Adjudication update

There continues to be a steady stream of adjudication enforcement cases going through the courts, which tend to suggest that adjudication remains a popular form of dispute resolution. James Mullen looks at some of the most important developments from the last few months, starting with the question about whether a party can recover the costs incurred during the adjudication process.

Adjudication Costs

It is well established that a party's ability to recover its adjudication costs is limited. However that has not stopped parties from trying to assert that they are entitled to payment of their costs. A decision from Mrs Justice O'Farrell has provided important guidance and clarity on this issue.

It is generally accepted amongst legal practitioners that the wording of section 108A of the Housing Grants, Construction and Regeneration Act 1996, as amended ("Construction Act"), prevents parties from agreeing that an adjudicator can allocate party costs unless there is a written agreement made after the start of the adjudication.

Such agreements rarely happen in practice meaning that in the vast majority of cases, each party bears its own adjudication costs. However, whilst adjudication is intended to be a quick and inexpensive dispute resolution process, the costs can be significant. As a result, parties have come up with various arguments to try to recoup their adjudication costs.

For a while during the past year, it was thought that a party may be able to recover its adjudication costs as a debt under the Late Payment of Commercial Debts (Interest) Act 1998 ("Late Payment Act").

Support for this line of thought was reinforced by the case of Lulu Construction Ltd v Mulalley & Co Ltd.1 Here, Mulalley (who were effectively the paying party) commenced adjudication proceedings to resolve the value of Lulu's claim under the parties' subcontract. In its rejoinder, Lulu included for the first time a claim of £48k for "debt recovery costs" claimed under the Late Payment Act.

The adjudicator awarded Lulu its debt recovery costs. Mulalley argued that the head of claim was not within the scope of the referral and was not something which could be run as what might be called a defence. The Judge disagreed, finding that the costs were clearly connected with and ancillary to the referred dispute and must properly be considered part of it. Therefore the adjudicator had jurisdiction to decide that element of the dispute.

However, the TCC has recently firmly shut the door on this potential route of recovery in Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd. Although the case is unreported it appears that the adjudicator had awarded Enviroflow £81k plus interest and also its reasonable costs of recovering the debt in the amount of £14,900 plus VAT under the Late Payment Act.

On enforcement, it seems that Mrs Justice O'Farrell referred to:

(i) section 5A of the Late Payment Act which implies a term into a contract that a successful party is entitled to its reasonable costs of recovering a debt; and (ii) section 108A of the Construction Act which says that the costs of an adjudication can only be awarded where such a provision has been made in writing.

Therefore, whilst Enviroflow was entitled to seek its reasonable costs by the implied term under section 5A of the Late Payment Act, such an...