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Despite the fact that it was intended to be a cheap and cheerful way of resolving disputes, adjudication can be an expensive process. The costs that parties may incur in an adjudication include:

  1. Legal costs
  2. Experts’ costs
  3. Adjudicator’s fees and expenses

Whilst the adjudicator’s fees will probably be in the thousands of pounds, legal and experts’ fees can amount to tens of thousands of pounds. Yet the adjudicator will generally only have the power to allocate his or her fees and expenses between the parties (provided that this is provided for in the construction contract)[1]. He or she will not have the power to make an award in respect of the other costs (there is one very limited exception to this, where the parties agree otherwise in writing after the notice of intention to refer to adjudication- a very rare occurrence).[2]

What this means is that, as a rule, the parties will have to bear their own costs of an adjudication, notwithstanding the outcome. From the point of view of the referring party, this is crucial to remember, as those costs will eat into the amount it recovers. This in turn means that adjudicating for relatively modest sums can be commercially unviable.

So it is not surprising that there has been much talk recently about the possibility of circumventing this rule by claiming costs of adjudication under the Late Payment of Commercial Debts (Interest) Act 1998, which was amended in 2013 (the Late Payment Act).

Under the Late Payment Act there is an implied term in every contract for the supply of goods and services (this includes construction contracts) that a ‘qualifying debt’ will carry statutory interest and an entitlement to compensation for late payment.

Compensation under the Late Payment Act includes a fixed sum. This in itself is not very exciting (the fixed sum is a maximum of £100[3]). However, if this fixed sum does not meet the “reasonable costs of the supplier in recovering the debt”, then the ‘supplier’ is also entitled to “a sum equivalent to the difference between the fixed sum and those costs”.

It is this latter provision that has excited the interest. There can be little doubt that the costs of adjudication fall within the definition of “reasonable costs of the supplier in recovering the debt“. This would appear to open the door to parties claiming their adjudication costs under the Late Payment Act. The door appeared to be even further opened when the TCC recently awarded an unpaid party its adjudication costs as ‘debt recovery costs'[4].

Yet on closer inspection, it is clear that the door is not as wide open as it first appeared. This is because:

  1. The TCC case did not actually decide that costs of adjudication are, as a matter of law, recoverable. The Court merely decided that the adjudicator had jurisdiction to award the debt recovery costs (which he did, because they were ancillary to and related to the dispute). It did not decide that the adjudicator was right in law to make that award
  2. Although a ‘qualifying debt’ includes a claim for sums due under the contract, it does not include damages. In other words, a party can only claim its adjudication costs where it is claiming for the contract price (or a part of it), and not for damages
  3. If the contract provides for a ‘substantial remedy’ for late payment, then there will be no entitlement to compensation for late payment. To cut a long story short, a substantial remedy is a sufficient interest rate. In previous cases, the Court has indicated that 5% above base rate amounts to ‘substantial remedy’. So if a construction contract provides for an interest rate of 5% above base rate or more, then there is unlikely to be an entitlement for compensation for late payment.

Conclusion

Although it is an interesting proposition, it would be fair to say that as far as recovering costs of adjudication under the Late Payment Act is concerned, the door is only slightly ajar. The Courts have yet to make a definitive ruling on the point, but it looks like adjudication costs can only be recovered under the Late Payment Act where a party is making a claim for the contract sum (or part of it) and the contract does not provide for a substantial remedy for late payment.

For more information, email blogs@gateleyplc.com.

[1] Section 108A(2)(a) of the Construction Act 1996

[2] Section 108A(2)(b) Construction Act 1996

[3] Section 5(A)2 of the Late Payment Act

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


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This blog is intended only as a synopsis of certain recent developments. If any matter referred to in this blog is sought to be relied upon, further advice should be obtained.