In a previous Newsletter we considered the position regarding the recovery by a party of its costs in the adjudication process. The ‘Construction Act’ of 1996, was silent on the question of costs. However, the presumption was always that (irrespective of the outcome of the adjudication) parties would be liable for their own costs in the adjudication process.
The Bridgeway Construction Ltd v Tolent Construction Ltd [2000] case, confirmed that parties could agree to a clause which required the referring party to pay the costs of the adjudication, regardless of the outcome of the adjudication. This became known as a ‘Tolent clause’.
However, the perceived unfairness of the Tolent clause was addressed when the 1996 ‘Construction Act’ was amended by the 2009 ‘Construction Act’, which, in effect, made a Tolent clause unlawful.
Despite this, the Late Payment of Commercial Debts (Interest) Act 1998 (the ‘Late Payments Act 1998’) seemed to offer an opportunity to recover adjudication costs particularly as the 2013 amendments to that Act introduced the right to be paid the reasonable costs of recovering a debt. As is the way of things, it was only a matter of time before the Late Payments Act 1998 was relied on to persuade an adjudicator that a referring party was entitled to claim its costs of an adjudication.
This was the case in an adjudication between Lulu Construction Ltd and Mulalley & Co Ltd, and in that adjudication, the adjudicator decided that Lulu was entitled to recover its "debt recovery costs". Mulalley did not make that payment and in the subsequent enforcement case, the court enforced the adjudicator’s decision, finding that the adjudicator had jurisdiction to award the unpaid party its "debt recovery costs". The 2016 enforcement judgment did not look at whether the referring party’s costs fell within the meaning of "reasonable costs" under the Late Payment Act 1998, it simply decided that, in that case, the Adjudicator had the jurisdiction to award the referring party its costs in the adjudication process. Notwithstanding this, there was hope, by some, that the Lulu case gave a referring party the general right to recover its costs in the adjudication process, if it was successful in that process.
However, those hopes were largely dashed by the unreported 2017 adjudication enforcement case of Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd. In the adjudication itself, the adjudicator had awarded Enviroflow a capital sum plus its "reasonable costs" of recovering the debt (of about £14,900). Redhill did not make payment in line with the adjudicator’s decision, and enforcement proceedings followed.
In those enforcement proceedings, O’Farrell J noted that whilst Section 5A of the Late Payment Act 1998 provides that a successful party is entitled to its costs of recovering a debt, Section 108A of the Construction Act 1996 provides that the costs of an adjudication can only be awarded in the circumstances outlined under that section, and where such a provision had been made in writing. O’Farrell J concluded that "Accordingly, by reason of the 1998 Act, [Enviroflow] was entitled to seek its reasonable costs by reason of an implied term. However, such an implied term was caught by s.108A of the 1996 Act and was ineffective unless an agreement had been made in writing."
On the facts, it was common ground that the building contract was an oral contract, and that no agreement regarding the costs of the adjudication pursuant to Section 108A of the Construction Act 1996 had been made in writing, and the court decided that this meant that the adjudicator lacked jurisdiction to make a costs award.
Even though the full court report has not been seen, it would therefore appear that O’Farrell J was saying that whilst a party may have an implied right for debt recovery costs under the Late Payment Act 1998, the express provisions of the Construction Act 1996 require any agreement in respect of such costs to comply with section 108A (that is, to be in writing and to be made after the notice of adjudication is given); and if a party does not comply with the express provisions of one Act, it cannot take advantage of the implied terms of another Act.
However, this may not be the end of the matter, as in another unreported adjudication enforcement judgment (Actavo v Doosan Babcock), which was reached in 2017, but after the Enviroflow case, referred to above, O'Farrell J appears, from the reports seen, to have followed the decision in the 2016 Lulu case, and enforced an adjudicator's decision which awarded costs under the Late Payment Act. As the case is unreported, it is difficult to say what the distinguishing facts are between the Actavo case and the Enviroflow case, but it appears that one distinguishing feature in Enviroflow may have been that it was based upon an oral contract and not a written contract.
Therefore, in conclusion, whilst the weight of opinion is still that adjudicators should not award a referring party’s adjudication costs under the Late Payment Act 1998, if they do make such an award, their decision may be enforced (although it is unlikely if an oral contract applies). Consequently, the unreported Actavo case means that there may still be the opportunity in certain cases for a referring party to recover its adjudication costs pursuant to the Late Payments Act 1998.
