Recoverability of adjudication costs: TCC shouts down Lulu

Litigation, Arbitration and Investigations Alert

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In our previous article in this series, "Recoverability of adjudication costs: Is Lulu something to 'shout' about?", we predicted that parties may incorrectly see the TCC decision in Lulu v Mullaley as authority to claim legal costs of an adjudication as "debt recovery costs" under section 5A(2A) of the Late Payment of Commercial Debts (Interest) Act 1998 (LPCDIA) - despite the apparent conflict between this and the general prohibition on recovering adjudication costs under section 108A of the Housing Grants, Construction and Regeneration Act 1996 (HGCRA).

The difficulty with treating Lulu as authority for this is that, while the adjudicator had awarded "a sum equivalent to" the reasonable costs of recovering the debt under LPCDIA ie legal costs of the adjudication, the apparent conflict with section 108A HGCRA was not argued before the court - the TCC was only asked to decide whether the adjudicator had jurisdiction to reach a decision.

The TCC therefore (correctly) restricted its consideration and judgment to the question of jurisdiction and, finding that the adjudicator had jurisdiction, enforced the adjudicator’s award without considering the correctness of it. The TCC, if it wanted to address this apparent conflict, required a further opportunity to do so.

The question was therefore posed whether the TCC would get an opportunity to address this apparent conflict soon and, if so, whether the TCC would choose to take it.

A first glimpse

Although not directly related to "debt recovery costs" under the LPCDIA, the recent TCC decision in Wes Futures Ltd v Allen Wilson Construction Ltd is interesting, as the TCC was asked to decide whether adjudication costs could be recovered by a similarly creative argument (which would also appear to contradict section 108A HGCRA) - that the costs of adjudication can be recovered as part of a settlement under Part 36 of the Civil Procedure Rules 1998 (CPR).

In Wes Futures v Allen Wilson , Wes Futures had carried out subcontract works for Allen Wilson, but Allen Wilson failed to pay Wes Futures' invoices. In 2015, Wes Futures had therefore commenced adjudication, but the adjudicator resigned on jurisdictional grounds. On 11 February 2016, Wes Futures threatened to issue court proceedings, but, on the same day by separate letter, made a Part 36 offer to settle the claim, including the "costs of this case". This was not accepted at the time.

In August 2016, Wes Futures commenced a second adjudication and the adjudicator found in its favour on 13 September 2016. However, Allen Wilson refused to pay the award. Wes Futures therefore commenced adjudication enforcement proceedings on 6 October 2016, but, on 4 November 2016, Allen Wilson accepted the February Part 36 offer (which had not been withdrawn).

While both parties agreed that they had reached a binding compromise, the issue that came before the court was whether "costs" payable under Part 36/the offer could include the costs of the adjudications.

The cold shoulder

The case came before Mr Justice Coulson, and it seems fair to say that he was unimpressed with the argument. In his judgment, Coulson J took the opportunity to reiterate the well-established principle that costs incurred in adjudication are not recoverable under the HGCRA as part of the adjudicator's award. Coulson J then took this a step further, confirming that these costs remain irrecoverable on enforcement. Coulson J stated that:

"…in an ordinary case, a party seeking to recover a sum awarded by an adjudicator is not entitled to (and cannot seek) the legal costs it incurred in the adjudication itself. That is because, pursuant to the Housing Grants (Construction and Regeneration) Act 1996, as amended, costs incurred in adjudications are not recoverable. So if a successful party cannot recover its costs in the adjudication itself, it cannot recover them in enforcement proceedings either."

Coulson J also confirmed that adjudication costs cannot suddenly become recoverable in subsequent court proceedings, stating:

"…costs of a pre-action mediation could not subsequently be recovered as costs of the proceedings because the parties had agreed that they would each bear their own costs of that mediation. That is effectively achieving by an agreement to mediate what the 1996 Act requires for adjudication, and the result is the same: the costs are the subject of a different regime and are not recoverable."

Needless to say, Coulson J was unequivocal that "…for all those reasons, I conclude that Futures are not entitled to recover from Wilson their costs of the adjudications."

As a slight aside, this case is also instructive in relation to what is covered by Part 36/offers to settle. Coulson J held that "costs of this case" was not wider than "costs of the proceedings" under 36.13(1) CPR. Therefore, as adjudication costs are not 'costs of the proceedings' or recoverable pre-action costs, they were not included within the offer, whether or not it was compliant with Part 36 CPR.

Where next?

While not dealing directly with Lulu or the apparent conflict between the LPCDIA and HGCRA, the case is interesting in this context for two reasons:

  1. As predicted, parties are looking for creative ways to recover the costs of adjudication, which have long been accepted by most practitioners/parties as being irrecoverable
  2. Coulson J, the judge in charge of the TCC, has well and truly taken the first opportunity since Lulu to give short shrift to the attempt by a party to adjudication to recover its adjudication costs

The decision in Wes Futures would appear to support our conclusion in our previous article in this series - that the position is, in fact, relatively simple:

"The LPCDIA is the generally applicable position in relation to commercial contracts (in the widest form). The HGCRA is a more specific statute that restricts this general position in relation to adjudication - not contradictory, but supplementary."

In any case, this is unlikely to be the end of the matter, but we still expect that the TCC will "stay the course" on rejecting recoverability of adjudication costs whenever it gets the chance.