Recovery of Party Costs in Adjudication

Lulu Construction v Mulalley [2016] EWHC 1852 TCC Deputy Judge Acton

Facts

Mulalley employed Lulu Construction on a building project and the parties fell out as to the value of the final account.  Unusually Mulalley, the paying party, commenced an adjudication to get an adjudicator to declare what the actual amount was which the employer owed the contractor.  Lulu were successful in their version of the valuation, and the adjudicator made a substantial order for payment against Mulalley which was largely carried out.

In Lulu’s response to the adjudication it not only successfully advanced its own version of the final account valuation, it also asked for interest pursuant to the Late Payment of Commercial Debts Interest Act 1998 (“the Late Payment Act”).  It also asked for its reasonable costs of recovering the debt which were £47,000!  The adjudicator accepted that figure as the “reasonable cost” and ordered the Claimant employer to pay the Defending contractor’s costs of the adjudication in the sum of £47,000.

Mulalley refused to pay and the matter went to the TCC before Deputy Judge Acton.

TCC Held:

1. Section 5A subsection 2A of the Late Payment Act provides that once statutory interest begins to run in relation to a qualifying debt, the supplier shall be entitled to its reasonable costs of recovering the debt (if they are not met by the usual small fixed sums prescribed). This clause applies to adjudication costs just as much as to any other costs of recovering a debt.
2. Although the claim for payment of costs was expressed in the response rather than in the notice of referral to adjudication, it was an item which was “clearly connected with and ancillary to the referred dispute and (as such) properly considered part of it.”

Comment

1. The purpose behind the Housing Grants Construction and Regeneration Act 1996 (the Construction Act) was to provide a cost-effective informal means of resolving construction disputes on a temporary basis to improve cash flow for the industry. This was the main point of Total M&E services v ABB (2009) where the Claimants successfully obtained an adjudication award of £462,000 and in subsequent enforcement proceedings asked the Court to also order payment of adjudication costs of about of about £85,000.
2. The TCC refused to do so and expressly remarked (1) that the claim for recovery of the costs of the adjudication was “misconceived…since the Act does not provide for the recovery of costs.” Also (2) that the statutory scheme envisages that both parties may go to adjudication and incur costs which they cannot recover from the other side and therefore such costs cannot in the alternative be recovered as damages for breach of contract.

The Court in Lulu was persuaded that recent amendments to Late Payments Act of 1998 imposed a power in connection with the recovery of debts to order costs, which overruled the Construction Act.  We question this on two grounds (1) it would be surprising if the clear policy of an Act of Parliament was “accidentally” overruled by a minor provision of later legislation; and (2) if the Late Payments Act does apply to construction adjudications, it can only do so where the adjudication is to recover an outstanding debt.  There is a clear difference between proceedings which establish whether a debt exists and if so in what amount; and proceedings to recover that debt subsequently.  Arguably the adjudication serves the purpose of establishing what the debt is rather than pursuing its recovery.  Thus failure to pay an adjudication decision is a breach of contract; actual collection of the money depends upon obtaining a court judgment, unless the debtor co-operates.

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