UK: Recovery Of Costs In Adjudication

Last Updated: 2 January 2014
Article by Jessica Stephens

The issue of costs has troubled adjudicators and the courts since the Housing Grants Construction and Regeneration Act 1996 was introduced. This article seeks to clarify the statutory position in the light of the case law.

Costs of Adjudication

The HGCRA 1996 was silent as to the adjudicator's power to make orders as to the payment of either side's costs of the adjudication. The Scheme for Construction Contracts gave the adjudicator power to determine which of the parties was liable for his fees or expenses but did not expressly empower the adjudicator to order one party to pay some or all of the other party's costs.

Parties could expressly agree contractually or during the adjudication itself to the adjudicator determining liability for a party's costs. The latter approach conferred ad hoc jurisdiction on the adjudicator: see, for example, Northern Developments (Cumbria) Ltd v J & J Nichol [2000] BLR 158.

Some standard form clauses preserved the statutory position that an adjudicator has no power to determine liability for a party's legal/expert costs: eg CIC Model Adjudication Procedure. Others such as RIBA Standard Conditions empowered adjudicators to direct the payment of legal costs and expenses as part of their decisions. There was no difficulty with clauses such as these.

In the absence of jurisdiction, any adjudicator's decision requiring a party to pay the costs of another would be unenforceable, although it is likely that this part of the decision would be severable from the remainder: see Cantillon Ltd v Urvasco Ltd [2008] BLR 437 at [78].

Costs where referral withdrawn

What about liability for a responding party's wasted costs in the event of a referring party withdrawing a claim? Ordinarily, where the adjudicator has no power in respect of party/party costs, he cannot make an order for costs against the party who discontinues.

However, where the adjudicator was permitted to award legal costs against one party, discontinuance is likely to lead to the discontinuing party paying the costs of the other. The Court of Appeal's decision in John Roberts Architects v Parkcare Homes (No 2) [2005] EWHC 1637 (TCC) strongly supports that approach.

'Tolent' Clauses

As well as clauses that enabled costs allocation as part of a decision, clauses were devised that dictated the costs position following an adjudication. The most potent were clauses that required the referring party to pay the responding party's costs regardless of outcome.

This was initially permissible. In Bridgeway Construction v Tolent Construction [2000] CILL 1662, the contract included a clause that required the party serving the notice of adjudication to bear all the costs and expenses of the adjudication incurred by both parties, including, but not limited to, legal costs and expert fees.

HHJ McKay upheld this clause (which became known as a Tolent clause) finding that the term was not contrary to the Act and could not be unfair because (notwithstanding its practical implications) it applied equally to both parties. In a later decision, Edwards-Stuart J came down against such clauses, finding in Yuanda (UK) v WW Gear [2010] EWHC 720 (TCC) that if the effect of the clause was to discourage a party from exercising its statutory right to refer disputes to adjudication, it may well be contrary to the Act and therefore not compliant or enforceable.

The clause in Yuanda was similar to that in Tolent. There can be other permutations that reflected the level of success which would not offend against the Act since they applied equally and were designed to reduce massively inflated claims.

The Amended Act

The amendments introduced by the snappily titled Local Democracy, Economic Development and Construction Act 2009 ('LDEDCA') include a new section 108A, which is in the following terms:

"1 This section applies in relation to any contractual provision made between the parties to a construction contract that concerns the allocation as between those parties of costs relating to the adjudication of a dispute arising under a construction contract."

"2 The contractual provision referred to in subsection (1) is ineffective unless – (a) it is made in writing, is contained in the construction contract and confers power on the adjudicator to allocate his fees and expenses as between the parties,

or

(b) it is made in writing after the giving of notice of intention to refer the dispute to adjudication."

When the legislation was proposed, its stated purpose was that 'save for a particular type of pre-dispute agreement regarding costs (namely 'a clause in the parties' construction contract to the effect that an adjudicator will be able to allocate his own costs as part of his decision') the effect of the 'broad and simple prohibition' contained in the new section 108A was to outlaw any other contractual provision concerning the allocation of the costs of an adjudication'.

Does this prohibit clauses conferring upon an adjudicator power to determine party/party costs? This would appear to be the intent. There is no reason why it should: such clauses do not 'allocate' costs. If the prohibition was aimed at Tolent (or similar type) clauses, this result had already been achieved by Yuanda.

One reading of section 108A might be that a costs allocation clause (or, if of broader effect, a clause empowering an adjudicator to determine liability for costs) is effective provided that it is made in writing, is contained in the construction contract and confers power on the adjudicator to allocate his fees and expenses

There is a clear distinction between ss (1), which refers to "the allocation between those parties of costs relating to an adjudication", and ss (2), which refers to (and only to) an adjudicator's fees and expenses. There may be some fertile ground for argument in relation to the precise scope of the prohibition in relation to clauses dealing with the allocation of party/party costs.

In the absence of any authority, it remains arguable that a clause may empower an adjudicator to determine party/party costs; it may also be possible to prescribe some degree of pre-allocation in the event of a claim not succeeding entirely, providing that the clause complies with section 108A, applies equally to both parties and does not detract from a party's right to adjudicate.