Whilst it is obviously unsatisfactory for this matter to remain unresolved, we will unfortunately now need to wait and see how the courts decide upon this matter the next time that this issue is brought before them.
Peter Barnes
Blue Sky ADR Ltd
19 November 2017
However, the perceived unfairness of the Tolent clause was addressed when the 1996 ‘Construction Act’ was amended by the 2009 ‘Construction Act’, which, in effect, made a Tolent clause unlawful.
Despite this, the Late Payment of Commercial Debts (Interest) Act 1998 (the ‘Late Payments Act 1998’) seemed to offer an opportunity to recover adjudication costs particularly as the 2013 amendments to that Act introduced the right to be paid the reasonable costs of recovering a debt. As is the way of things, it was only a matter of time before the Late Payments Act 1998 was relied on to persuade an adjudicator that a referring party was entitled to claim its costs of an adjudication.
This was the case in an adjudication between Lulu Construction Ltd and Mulalley & Co Ltd, and in that adjudication, the adjudicator decided that Lulu was entitled to recover its "debt recovery costs". Mulalley did not make that payment and in the subsequent enforcement case, the court enforced the adjudicator’s decision, finding that the adjudicator had jurisdiction to award the unpaid party its "debt recovery costs". The 2016 enforcement judgment did not look at whether the referring party’s costs fell within the meaning of "reasonable costs" under the Late Payment Act 1998, it simply decided that, in that case, the Adjudicator had the jurisdiction to award the referring party its costs in the adjudication process. Notwithstanding this, there was hope, by some, that the Lulu case gave a referring party the general right to recover its costs in the adjudication process, if it was successful in that process.
However, those hopes were largely dashed by the unreported 2017 adjudication enforcement case of Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd. In the adjudication itself, the adjudicator had awarded Enviroflow a capital sum plus its "reasonable costs" of recovering the debt (of about £14,900). Redhill did not make payment in line with the adjudicator’s decision, and enforcement proceedings followed.
In those enforcement proceedings, O’Farrell J noted that whilst Section 5A of the Late Payment Act 1998 provides that a successful party is entitled to its costs of recovering a debt, Section 108A of the Construction Act 1996 provides that the costs of an adjudication can only be awarded in the circumstances outlined under that section, and where such a provision had been made in writing. O’Farrell J concluded that "Accordingly, by reason of the 1998 Act, [Enviroflow] was entitled to seek its reasonable costs by reason of an implied term. However, such an implied term was caught by s.108A of the 1996 Act and was ineffective unless an agreement had been made in writing."
On the facts, it was common ground that the building contract was an oral contract, and that no agreement regarding the costs of the adjudication pursuant to Section 108A of the Construction Act 1996 had been made in writing, and the court decided that this meant that the adjudicator lacked jurisdiction to make a costs award.
Even though the full court report has not been seen, it would therefore appear that O’Farrell J was saying that whilst a party may have an implied right for debt recovery costs under the Late Payment Act 1998, the express provisions of the Construction Act 1996 require any agreement in respect of such costs to comply with section 108A (that is, to be in writing and to be made after the notice of adjudication is given); and if a party does not comply with the express provisions of one Act, it cannot take advantage of the implied terms of another Act.
However, this may not be the end of the matter, as in another unreported adjudication enforcement judgment (Actavo v Doosan Babcock), which was reached in 2017, but after the Enviroflow case, referred to above, O'Farrell J appears, from the reports seen, to have followed the decision in the 2016 Lulu case, and enforced an adjudicator's decision which awarded costs under the Late Payment Act. As the case is unreported, it is difficult to say what the distinguishing facts are between the Actavo case and the Enviroflow case, but it appears that one distinguishing feature in Enviroflow may have been that it was based upon an oral contract and not a written contract.
Therefore, in conclusion, whilst the weight of opinion is still that adjudicators should not award a referring party’s adjudication costs under the Late Payment Act 1998, if they do make such an award, their decision may be enforced (although it is unlikely if an oral contract applies). Consequently, the unreported Actavo case means that there may still be the opportunity in certain cases for a referring party to recover its adjudication costs pursuant to the Late Payments Act 1998.
Whilst it is obviously unsatisfactory for this matter to remain unresolved, we will unfortunately now need to wait and see how the courts decide upon this matter the next time that this issue is brought before them.
Peter Barnes
Blue Sky ADR Ltd
19 November 2017
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