Recovering Party Costs in Adjudication – The final word?
The costs of representing a party in adjudication can be significant. Not surprisingly parties are keen, where they can, to recover these costs and there have been a number of reported cases where, for one reason or another, a party has managed to persuade an adjudicator to award the recovery of one party’s costs from its opponents.
Although Section 108 of The Housing Grants Construction& Regeneration Act 1996 (“the Act”) is silent on whether this was permitted or not, in the early days it was believed by some that such power was automatically bestowed on the Adjudicator. It was argued that, because the Act provided the express power to apportion liability for the payment of his fees, there was an implied power to order the apportionment and recovery of other party costs. This notion was, however, quashed in Northern Developments (Cumbria) Ltd v J & J Nichol  BLR 158 in which HHJ Bowsher QC concluded that an Adjudicator had no jurisdiction to decide that one party’s cost of the adjudication should be paid by the other party.
As we know, the Local Democracy, Economic Development & Construction Act 2009 amended the Act and introduced a new section 108A to deal specifically with party costs. The provision says:
108A Adjudication costs: effectiveness of provision
- This section applies in relation to any contractual provision made between the parties to a construction contract which concerns the allocation as between those parties of cost relating to the adjudication of a dispute arising under the construction contract.
- The contractual provision referred to in subsection (1) is ineffective unless-
- 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
- It is made in writing after the giving of notice of intention to refer the dispute to adjudication.
There has been some confusion concerning what Section 108A actually means. Did paragraph (2)(a) allow parties to lawfully include express provisions in their contracts allowing for one party to recover cost from the other or did this provision solely relate to allocation by the adjudicator of his fees and expenses? We now have an answer.
In Enviroflow Management Limited -v- Redhill Works (Nottingham) Limited  EWHC 2159 (TCC) this very point was addressed by Mrs Justice O’Farrell DBE in which she said at paragraph 52 of the decision:
“In my judgement section 108A makes an express provision in relation to the costs of the parties relating to adjudication. It provides that such costs incurred by the parties in the adjudication process will only be recoverable where an agreement to that effect is made in writing after the giving of notice of intention to refer the dispute to adjudication (unless it is a contractual provision relating to the adjudicator’s fees and expenses)” [my emphasis]
This is an important judgement because Enviroflow was relying on the implied term set out in Section 5A of the Late Payment of Commercial Debts (Interest) Act 1998 to claim its reasonable costs in recovering the debt Enviroflow considered was owed to it.
This very point was addressed in the next paragraph of the decision:
“In this case, by reason of the Late Payment Act, Enviroflow was entitled to seek its reasonable costs in recovering the sums due in respect of interim applications for payment by reason of an implied term. That implied term falls within the definition on “any contractual provision made between the parties to a construction contract which concerns the allocation between those parties of costs relating to the adjudication of a dispute under the construction contract”. Therefore, it is caught by section108A, subsection (2), and is ineffective unless the subject of an agreement made in writing after the notice of adjudication.”
So, it seems that two very clear points arise from this judgment.
Firstly, any agreement relating to the recovery of inter-party costs will only be recoverable if an agreement is put in writing after the notice has been issued.
Secondly, a party to an adjudication cannot rely on The Late Payment of Commercial Debts (interest) Act 1998, if it applies, to seek recovery of its reasonable costs in an adjudication unless a specific agreement made in writing after the notice of intention has been issued.
Don’t you just love it when we have clarity?
Peter Vinden is a practising Arbitrator, Adjudicator, Mediator and Expert. He is Managing Director of The Vinden Partnership and can be contacted by email at firstname.lastname@example.org. For similar articles please visit www.vinden.co.uk.