Legal Costs in Adjudication - the road to recovery?

The recent case of Lulu Construction Limited v Mulalley and Co Limited [2016] EWHC 1852 TCC has permitted the recovery of legal costs associated with an adjudication in certain situations on the basis the legal costs are debt recovery costs incidental to the dispute.

The Lulu Construction case was brought to enforce the unpaid element of an Adjudicator's award, namely accrued interest of £9,794.70 and debt recovery costs of £47,666.27. Under sections 5A (2A) and (3) of the Late Payment of Commercial Debts (Interest) Act 1998 a party is entitled to claim reasonable costs of recovering the debt as compensation arising out of late payment. If the fixed sum of £100 (for a debt of £10,000 or more) is not sufficient the recovering party can claim further reasonable costs. Lulu Construction claimed £47,666.27 under this principle. This claim was first raised in the Rejoinder and (unsurprisingly) did not form part of the Notice of Intention to refer a dispute to Adjudication as the Referring Party was also the Paying Party. The Adjudicator determined that he had jurisdiction to consider this element of the claim and awarded Lulu Construction debt recovery costs and interest on the principal sum of £182,863.80.

Mulalley only paid the principal sum, and consequently Lulu Construction issued enforcement proceedings. In considering whether the Adjudicator could rightfully award the debt recovery costs, Mr Jonathon Acton-Davis QC relied on the decision of Akenhead J in Allied P & L Limited and Paradigm Housing Group Limited [2009] EWHC 2890 TCC. In this case, Akenhead J had held that "if the basic claim, assertion or position has been put forward by one party and the other disputes it, the dispute referred to adjudication will or may include claims for relief which are consequential upon and incidental to it…" Mr Acton-Davis QC therefore held that the debt recovery costs - being the costs of running the Adjudication - were connected with and ancillary to the referred dispute and must therefore be properly considered part of it. Consequently Mr Acton-Davis QC awarded the sums in full to Lulu Construction.

The decision of Mr Acton-Davis QC appears to open the way for recovery of legal costs in Adjudication where interest is awarded pursuant to the Late Payment of Commercial Debts (Interest) Act 1998 on the basis such costs are incidental to and connected with the dispute in question. Whilst this is likely to be a welcomed development for many, this goes against the principles of the Housing Grants, Construction and Regeneration Act 1996 (as amended). It remains to be seen whether the decision of Mr Acton-Davis QC will be followed in subsequent cases. The Lulu Construction case is a first instance decision and is therefore persuasive but not binding in future cases. However, it is interesting to note that although the transcript has only just been released, the decision was handed down in March 2016 and there appears to be no indication of an appeal. 

This article was written by Stephen Homer and Lianne Edwards.