Can I Get My Costs Back in Adjudication?

THE POSITION IN LITIGATION

Civil litigation in England and Wales is conducted in accordance with a set of rules known as the Civil Procedure Rules (or CPR).  Those rules play a big part in how and when legal costs can be recovered from the other party in litigation (but they do not apply to Adjudication). 

The rules are complicated and nuanced, and for some types of claims they limit the amount that a winning party can recover from a losing party to specific sums of money, known as ‘fixed costs’, regardless how much has actually been spent.

When those fixed costs limits do not apply, there are two important aspects of the rules which play a big part in how costs are dealt with in litigation.

The Court’s Discretion

The first is rule 44.2(1), which states that the judge has a discretion as to who should pay the costs, and in what amount.  The court therefore has the power to make an order that one party pays the other party’s costs (and the courts habitually use that power).

The Party that Loses Will Pay the Costs

The second is rule 44.2(2), which states that if the judge decides to exercise the discretionary power referred to above, then “the general rule is that the unsuccessful party will be ordered to pay the costs of the successful party”. 

This means that the starting point is that the judge will order the loser to pay the winner’s costs (assuming the judge is willing to make an order about costs in the first place). 

However, this is only a general rule, and the judge is not required to follow it.  The court retains the ability to depart from the general rule if it wishes to do so.  There is, therefore, no guarantee that the loser will pay the winner’s costs.

THE POSITION IN ADJUDICATION

Things are different in Adjudication, which is not governed by the Civil Procedure Rules.  Instead, Adjudication is governed either by rules agreed upon by the parties, or by a default set of rules where there is no such agreement.

The Default Rules

The rules that apply in default of any that are agreed are set out in Part I of the Schedule to the Scheme for Construction Contracts (England and Wales) Regulations 1998 (known simply as The Scheme).

Paragraph 25 of the Scheme is the relevant one.  It states that:

“The adjudicator shall be entitled to the payment of such reasonable amount as he may determine by way of fees and expenses reasonably incurred by him. The parties shall be jointly and severally liable for any sum which remains outstanding following the making of any determination on how the payment shall be apportioned”

The courts have decided that this paragraph gives an Adjudicator the power to decide which party should pay his/her fees for deciding the Adjudication (i.e. those incurred by him/her) but it does not extend to fees incurred by the parties in fighting the Adjudication.  The High Court stated in 2020 that:

“Construction adjudication does not generally allow for party and party costs shifting. Paragraph 25 of the default framework only permits adjudicators to determine the amount of their own reasonable fees and expenses and to apportion them between the parties”

The Parties’ Agreement

Unfortunately, this restriction cannot simply be avoided by the parties stating in their contract that an Adjudicator will have the power to award the winning party its costs in the event of an Adjudication being commenced.  That is because, in 2009, section 108A was added to the Housing Grants, Construction and Regeneration Act 1996 which renders ineffective any such agreement except in very narrow circumstances.

Section 108A states that it:

“...applies in relation to any contractual provision made between the parties to a construction contract which concerns the allocation as between those parties of costs relating to the adjudication of a dispute arising under the construction contract”

and that such a contractual provision is unenforceable 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”.

Therefore, the parties can agree in their contract – in advance of an Adjudication – that a future Adjudicator will have the power to decide which party should pay his/her fees (i.e. those incurred by him/her in deciding the Adjudication), but they cannot agree in advance of an Adjudication that the Adjudicator will have the power to order that the losing party pays the winner’s costs incurred in fighting the Adjudication.  That can only be agreed between the parties after the Adjudication has commenced.

What About the Late Payment of Commercial Debts (Interest) Act 1998?

The Late Payment of Commercial Debts (Interest) Act 1998 states in section 5A that a party is able to recover “the reasonable costs of ... recovering the debt”.  Does that mean that a winning party has a statutory right to recover its costs of fighting an Adjudication?

No: the High Court clarified in 2017 that because this right to recover reasonable costs is implied into a contract by that statute, then it is just another term agreed by the parties (albeit implicitly, by operation of the statute), and is therefore subject to s.108A in the same way as if the parties had written it into their contract at the outset. As a result, s.108A acts to render the term implied by s.5A of the Late Payment of Commercial Debts (Interest) Act 1998 unenforceable.

SUMMARY

There are several potential advantages to commencing an Adjudication rather than starting litigation in court: the main ones being speed, and reduced cost.

However, one significant disadvantage is the inability of a winning party to recover the costs it has expended on bringing – and succeeding in – the Adjudication. 

Only if the parties agree in writing, and after the Adjudication has commenced, will the Adjudicator have the power to award a party it’s costs.  Even then, the Adjudicator retains discretion (just as a court would) not to award costs to the winning party despite having the power to do so.

If you need help with an Adjudication, contact Hamshaw today