sale of goods and/or services and governs the time for payment and interest. It allows a creditor to claim interest and compensation in certain circumstances. That compensation could include the costs of recovering a debt.

The compensation entitlement arises under the Late Payment Act in the following circumstances. Where there is no contractual provision for interest, then the rate set under the Late Payment Act becomes due (currently 8% over base rate). If there is a contractual interest rate, but the rate set is not “a substantial remedy” then the statutory rate will instead apply. It arises as an implied term.

If interest arises, then a creditor is also entitled to claim compensation for late payment depending on the level of debt of £40 rising to £100 for a debt of more than £10,000.  By section 2A of the Late Payment Act, if the reasonable costs of the creditor in recovering a debt are not met by the fixed sum, then it shall also be entitled to a sum equivalent to the difference between the fixed sum and those costs.

It has been argued that this provision entitles a party to claim the costs of pursuing a debt in adjudication. But is this right?

The Lulu decision
A recently published court decision in  Lulu Construction Ltd –v– Mulalley & Co Limited [2016] EWHC 1852 (TCC) has been said to be authority for the proposition that adjudication costs are recoverable under the late payment legislation. However, that is not so.

The Lulu case was simply an application to enforce a decision of an adjudicator. The underlying facts were unusual. The adjudicator had made a decision that included granting debt recovery costs (i.e. the legal costs of the successful party in the adjudication) of £47,666.27 purportedly under the Late Payment Of Commercial Debts (Interest) Act 1998. The jurisdictional challenge arose from the fact that the claim for debt recovery costs was raised in the rejoinder for the first time. The Court decided that the issue of whether or not to award debt recovery costs was within the adjudicator’s jurisdiction on the basis that it was a point raised by the Respondent who was the successful party. As it was the Respondent’s point, it was not surprising it was not raised in the referral notice. Based on established case law the court held that it was open to any defendant to raise any defence to the claim when it is referred to adjudication and as such the adjudicator was acting within his jurisdiction and the decision was enforced.

It is important to realise that this judgment did not deal with the underlying question of whether the Late Payment Act applied and whether the adjudicator was right to decide that the costs of the adjudication could be awarded as debt recovery costs under Late Payment Act. Having decided that he had the jurisdiction to decide the point, the court did not need to go any further.

There is no decided case law on whether costs of adjudication can be recovered under the Late Payment Act.

Recoverability of costs in adjudication using the Late Payment Act
Section 108A of the Construction Act makes it very clear that to be enforceable, any contractual provision dealing with the recoverability of costs in adjudication must comply with the requirements of that section, as set out above. Put simply, an entitlement to claim costs as compensation under the Late Payment Legislation only operates as an implied term, it does not fulfil the requirements of S108A, most obviously because it is not in writing but it does not comply with the other elements either.

It should also be borne in mind that the late payment legislation only applies to debts. Adjudications are often over disputes about other issues that would not come within the definition of a debt.

Parties do often seek to recover all of their costs in adjudications and will continue to do so. However, I would counsel against any assumption that the late payment legislation entitles a party to seek the costs of pursuing a debt claim through adjudication.

First published in The Construction Index, November 2016

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