In adjudication, can a party recover their legal costs?

18th October 2016

Lulu Construction Limited v Mullaley & Co Limited [2016] EWHC 1852 (TCC)

It is an established principle under the Housing Grants Construction and Regeneration Act 1996 (the Construction Act) that the parties will each bear their own legal costs.

However, the Late Payment of Commercial Debts (Interest) Act 1998 as amended by the Late Payment of Commercial Debts Regulations 2013 (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. This includes legal costs.

As such, if a party is seeking payment of an unpaid debt, through the adjudication process it is unclear which legislation will take precedence. If the Late Payment Act overrules the Construction Act, then reasonable legal costs will be recoverable. However if the Construction Act continues to apply, then the parties must each bear their own costs.

This recent judgment has led some commentators to suggest that the legal costs incurred by a party in respect of adjudication proceedings may be recoverable in certain circumstances.

However as we set out below, it is our view that until there is a clear court ruling on this point, if the parties choose to refer their dispute to adjudication rather than to the courts or another dispute resolution forum, then the provisions of the Construction Act will continue to apply and legal costs will not be recoverable.

In this case an adjudicator ordered that Mullaley & Co Limited (Mullaley) pay to Lulu Construction Limited (Lulu) (amongst other things) £47,666 of debt recovery costs which Lulu had claimed under the Late Payment Act. Mullaley refused to make payment, and Lulu commenced enforcement proceedings in the TCC.

It is a fundamental rule of adjudication enforcement that the court will automatically enforce an adjudicator’s decision even if the adjudicator has made an error in fact or at law. The courts can only decline to enforce an adjudicator’s decision if the adjudicator acted outside of his jurisdiction, and/or there has been a breach of natural justice.

The TCC held that it was within the scope of the Adjudicator’s jurisdiction to order that these debt recovery costs be paid, because they had been expressly requested in one of the parties’ submissions (the Rejoinder).

Having found that the question of whether or not debt recovery costs were payable had been properly referred to the Adjudicator and was within his jurisdiction, the TCC could not go on to consider whether the Adjudicator had been right in law to award those costs.

If the parties had wanted the TCC to consider whether or not there was a legal right to the debt recovery costs, then the parties would have needed to issue part 8 proceedings for a declaration dealing with this point.

There were no allegations of a breach of natural justice, and as such, the TCC proceeded to enforce the Adjudicator’s decision and Mullaley was ordered to make payment of the debt recovery costs forthwith.

As the TCC did not consider whether there was a right at law under the Late Payment Act to the recovery of legal costs in adjudication, this case does not provide an answer to the conflict between the Late Payment Act and the Construction Act.

We have recently successfully persuaded an adjudicator that debt recovery costs should not be included in an adjudication award, however a lot of time and money will no doubt be spent debating this point in future adjudications, until the legal position is clarified by the courts.