Costs under the Late Payment of Commercial Debts (Interest) Act 1998 following Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd [2017] EWHC 2159 (TCC): a resolution of temporary finality?

One of the facets of adjudication that often makes it attractive to parties, or at least the most attractive of the options available to them at the time, is that it is a “no costs” regime. Of course, you’ll have to pay the adjudicator’s fees and expenses (it seems pretty much without demure following the fairly recent decision in Vinden Partnership LTD v (1) Orca Lgs Solutions LTD (2) Stourport On Severn Care LTD (2017), where the court re-iterated the fact that where reasonableness was in issue, then insofar as the adjudicator had provided details of his time spent there was an evidential burden on the defendant to make out a prima facie case for unreasonableness, and the court should adopt a robust approach to that question, allowing the adjudicator a considerable margin of appreciation, given the circumstances in which adjudicators had to work (see Fenice Investments Inc v Jerram Falkus Construction Ltd [2011] EWHC 1678 (TCC)).

However, one thing that the parties will not usually have to worry about is the other side’s spiralling costs. Although, I do note in passing, the case of Jacobs UK Ltd v Skanska Construction UK Ltd [2017] EWHC 2395 (TCC) from July of this year, where O’Farrell J awarded wasted costs against a party who had come to an ad hoc agreement as to the adjudication procedure and timetable applicable to the dispute referred but had withdrawn their referral when they were no longer able to meet the deadlines imposed (or rather agreed).  O’Farrell J had found that the parties’ agreement went beyond mere agreement as to the timetable to be directed by the adjudicator in respect of an existing contractual or statutory adjudication and imposed new enforceable obligations on the parties. Therefore, Skanska’s failure to serve its reply or continue with the first adjudication constituted a breach of the ad hoc agreement, entitling it to its wasted or additional costs as damages.

With that salutary decision ringing in our ears (and mainly the fact that it’s important to make sure that you’re available during the entire course of the Adjudication!), this article focuses rather on a different decision of O’Farrell J from the summer, which deals with the issue of costs – and in particular – “debt recovery costs” – incurred in the course of an adjudication.

Over the last few years, there’s been a lingering possibility that an adjudicator might be persuaded to award a party their “debt recovery” costs under s5A(2A) of the Late Payment of Commercial Debts (Interest) Act 1998.

The Late Payment Act 1998 implies a term into commercial contracts for the supply of goods and services for the payment of simple interest, together with compensation for late payment. Under section 5A, the rather optimistically-described “compensation” comprises a fixed sum of up to a maximum of £100 for debts over £10,000.

Section 5A(2A) goes on to say that:

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.

However, this entitlement sits uncomfortably with s108A of the HGCRA 1998, which states:

1. 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 costs relating to the adjudication of a dispute arising under the construction contract.
2. The contractual provision referred to in subsection (1) is ineffective unless-

   ​​(a) 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

   (b) it is made in writing after the giving of notice of intention to refer the dispute to adjudication. (underlining added)

Parties wanting to recover their “debt recovery costs” (basically, parties claiming the costs of having to recover unpaid interim payments or other “debts” under a contract) were given more than a little encouragement to keep claiming their costs by the decision of Mr Joanthan Acton-Davis QC (sitting as a Deputy Judge of the TCC) in the deceptively whimsically-named case of Lulu Construction Limited v Mullaney & Co Limited [2016] EWHC 1852 (TCC).

In that case, the Judge enforced an adjudicator’s decision that Lulu were entitled to the debt recovery costs, on the basis that he had jurisdiction to award those costs (in the sum of £47,666) under the Late Payments Act.

Importantly, the short (10 paragraph) judgment does not go into any consideration of the interrelation of s108A and s5A(2A) of the respective Acts because it seems that the defence was put fairly simply by Mullaney on the basis that the Adjudicator did not have jurisdiction to award any sums in respect of “the claim in respect of debt recovery costs … because it was not part of the dispute referred to him”. Mullaney’s point was that the referring party had not conferred on him a jurisdiction to decide whether costs could be recovered under the Late Payments Act (or on any other basis) since it was not an issue raised in the Adjudication Notice.

