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Non-recoverability of Adjudication Costs - only time will tell

In our article "Legal Costs in Adjudication - the road to recovery?", we considered whether the 2016 case of Lulu Construction Limited v Mulalley and Co Limited [2016] EWHC 1852 TCC ("Mulalley") opened the way for the recovery of legal costs in Adjudication where interest is awarded pursuant to the Late Payment of Commercial Debts (Interest) Act 1998 ("Late Payment Act"). Sitting in the Technology and Construction Court, Mr Acton-Davis QC alluded to the future possibility of the recovery of legal costs in adjudication proceedings by finding that the adjudicator had the jurisdiction necessary to consider and decide upon the claim for costs. The Judge's decision was based on the fact that such costs were "debt recovery costs" in that they were consequential and incidental upon the dispute being referred to Adjudication. However, the door appears to have closed on that argument following the recent case of Enviroflow Management Limited v Redhill Works (Nottingham) Limited (unreported).

In Enviroflow Management Limited ("Enviroflow") v Redhill Works (Nottingham) Limited ("Redhill"), Enviroflow applied to enforce an Adjudication decision for unpaid fees by way of summary judgment. The decision also awarded the sum of £14,900 to Enviroflow in respect of reasonable costs of recovering the debt. It was submitted to the Court that due to the implied terms under the Late Payment Act section 5A, a successful party was entitled to its costs of recovering the debt. This is the same point as put to Mr Acton-Davis QC in the Mulalley case. However, unlike in Mulalley, Redhill argued in defence that section 108A of the Housing Grants, Construction and Regeneration Act 1996 as amended ("Construction Act"), provided that where a dispute under a construction contract had been referred to Adjudication, the costs of the Adjudication could only be awarded where the parties agreed as much in writing after the provision of a Notice of Adjudication.

Mrs Justice O'Farrell departed from the view of Mr Acton-Davis QC and confirmed that the terms implied into the contract by the Late Payment Act were insufficient to overcome section 108A of the Construction Act as amended. Consequently any entitlement to recover costs of the Adjudication pursuant to the Late Payment Act was ineffective as it was not made in writing. It was therefore held that the Adjudicator had no jurisdiction to make a costs award and Enviroflow were awarded the sum claimed less the sum awarded in relation to reasonable recovery costs.

Where does this leave us now?

Given that Mulalley did not consider the impact of section 108A of the Construction Act, it would seem likely that many Adjudicators will follow the view of Mrs Justice O'Farrell and refuse to award the costs of Adjudication purely on the basis of such costs being incidental to the dispute referred. Indeed, following this judgment we already have experience of Adjudicators following the decision in Enviroflow in place of Mulalley on the basis that the recovery of costs of adjudication would subvert the statutory regime which does not allow recovery of such costs.

However, the fact remains that we have two seemingly conflicting judgments of the Technology and Construction Court and it may be some time before the question reaches the Court of Appeal and the position is finally confirmed.  For the foreseeable future, parties will have to rely on an agreement in writing made after the service of the Notice of Adjudication. 

This article was written by Patrick Blake and Lianne Edwards.