28 September 2016

Since 1996, adjudication has been the go-to method for resolving construction disputes. It’s a rough and ready form of dispute resolution where getting an answer – and getting cash flowing – is the aim. Adjudication was initially seen as a quick and cheap way of getting a result. And, crucially when trying to keep costs down, lawyers were not necessarily envisaged as necessary. The 1996 Construction Act didn't give adjudicators the right to award a party its costs in pursuing (or defending) an adjudication. Section 108A of the Act (introduced in 2011), tries to make this clear (admittedly, with limited success).

But since 1996, the disputes resolved through adjudication have become more and more complex, and the process has become longer and longer. Parties commonly now adjudicate disputes which cover complex legal issues with claims of thousands, if not millions, of pounds. Lawyers get involved. Costs are incurred. But can a successful party recover its – frequently considerable – costs?

Late Payment of Commercial Debts (Interest) Act 1998

In 2013, brief excitement ensued after the introduction of a new section to the Late Payment Act which suggested that adjudication costs may be recoverable. Section 5A(2A) of the Act says:

“If the reasonable costs of the supplier in recovering the debt are not met by the fixed sum, the supplier shall also be entitled to a sum equivalent to the difference between the fixed sum and those costs”.

There was much discussion as to whether this meant that a party who obtained an adjudication decision in its favour regarding a debt could claim its legal costs on the basis that the “fixed sum” referred to in section 5A(2A) is a very small amount. Since then, while we were aware of parties trying to use the Late Payment Act in this way in adjudication, there was certainly less debate about it in construction and legal circles. But the recent case of Lulu v Mulalley has reignited debate and, according to some commentators, heralds a new dawn of claiming costs in adjudication.

But parties who are considering making such a claim – and those who may find themselves on the receiving end of such – should consider the following:

  • The Late Payment Act relates to debts. The debt has to relate to the whole or part of the contract price. So claims for damages for a breach of contract, or for any other payment which can’t be said to form part of the "contract price" won’t be caught.
  • If the contract already provides a substantial remedy for late payment of a debt – and the courts have in the past held that the rate of interest in JCT forms is a “substantial remedy” – statutory interest under the Late Payment Act won’t kick in and, again, a party won’t be able to rely on it to claim back its costs in adjudication.
  • In Lulu, the court decided that the adjudicator could award costs as they were “connected with” and “ancillary to” the referred dispute. Lulu was only an enforcement hearing and, as such, the Judge did not – rightly – look at whether the adjudicator was actually right to award the costs: he had answered the question put to him.

So in our view, the Late Payment Act still doesn’t present a cut-and-dried method for recovery of legal costs in adjudication, even taking into account Lulu. There are hurdles to clear and for a responding party in an adjudication, it would be sensible to double-check the basis on which the Late Payment Act is being used if confronted by a claim for legal costs. It may also be sensible for parties to double check the rate of interest being used in their contracts, to see whether or not it constitutes a “substantial remedy”, for clarity on whether the Late Payment Act is likely to apply.

This article was written by Catherine Gilbert.

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Michael Barlow

Michael Barlow Partner

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