Given the speed at which Adjudications are conducted during construction disputes, costs can escalate quickly. However, pursuant to Section 108A of the Housing Grants Construction and Regeneration Act 1996 (the Construction Act), such costs are rarely recoverable by the parties. S.108A prohibits contractual clauses which provide for the allocation of costs between the parties unless they are a) written into the construction contract and allow for the Adjudicator to allocate his fees and expenses between the parties or are b) made in writing after notice of intention to refer the dispute to Adjudication is served (the former is a common term in written construction contracts, the latter, in my experience as a construction solicitor, almost never occurs in practice).
Therefore, the reality is that the losing party to an Adjudication often has to pay the Adjudicator’s fees and expenses but very rarely has to pay the winning party’s costs.
It is therefore no surprise that parties to construction contracts continue to seek to find alternative ways to recover their costs of the Adjudication. Two recent cases are of interest in this respect.
In Lulu Construction Limited v Mulalley & Co Limited the Technology and Construction Court (TCC) enforced an Adjudicator’s decision to allow the unpaid party to recover £47,666, being its costs of the Adjudication, which it had claimed pursuant to the Late Payment of Commercial Debts (Interest) Act 1998 (the Late Payment Act).
The Court noted that an Adjudication could include claims for relief that were consequential upon and incidental to it, which the claim for costs under the Late Payment Act was.
Parties to construction contracts have been eagerly awaiting a decision on whether Adjudication costs could be recovered under the Late Payment Act. However, before everyone gets too excited by this decision, there is an important point to note. This was a claim for enforcement of the Adjudicator’s decision. Provided an Adjudicator has answered the right question, his decision will be enforced regardless of whether he reached the correct answer. In this case the Court simply found that the Adjudicator had jurisdiction to award debt recovery costs under the Late Payment Act; it did not determine whether the Adjudicator had exercised that jurisdiction correctly.
There has been much debate among practitioners as to whether or not it is correct to award Adjudication costs under the Late Payment Act. Although unpaid parties will undoubtedly seek to take advantage of this judgment, I suspect the debate about that underlying question is far from over.
In WES Futures Limited v Allen Wilson Construction Limited, the claimant sought to rely on its Part 36 offer having been accepted, during the course of Adjudication enforcement proceedings in the TCC, as grounds for recovering its costs of the Adjudication itself (as well as a previous failed Adjudication). For readers that are not familiar with the terminology, a Part 36 Offer is an offer made under Part 36 of the Civil Procedure Rules (CPR), which carries automatic costs consequences, depending on whether, and if so when, the offer is accepted or, if it is not accepted, the outcome at trial.
The question of whether Futures’ Adjudication costs were recoverable under Part 36 was considered by the TCC. In his judgment, Coulson J held that they were not, because CPR 36.13(1) refers to the recovery of “costs of the proceedings” and Adjudication costs were not costs “of the proceedings”. Although “costs of proceedings” includes “recoverable pre-action costs”, such costs did not include standalone proceedings such as Adjudication.
Readers may also be interested to know that Coulson J also considered what the effect of the Claimant’s offer would have been, had it not been a compliant Part 36 Offer (and therefore not subject to CPR 36.13(1)). His finding was that it would have made no difference. On the proper construction of the specific offer letter, it was clear that it was always intended to refer only to the costs of Court proceedings, not of Adjudication. More interestingly though, he also went on to consider “wider principles” and referred to the fact that Adjudication costs are not recoverable under the Construction Act (save for in the limited circumstances mentioned above). His finding, therefore, was that “if a successful party cannot recover its costs in the Adjudication itself, it cannot recover them in enforcement proceedings either.”
My view is that the question of whether Adjudication costs are in fact recoverable under the Late Payment Act still remains unanswered. No doubt we will continue to see claimants trying to rely on the decision in Lulu v Mullaley. Whether they are correct to do so requires urgent clarification by the Courts.
As regards recovering Adjudication costs under the terms of a settlement offer, it is clear that Part 36 is not currently of any assistance. However, parties are of course free to agree terms of settlement outside of the scope of CPR 36. Such terms could include the payment not just of the costs of any Court proceedings but also of any prior Adjudication. However, whether a paying party would agree to pick up the Adjudication costs will almost certainly depend on whether they were in fact recoverable in the Adjudication in the first place (which, as we have seen, will be rare).
For now, the ability to recover Adjudication costs looks doubtful at best. In my view, parties to construction contracts ought therefore to be focussing on two key points:
In my experience, both of these things are best achieved by good preparation and immaculate record keeping combined with obtaining quality, and commercially sensible, legal advice from a construction solicitor at an early stage.
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