Usually, even though Mullaney were the paying party they had in fact referred the dispute to adjudication, in order to ascertain the final value of the sums they were due to pay Lulu. Therefore, Lulu would never have been able to raise any sort of costs claim in the Adjudication Notice (because they did not draft it). Indeed, they had not raised the fact that they might like their costs until their Rejoinder.

Therefore, the court’s reasoning focussed on the fact that Akenhead J’s judgment in Allied P&L Limited and Paradigm Housing Group Limited [2009] EWHC 2890 (TCC) provided clear authority for the proposition that (i) the ambit of an adjudication can be “unavoidably widened by the nature of the defence or defences put forward by the defending party”  and (ii) where issues such as costs and interest were “connected with and ancillary to the referred dispute” then “even if the claim did not as such seek a declaration for discretionary interest or costs” it can nevertheless be awarded, “where it is so connected with and ancillary to the referred dispute as properly to be considered as part of it”.

It does not appear, therefore, that the court was asked to consider what effect s108A might have on the Adjudicator’s jurisdiction to award costs as a matter of substance.  Presumably, the judge proceeded on the basis of the long-established principle that, so long as an adjudicator has jurisdiction, the court on enforcement cannot deny a claimant summary judgment merely because the adjudicator’s decision was wrong as a matter of law or fact.

That issue has, however, been addressed by O’Farrell J in the case of Enviroflow Management Ltd v Redhill Works (Nottingham) Ltd [2017] EWHC 2159 (TCC). O’Farrell J’s judgment on this aspect of the case before her is short, taking up 14 paragraphs in total, perhaps reflecting the elegant simplicity of her decision.  It might have been a different matter had the facts of the case or the parties required her to decide any of the thornier issues that have been rumbling on in recent years. For example, the fact that what was in issue in the adjudication before the court was the recovery of sums owing under one or perhaps more than one interim payment, may have excused the court of having to consider whether the principle sum in question was, in fact, a “qualifying debt” for the purposes of the Late Payment Act.  Under the Act, a debt is created by an obligation to pay the “whole or any part of the contract price”. The definition set out in section 16 of the Act of “contract price”, with admirable circularity, refers to the price in the contract. That, therefore, raises an issue as to what would be considered as included in “contract price”. Logically, the contract price could not include damages, whether liquidated or unliquidated. It is difficult to see, at first glance, whether it could properly include loss and expense claimed under the terms of a contract. Although, of course, this might be treated as part of the adjusted contract sum under JCT contracts, it is unclear whether that would be sufficient to form part of the “contract price” for he purposes of the Late Payments Act.

However, O’Farrell J’s reasoning was that the implied term under s5A(2A) was a 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 under s108A(1).

Therefore, the clause was caught by the requirements of s108A(2), which expressly provides that such a clause is ineffective unless the it is the subject of a written agreement made after the notice of adjudication is referred.

Put simply, O’Farrell J’s decision was that section 108A(2) trumps section 5A2(2A).

Although the judgment does not expressly state whether the Defendant had reserved their right to challenge the Adjudicator’s jurisdiction on the costs issue, or indeed on the other issue raised by the defendant regarding the correct identity of the parties to the contract, the very fact that such challenges were raised indicates that they surely must have been.

That point is important because O’Farrell J’s decision in Enviroflow would not, at least on its face, come to the aid of a party who had failed to challenge the adjudicator’s right to award a party their costs under the Late Payments Act and had failed to reserve their right to challenge such an award on enforcement.

Without such a reservation of jurisdictional rights, then the court would be entitled to find that a party had waived its rights to raise a relevant challenge in the TCC and the paying party would be bound to make a payment (at least in the first instance) of the debt recovery costs, even in the face of O’Farrell’s ruling that the fact of the award is wrong in law.

