Opening the Door to Recovery of Inter-Party Costs in Adjudication
The articles, which were published in May and June 2014, are still relevant today and are still available to read on our web site at Putting the EU Cat amongst the UK Pigeons and Adjudication and Back Door Cost Recovery.
Back then I speculated that it might become popular for Referring Parties to start claiming costs incurred in adjudication under The Late Payment of Commercial Debts (Interest) Act 1998 ("the Act") where the Parties' contract failed to include an adequate remedy to recover interest, and both interest and costs were being claimed by the Referring Party under the Act.
Sections 1(1) and 5A (3) of The Late Payment of Commercial Debts (Interest) Act 1998 entitle a creditor to claim interest (1(1)) and fixed compensation sums of £40, £70 or £100 depending on the size of the debt (5A (3)). The right to recover your additional reasonable debt recovery costs arises out of the amended section 2A which states:
“(2A) 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.”
For a time this prediction came to pass and myself and my fellow adjudicators were regularly asked to decide that costs should be awarded as part of a Decision. This created consternation as, despite the apparently clear wording of the Act referred to above, many adjudicators, and I include myself in this, felt it was counter-intuitive to be able to award costs to a claiming party where no such remedy was available to a Responding Party. Could that be fair and how would the Court deal with such an application? We (adjudicators) needed some guidance from the Courts and we now have our first glimpse of how the Courts may deal with this issue through the handing down of a judgement in Lulu Construction Ltd v Mulalley & Co Ltd  EWHC 1852 (TCC) (“Lulu”).
In this case Lulu applied for summary judgement to enforce the balance of an adjudicator's decision in its favour for interest and costs incurred in an adjudication that had actually been referred by Mulalley in order to obtain a decision on the value of Lulu's final account.
Interestingly, Lulu didn't actually raise the claim for its costs until it issued its Rejoinder. Two issues arose in the proceedings. Firstly, did the lack of a reference to costs in the Notice of Adjudication mean that the Adjudicator lacked jurisdiction to deal with the cost recovery claim? Secondly, could the costs be awarded in any event?
In what is a relatively short judgement, Mr Acton-Davis QC decided that "debt recovery costs" were connected with and ancillary to the referred dispute and considered to be part of the dispute. Secondly, the failure to refer to costs in the Notice was not fatal to Lulu's claim, made for the first time in the Rejoinder, because it was Mulalley's Notice that had started the adjudication and not Lulu's.
Although we now have the start of some judicial guidance on the recovery of inter-party costs in adjudication courtesy of Lulu, it should be said that the decision isn’t a binding statement of the law on the issue and we are still awaiting a final statement of the correct legal position from the Courts.
Potential claimants have been waiting for a judgement to be handed down and for the door to be opened to all for the recovery of costs. Lulu might just be the start of something and it will be interesting to see how many Parties will now try to bring claims which include an element for cost recovery where the underlying contract has failed to include an adequate remedy for dealing with the recovery of interest, and both interest and costs recovery are claimed under The Late Payment of Commercial Debts (Interest) Act 1998.
Peter Vinden is a practising Arbitrator, Adjudicator, Mediator and Expert. He is Managing Director of Gateley Vinden and can be contacted by email at email@example.com. For similar articles please visit www.gateleyvinden.com.