However, if section 108A does constitute an effective prohibition against all such clauses, any part of an adjudicator's decision in respect of party/party costs will be unenforceable (albeit potentially severable from the substantive decision).

Recovery of Adjudication Costs in Subsequent Proceedings

Generally, costs incurred in adjudications are not recoverable as damages in subsequent proceedings. In Total M&E Services v ABB Building Technologies [2002], the successful adjudicating party enforced the decision, adding a claim for damages for its adjudication costs, arguing that they were the foreseeable consequence of the failure to pay. HHJ Wilcox considered that that was misconceived. The parties contracted with the right to adjudicate without liability for costs. It followed that such costs were not recoverable.

More recently, in National Museums and Galleries on Merseyside v AEW and PiHL Galliford Try, the employer sought damages from the architect and contractor, including its costs of an earlier adjudication between it and the contractor concerning the contractor's liability for defective design. The adjudicator found for the contractor and ordered the employer to pay his fee. The employer sought damages in respect of the adjudicator's fees and its own costs.

Akenhead J considered these heads of damage by reference to an analysis on the basis of foreseeability and causation to link the architect's defective design with the claimed heads of loss.

It was held that the adjudication itself was the reasonably foreseeable result of the architect's negligence: but for the inadequate design, the works would have been completed without issue, any suspension and/or further instruction to the contractor. Causation was hotly contested by the architect, who said that the employer fought the adjudication knowing that even if it was successful it would not recover its costs, and that the architect should not therefore be liable for them as damages.

This was rejected. Akenhead J found that there was a "sufficient causative link between the defaults of the architect and the adjudication" and that "the causative link would only be broken if the museum had acted unreasonably or if its solicitors had acted negligently in advising the museum that it had an arguable defence in the adjudication".

Damages were recovered in respect of the adjudicator's fees and legal costs and expert fees incurred by the employer in the adjudication. In th

It is difficult to see that this would necessarily have broader application. There is no good reason why it should apply where the same dispute as was adjudicated is finally resolved between the same parties in arbitration or litigation.

Another Route to Costs Recovery?

The Late Payment of Commercial Debts Regulations 2013 came into force in early 2013 and amended the Late Payment of Commercial Debts (Interest) Act 1998 (the Late Payment Act). They added the following to the compensation already provided for by section 5A(2A) of the Late Payment Act:

"If the reasonable costs of the supplier in recovering the debt are not met by the fixed sum, the supplier shall also be entitled to a sum equivalent to the difference between the fixed sum and those costs".

The Regulations implement a Directive that states that the recoverable expenses should include the costs of instructing a lawyer. Therefore, in so far as these Regulations apply in adjudicated claims, they may present a route for recovering legal costs.

At the outset, any such right is entirely onesided; it applies only to claims going up the contractual chain rather than down.

The guidance to the Directive also states that "Compensation for the recovery of costs should be determined without prejudice to national provisions according to which a national court may award compensation to the creditor".

This may mean that the Regulations were not intended to oust the Court's jurisdiction to determine costs, but what about the conflict between adjudication where the position is either silent (and there is no power to order costs) or the position is dealt with by a clause that purports to allocate costs?

How – if at all – do the competing regimes fit together?

It is possible to contract out of the Late Payment provision (which operates by implying terms), providing that UCTA 'reasonableness' principles are met. If the parties agree expressly to contract out of section 5A(2A) without upsetting the UCTA principles, 'compensation' for late payment would not include an uplift to cover that party's reasonable costs and the parties would be left with whatever their contract provided in respect of the costs of adjudication.

However, if the proper interpretation and effect of section 108A is that provisions that preallocate party/party costs are prohibited, it is arguable that any such clause could not be relied upon to contract out of section 5A(2A). If section 108A extends to provisions that permit the adjudicator to allocate costs, then any attempt to contract out will be of doubtful efficacy.

How is the clash between the provisions of the Act and the provisions of the Regulations to be resolved?

Bennion on Statutory Interpretation considers that "delegated legislation cannot override any Act". If the Late Payment Act is applicable to claims brought in adjudication, they appear to be inconsistent with section 108A's prohibition on cost allocation clauses, and are potentially ultra vires or at least inapplicable to the extent of the inconsistency.

Whether ultra vires or not, what if an adjudicator decides that the referring party can rely upon section 5A(2A) and recover its costs? Is that a jurisdictional issue or just an example of an adjudicator reaching the wrong conclusion on the law?

It is reasonably arguable that an adjudicator's reliance upon ultra vires (or inapplicable) delegated legislation to award costs when legislation prohibits such clauses is a jurisdictional issue rather than an error of fact or law that does not affect the validity of the decision.

Whether that renders the entire decision unenforceable or only the part that deals with costs is debatable: if the decision on costs is separate from the substantive decision, it ought to be severable.

What is clear is that it is by no means entirely clear. As the amounts spent on costs in adjudications can be significant, and many consultants advertise their services on the basis that costs (i.e. their fees) may be recoverable, it is only a matter of time before this issue comes before the courts for resolution. requiring a party to pay the costs of another would be severable from the remainder...

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The articles and papers published by Keating Chambers are for the purpose of raising general awareness of issues and stimulating discussion. The contents must not be relied upon or applied in any given situation. There is no substitute for taking appropriate professional advice.

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