Recovering adjudication costs under the Late Payment of Commercial Debts (Interest) Act 1998

Recovering adjudication costs under the Late Payment of Commercial Debts (Interest) Act 1998
Stack of pound coins on financial figuresRachel Gwilliam, partner at Blake Morgan, explores the possibility of recovering adjudication costs under the Late Payment of Commercial Debts (Interest) Act 1998 (LPCD(I)A 1998) and looks at how the recently-published judgment in Lulu Construction v Mulalley impacts the position.

LPCD(I)A 1998 implies a number of terms into commercial contracts for the supply of goods and services. In particular, LPCD(I)A 1998 prescribes a statutory rate of interest of 8% above the Bank of England’s official dealing rate for late payment of commercial debts. The creditor is further entitled to ‘compensation arising out of late payment’, comprising a fixed sum.

In addition, since March 2013, creditors have been entitled to claim further sums by way of ‘compensation arising out of late payment’ to cover the costs of recovering debts to which LPCD(I)A 1998 applies. LPCD(I)A 1998, s 5A(2A) now provides:

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.

HGCRA 1996, s 108A

There has been some debate amongst construction law practitioners as to whether or not LPCD(I)A 1998, s 5A(2A) conflicts with section 108A of the Housing Grants, Construction and Regeneration Act 1996 (HGCRA 1996). HGCRA 1996, s 108A provides that ‘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 a construction contract’ is ‘ineffective’ unless it is made in writing:

  • and is contained in the construction contract and confers power on the adjudicator to allocate his fees and expenses as between the parties, or
  • after the giving of notice of intention to refer the dispute to adjudication

I have explored in some detail the question of whether or not any conflict genuinely exists in my paper ‘Recovering Adjudication Costs under the Late Payment of Commercial Debts (Interest) Act 1998’. The paper was awarded second prize in the Society of Construction Law’s 2015 Hudson Prize competition and will shortly be published by the Society. While I have concluded that there is arguably no conflict between the two provisions, we now have the benefit of the first court decision to consider an adjudicator’s award directing payment of ‘debt recovery costs’ under LPCD(I)A, s 5A(2A).

Lulu v Mulalley

In Lulu Construction Limited v Mulalley & Co Limited [2016] EWHC 1852 (TCC), a dispute was referred to adjudication by the paying party (Mulalley) to determine the sum due to the sub-contractor and responding party, Lulu, under the terms of the sub-contract between the parties. During the adjudication, Lulu claimed 'debt recovery costs’ pursuant to LPCD(I)A 1998, s 5A(2A). This issue was raised for ‘for the first time’' in Lulu’s rejoinder and was met by a jurisdictional objection by Mulalley.

In his decision, the adjudicator directed that Mulalley must pay Lulu £240,324.77. Mulalley paid £182,863.80 of the sum awarded, but disputed Lulu’s claim for accrued and continuing interest and ‘debt recovery costs’ in the sum of £47,666.27.

At the hearing of Lulu’s Part 24 (summary judgment) application to enforce the adjudicator’s decision, Mulalley conceded that the interest element of the disputed balance was due, but disputed the claim in respect of debt recovery costs on the grounds that the adjudicator did not have jurisdiction to make any decision in respect of that claim because it was not part of the dispute referred to him.

Given that the debt recovery costs were being claimed by Lulu as the responding party in the adjudication, the Court noted that ‘it is hardly surprising that the claim for debt recovery costs was not referred to in the Notice of Adjudication’ prepared by Mulalley. The court referred to the decision of Mr Justice Akenhead in Allied P & L Limited v Paradigm Housing Group Limited [2009] EWHC 2890 (TCC), at para 30(d), which noted:

[…]if the basic claim, assertion or position has been put forward by one party and the other disputes it, the dispute referred to adjudication will or may include claims for relief which are consequential upon and incidental to it and which enable the dispute, effectively, to be resolved. Thus, even if the claim did not as such seek a declaration or discretionary interest or costs, it is so connected with and ancillary to the referred dispute as properly to be considered as part of it[…]

Applying the foregoing principles, the court held that the debt recovery costs claimed by Lulu were ‘clearly connected with and ancillary to the referred dispute and must properly be considered part of it’. The costs claimed ‘are the costs of running the adjudication which was instituted by the Notice of Adjudication’.

Accordingly, the court held that the adjudicator had jurisdiction to determine that element of the dispute and granted summary judgment to enforce the adjudicator’s decision.

Current position

It is important to bear in mind, however, that this does not mean that the court agreed with the adjudicator’s reasoning with regard to the application of LPCD(I)A 1998, s 5A(2A). Nor did the court comment upon, or seek to resolve, any perceived ‘tension’ between LPCD(I)A 1998, s 5A(2A) and HGCRA 1996, s 108A. The Court simply agreed that the adjudicator was entitled to decide the issue.

As Chadwick LJ said in Carillion Construction Ltd v Devonport Royal Dockyard [2005] EWCA Civ 1358, [2005] All ER (D) 202 (Nov):

The objective which underlies the Act and the statutory scheme requires the courts to respect and enforce the adjudicator's decision unless it is plain that the question which he has decided was not the question referred to him or the manner in which he has gone about his task is obviously unfair.[…]The need to have the “right” answer has been subordinated to the need to have an answer quickly.

Unless and until a court is asked to resolve whether or not a conflict exists between LPCD(I)A 1998, s 5A(2A) and HGCRA 1996, s 108A, if an adjudicator is asked to determine a party’s entitlement to 'debt recovery costs' under LPCD(I)A 1998, s 5A(2) and does so (either for or against the claiming party), Lulu v Mulalley will undoubtedly be cited as authority that such a decision should not be impeached.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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