Adjudication Matters - The knockout blow for recovery of legal costs in adjudication?

10th October 2017

Enviroflow Management Ltd v Redhill Works (Nottingham) (2017) (unreported, 16 August 2017)

Following the much commented upon decision in Lulu Construction Limited v Mulalley & Co Limited [2016] (which we discuss here), the courts have now provided clarity as to whether an adjudicator has jurisdiction to order payment of a party’s legal costs under the Late Payment of Commercial Debts (Interest) Act 1998 as amended by the Late Payment of Commercial Debts Regulations 2013 (the Late Payment Act).

Case Facts

No formal judgment has yet been issued in respect of this case, so only brief details of the background facts are available.

Redhill Works (Nottingham) (Redhill) was the main contractor engaged to carry out internet installation works. Redhill engaged Enviroflow Management Ltd (Enviroflow) as a subcontractor to carry out some of the work.

Following Practical Completion of the works, a payment dispute arose between the parties and Enviroflow commenced an adjudication seeking an order for payment as well as recovery of its reasonable costs in respect of the adjudication under section 5A of the Late Payment Act.

Costs in Adjudication

As originally enacted, the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act) was silent as to the allocation of legal costs in adjudication, which led to the widely accepted presumption that each party would be responsible for their own costs in an adjudication.

This position became uncertain with the creation of so called Tolent clauses in Bridgeway Construction Limited v Tolent Construction Limited [2000] CLL 1662 which allowed parties to agree to a contractual clause requiring the Referring Party to pay the Responding Party’s legal costs, irrespective of the outcome of the adjudication.

However, the introduction of section 108A into the Construction Act under Part 8 of the Local Democracy, Economic Development and Construction Act 2009 which came into force in September 2011 aimed to resolve this point.

Section 108A states that any agreement by the parties concerning the allocation of legal costs to adjudication would be ineffective unless:

• made in writing; and
• made after the Referring Party had served a notice of intention to adjudicate on the Responding Party.

However, the Late Payment Act implies a term into commercial contracts for the supply of goods and services for the payment of simple interest, together with compensation for late payment. Under section 5A(2A) of the Late Payment Act, the unpaid party can recover the reasonable costs of recovering the unpaid debt, including legal costs.

As the Late Payment Act was silent as to how it interacts with section 108A of the Construction Act, legal commentators began to consider that the Late Payment Act could be used as a means to recover adjudication costs.

Lulu

In the case of Lulu Construction Limited v Mullaley & Co Limited [2016] EWHC 1852 (TCC), the court’s upheld an adjudicator’s decision,  that Mullaley was required to pay £47,666 of debt recovery costs which Lulu had claimed under the Late Payment Act.

However, the decision in Lulu still left room for uncertainty as the TCC had not considered as a matter of law whether the Late Payment Act allowed recovery of legal costs in adjudication. The TCC only considered whether the adjudicator had jurisdiction to order debt recovery costs to be paid in this particular case (he did – because of an express request in both parties’ submissions that he determine such costs).

Enviroflow’s Argument

Enviroflow sought to adopt the same position as Lulu that:

• section 5A of the Late Payment Act entitles a “supplier” to seek compensation in recovery of a debt;
• that compensation takes the form of a fixed sum but where the “reasonable costs” of the supplier are not met by the fixed sum, the supplier can claim for a “sum equivalent to the difference between the fixed sum and those costs”;
•  on that basis, the costs of an adjudication are a debt under the Late Payment Act which are capable of recovery.

The adjudicator accepted Enviroflow’s argument and ordered Redhill to pay the £81,000 principal sum as well as £14,900 under the Late Payment Act in respect of Enviroflow’s legal costs together with the adjudicator’s own fees.

Redhill refused to make any payment to Enviroflow. Enviroflow issued proceedings to enforce the adjudicator’s decision both in respect of the principal sum and Enviroflow’s legal costs.

Decision

In hearing this case, Justice O’Farrell found that 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, as the implied term contradicted section 108A of the Construction Act 1996, the implied term was ineffective unless it was expressly agreed by the parties in writing after the notice of adjudication had been served (as required by Section 108A).

In Enviroflow there had been no agreement made in writing after a notice had been served and it was therefore held that the adjudicator did not have the jurisdiction to award payment of the parties’ costs.

Essentially, if there is no agreement between the parties which complies with the Construction Act as amended, the parties cannot rely upon the provisions of the Late Payment Act.

Analysis

Although the decision in Enviroflow will not be welcomed by those parties wanting to claim the legal costs of an adjudication, the case has provided some much needed certainty as to whether the Late Payment Act could trump the Construction Act.

In closing off the Late Payment Act loophole, it appears that the courts have given precedence to the Construction Act to the delight of those parties wanting certainty as to responsibility for costs in adjudications.