Therefore, if debt recovery cost, are still optimistically claimed, it will be important for paying parties not just to object to those costs being ordered but also reserve their right to challenge any aberrant award of those costs on enforcement.

That is a basic tenant of adjudication but is one that can easily be forgotten in the excitement of battle – especially if you are fairly well convinced that your client’s position is correct and you’re likely to win the point.

The further question, however, is whether a party would be entitled to bring a Part 8 claim to challenge the award of debt recovery costs at an enforcement hearing, in line with the criteria set out in Coulson J’s decision in Hutton Construction Ltd v Wilson Properties (London) Ltd [2017] EWHC 517 (TCC).

Under Hutton, the court will only countenance hearing a Part 8 claim at an enforcement hearing where the Part 8 claim deals with a short and self-contained point of law or fact, requires no oral evidence and where it would be unconscionable for the court to ignore it.

Some guidance can, perhaps, be found in O’Farrell’s recent judgment (again not yet available in full form) on Actova Uk Ltd v Doosan Babcock LTD (2017), which concerned, amongst other things, the rectitude of an award of interest under the Late Payments Act.

In that case, the defendant brought a Part 8 claim asking for a declaration that there had been a contractual agreement in relation to the interest rate applicable to the contract between the parties, evidenced by a previous course of dealing. Therefore, interest was not available under the Late Payment Act, as the Adjudicator had awarded.

In Actova, O’Farrell J found that it was not appropriate to determine the issue of interest by way of a Part 8 claim at the enforcement hearing because it was not, in fact, an issue that could be resolved by reference to the documents already before the court. The defendant’s case turned on there having been a previous course of dealing and so both parties should have the opportunity to put in evidence to address that point.

Therefore, even if the Adjudicator was wrong about the rate of interest that applied, that could not provide a defence to the instant summary judgement.

However, the situation is likely to be different in respect of an award of debt recovery costs because the question as to whether inter-partes costs are recoverable will be a simple one. Either the parties have entered into a post-adjudication written agreement as to the recoverability of their costs or they did not. If they did not, a provision that would otherwise by implied, by virtue of s5A(2A) of the Late Payments Act, into an agreement that necessarily will have been made prior to the giving of an adjudication notice, will be caught by s108A(2) of the HGCRA.

It is difficult to see why the court would refuse to determine – what in any usual case will be a very straight forward matter – on the basis of a Part 8 claim, which under Hutton, can be heard at an enforcement hearing. If the costs ordered end up being anywhere near they were in Lulu Construction, then that is likely to be a fight worth having.

A further issue that is not addressed directly by Enviroflow is whether s108A would intervene to deprive a party of the £100 compensation that is awarded pursuant to Section 5A. The entitlement rises on the following basis:

1. Once statutory interest begins to run in relation to a qualifying debt, the supplier shall be entitled to a fixed sum (in additional to the statutory interest on the debt).

Paragraph 42 of the Judgment talks about Enviroflow considering its reasonable costs of recovering the debt claimed as being “that in respect of the interim payments less the fixed sum of £100 pursuant to section 5A, 2A and 3 of the Late Payment Act as amended”. However, the summary of the Adjudicator’s award at the start of the judgement does not separate out or expressly refer to the £100 as being awarded or included in any other sum.

However, it is certainly arguable that the parties and the court did regard the £100 fixed sum as being separate to the “reasonable costs”. That view makes sense on the basis that the Late Payments Act makes clear that the entitlement to the fixed sum runs with the entitlement to interest, which is not something that is prohibited by s108A and, in any event, the fixed sum should be regarded as compensation in the true sense that (although it will always be inadequate) it is never in itself to meet the receiving party’s costs. For example, the receiving party does not have to forego any of the £100 should their costs of recovering the debt be less than that figure. However, the fact that the sum in question is so small, is likely to mean that little or no court time is given to the issue in future.