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‘The end of the affair?’ Sir Robert Akenhead and Christopher Reid on debt recovery legislation for Building

2nd Nov 2017

Sir Robert Akenhead, with assistance from Christopher Reid, contributes to Building with a column highlighting a recent inventive use of debt recovery legislation to recoup the costs of an adjudication, specifically the growing use of the Late Payment of Commercial Debts (Interest) Act 1998 (“the Act”).

The end of the affair?

The consequences of an adjudication, successful or not, can go on forever, it seems, or so a recent case suggests. When adjudication is not the end of the dispute between parties to a construction contract, the advice that it is hard for one party to recover the costs of the adjudication in a subsequent court action against the same party is likely to come as unwelcome news. This has given rise to a variety of inventive attempts in recent years to do exactly that. One of the most interesting such attempts is the growing use of the Late Payment of Commercial Debts (Interest) Act 1998 (“the Act”).

The argument runs along these lines. Subject to a number of pre-conditions, section 5A of the Act provides that where a “supplier” seeks payment of a debt, it is entitled to compensation. That compensation is provided by way of a fixed sum, depending on the value of the debt, or – if the “reasonable costs” of the supplier are not met by the fixed sum – the supplier “shall be entitled to a sum equivalent to the difference between the fixed sum and those costs” (section 5A(2A)).

On this basis, it is increasingly being argued that where adjudication is used to recover a debt which falls within the scope of the Act, the costs of an adjudication should not be treated any differently to other means of debt collection. As such – the argument continues – the costs of the adjudication may well be “reasonable costs” which in an adjudication of any value will not be met by the relatively minor fixed sums. The conclusion is that the costs of a previous adjudication are therefore recoverable, with a deduction for the fixed sum.

Of course, it has never been possible to run this argument after every adjudication. The most obvious restriction is that the Act applies only to “qualifying debts”, which will exclude claims for damages. Moreover, the remedy under section 5A is relatively easily ousted. This is because the right to compensation requires the debt to be one which attracts “statutory interest”. To the extent that the construction contract provides for interest on late payments, and that rate of interest constitutes a “substantial remedy”, statutory interest will be ousted and section 5A will have no application.

If these are deep waters for litigators, how much more so for a party to a construction contract trying simply to ascertain whether to seek to recover its previous costs

Even in those situations where an argument based on the Act can be run, the difficulty is section 108A of the Housing Grants, Construction, and Regeneration Act 1996 (“the Construction Act”). This is because section 5A of the Act takes effect in a construction contract by means of an implied term. But section 108A provides that “any contractual provision” which purports to allocate the costs of an adjudication is ineffective unless it complies with certain conditions, each of which requires writing (in respect of which condition an implied term will fail).

From there on, the legal difficulties multiply in every direction. Is it possible to reconcile the two sections of these different Acts? Does it make a difference that section 5A has roots in an instrument of the EU? If so, does this difference go so far that one section of the Act must give way to another? If these are deep waters for litigators, how much more so for a party to a construction contract trying simply to ascertain whether to seek to recover its previous costs.

Fortunately, the courts seem to be starting to consider the issues to which the argument gives rise. In the recent case of Enviroflow Management Limited vs Redhill Works (Nottingham) Limited(unreported, TCC, 16 August 2017), Mrs Justice O’Farrell heard an enforcement application in which the adjudicator had awarded the claimant the costs of the adjudication. This was not therefore the central case we are discussing, being one in which a party seeks to recover in litigation the costs of a previous adjudication against the same party. But it appears the submission was made to Mrs Justice O’Farrell that the remedy under section 5A of the Act was ineffective in that it failed to comply with section 108A’s requirements. This submission seems to have been accepted. Moreover, since there was no other agreement in writing between the parties regarding allocation of costs which did comply with section 108A, Mrs Justice O’Farrell concluded that the adjudicator did not have jurisdiction to make the award of costs. So far, so clear.

Where there will be plenty of room for future argument, however, is the relationship between the decision of Mrs Justice O’Farrell in Enviroflowand that of Mr Jonathan Acton Davis QC, sitting as a Deputy High Court Judge, in Lulu Construction Limited vs Mulalley & Co Limited [2016] EWHC 1852 (TCC). In the latter case, the deputy judge (also hearing an application for enforcement of an adjudication award) decided that an adjudicator’s conclusion that he did have jurisdiction to decide a dispute with respect to the award of costs claimed by way of section 5A was correct (though the judgement does not reveal details of the adjudicator’s conclusion, in particular if there was an agreement in writing which complied with section 108A).

We will be kept waiting for a case tackling the validity of the section 5A argument head on. Until then, it is premature to speak of the end to the affair. The only sure thing is that, until we have a determination, the ingenuity of parties seeking to recover the costs of their adjudication will continue. But ingenuity may well not succeed.





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